Four years ago minus eight days, Donald J. Trump swore an oath, “…and will, to the best of my ability, preserve, protect, and defend the Constitution of the United States.” Over the past two months he repeatedly violated that oath, attacking the Constitution and the presidential election process. He tried to seize for himself your right and mine to choose our next president by an agreed-upon set of rules.

Donald Trump lost to Joe Biden, fair and square. President Trump has then lied to the American people for two months, falsely claiming the election was stolen from him. He continues this lie even today. Courts investigated his claims; he lost. The states certified their results; he lost. The electors’ votes came to the Capitol to be counted. His exhortations led to a physical attack on the Capitol during the counting of those votes. After the insurrection, costing five lives so far, was quelled, Congress completed their task and counted the votes. Again, Mr. Trump lost. Mr. Biden won the presidency.

Simply put, President Trump tried to cheat in a constitutional process, a violation of his oath of office. He incited an insurrection, a violent uprising against an authority or government. He attacked that government from within for weeks, and then formed and provoked a mob of his most aggressive supporters, who attacked it from without.

We heard audio of President Trump trying to reverse the certified results of Georgia, threatening Georgia’s Secretary of State if he did not “find” enough votes to produce a Trump win.

President Trump pressured Vice President Pence to illegally disqualify electors from several states, disenfranchising more than 25 million voters in the process.

President Trump publicly urged his supporters to come to Washington and to march on the Capitol building, on the day and at the time when the Congress was counting the electors’ votes. That timing is significant. This was not a random rally; he was again trying to disrupt the constitutional and legal election processes. President Trump urged his army of supporters to march on the U.S. Capitol. It was his mob. He incited them to a four-pronged attack: on a sacred building, on all the people within it, on the legislative branch of our government, and on the constitutional vote-counting process.

At every stage of the election process, the Constitution defended itself, supported by widely accepted civic norms and by the honorable behavior of public servants in the courts, in the States, and in the legislative branch. Federalism and checks and balances worked, repelling the attack of a failed strongman. Mr. Biden defeated Mr. Trump in the election. The U.S. Constitution defeated Mr. Trump’s attempt to steal a second term.

Defending the integrity of our democracy must not be a partisan effort, and I hope the vote is overwhelming and bipartisan. I don’t care about the short-term side effects. This is about the long run. Accountability for these heinous acts and restoring lost credibility to this essential constitutional process are more important than any short-term pain.

I urge a YES vote on the impeachment of President Donald Trump for his attempted insurrection, his failed attack on our government and on the U.S. Constitution.

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We American citizens have the right to choose our leaders by voting in elections. Exercising that right requires that our elections be fair, especially the one for president. Anyone who cheats in an election denies us that right.

American elections are for Americans only. When a foreign power interferes in an American election, it attacks our democracy.

When our president asked a foreign head of state to interfere in our next presidential election, he cheated and he invited such an attack.

Cheating is wrong, and this cheating was no small matter. This was cheating in how we choose who will hold the most powerful job on the planet. President Trump cheated. To help himself, he tried to deny me my right to vote in a fair election, and he tried to involve a foreign government in that cheating. That is inexcusable and unforgivable.

President Nixon cheated. By removing him for this, our self-correcting democracy partially repaired the damage he caused. President Clinton lied in court. I thought that was a high crime and supported removing him then. We failed, lowered the ethical bar, and weakened our democracy. Both comparisons are relevant today.

Like Nixon, President Trump cheated in a presidential election. Even worse, President Trump’s attempt asked a foreign government to interfere. To me this is also worse than what Clinton did, and I thought Clinton should have been removed. Our democracy needs to self-correct, as it did with Nixon and failed to do with Clinton.

I think President Trump’s cheating in the next presidential election, and his use of his office in an attempt to involve a foreign government in that cheating to help himself, are together an abuse of power and a high crime. I recommend the Senate find President Donald Trump guilty of abuse of power and remove him from office.

I find many of the arguments in and on the margins of the Senate impeachment trial to be distractions or secondary.
– I don’t care whether President Trump tied explicit conditions or threats to his request for a “favor” from the Ukrainian president. The ask was the bad act.
– Nor do I care that his cheating failed. An inept cheater who fails to achieve his objective is still a cheater.
– I don’t care much whether his action violated a criminal statute, as I think this is not necessary to constitute a high crime.
– I would err on the side of being over-inclusive on witnesses and evidence but don’t need more of either to draw my conclusion.
– Others who also cheated should be or should have been punished. The right answer is to raise the ethical bar, not lower it.
– The prosecution’s flaws, failures, and in some cases corrupt motives do not mitigate President Trump’s bad act or guilt. Two wrongs don’t make a right.
– Relative peace and prosperity, good poll numbers, anticipated citizen anger, or an upcoming election do not excuse a president from being held responsible for trying to deny me my right to vote in a fair election. We should hold all elected officials accountable for their worst actions, not just those who are unpopular, unsuccessful, or whose policies or political style we dislike.

It is a privilege to live in a society where we can speak our minds, vote, criticize our elected leaders, and hold them to account. I cherish these freedoms and rights, and our democracy that protects them. As permitted by the Constitution, the Senate should remove from power anyone who attacks that democracy. That includes our president, Donald Trump.

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“I worked with Brett Kavanaugh on a near-daily basis for three years, from mid-2003 to mid-2006. Part of my job was to write memos and prepare briefing memos for President Bush, and Brett was the coordinator and gatekeeper who made sure my work was ready for the president’s desk. I trusted Brett with the work I did for the president, and I trust him now for an even more important role.

The post Once again, in support of Brett Kavanaugh appeared first on Keith Hennessey.

Judge Kavanaugh is simply one of the finest professionals with whom I have ever worked. His integrity, intellect, professionalism, and collegiality are unsurpassed. He is a role model for honorable public service, and just a good, solid guy. I urge the Senate to confirm him for the Supreme Court.

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Using press reports for some back-of-the-envelope calculations of my own, it appears that Congress is heading toward increasing discretionary spending by about $1.8 trillion over the next decade (+2/3 of this unfinished budget year), and will have to borrow about $1.7 trillion more from financial markets to finance those net spending increases.

In making this calculation I am being generous in all as-yet unspecified respects. I am ignoring rumored discretionary spending increases outside the spending caps in law, as well as reported possible mandatory (entitlement) spending increases. I am ignoring another $60ish B in added interest expenses that would result from the added government borrowing, and I am giving them full credit for a claimed $100 B in offsets that will, in all likelihood, consist partially of budget gimmicks.

The effects of this bill would be twofold. First, the numbers are really big.

Second, the Republican policy reversals are staggering:

With this bill, Republicans would abandon their goal to balance the budget. The smart way to achieve this goal is to restructure and significantly slow the growth of the big 4 entitlement spending programs: Social Security, Medicare, Medicaid, and the Affordable Care Act.

Instead, last year’s House Republican majority proposed a budget claiming to reach balance principally through cutting non-defense discretionary spending. At the other end of Pennsylvania Avenue, the President’s advisors reconciled a balanced budget and a large tax cut through a $2 trillion accounting mistake/gimmick.

Now that the tax cut has been enacted and Republicans are about to embrace large increases in non-defense discretionary spending, even those feeble budgetary fictions evaporate. President Trump’s advisors and Congressional Republicans have over-constrained themselves. They refuse to reform Social Security, have failed to repeal the Affordable Care Act, are discussing only small changes to Medicare and Medicaid, and are now about to enact large increases in both defense and non-defense discretionary spending. At the same time, they can no longer claim unspecified economic growth benefits from future pro-growth policies, since their pro-growth policies are all behind them. They can’t make the arithmetic work. This may explain reports that they won’t even try to pass a budget this year.

Other than their relative prioritization of defense over non-defense programs, when it comes to government spending and borrowing, it is now quite difficult to distinguish President Trump and Congressional Republicans from Democrats.

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I had three reactions to the leaked Trump NSC materials.

• Surely these are not actual policy documents they are using to make decisions.
• The author is using China as a model to design a U.S. policy.
• If the President says 5G or build a nationwide wireless network in his State of the Union address Tuesday night, his staff are setting him up for an embarrassing policy failure.

The leaked documents are of such low quality that they barely merit a response, but the policy ramifications would be so enormous and harmful I feel obliged to raise my concerns, framed as twenty questions for the author of these documents.

I encourage you to review the slide deck and memo and form your own judgment.

Public vs. Private

1. You compare a government-built 5G wireless communications to both the creation of the National Highway System in the 1950s, and the Space Race in the 1960s. The government did those projects in part because no one else could. Why shouldn’t private firms build 5G? They seem willing and able to do so.
2. Pointing to both the U.S. Interstate Highway System and the Chinese “Belt and Road” system as models, your primary option proposes a network model for 5G wireless: a single, universal, government-run, centrally-administered network. Why does this model make more sense for American 5G wireless than the multiple overlapping 3G and 4G private wireless networks, or the privately-owned wired U.S. internet infrastructure, or the private hub-and-spoke air carrier network, or the regional networks of State and local roads that connect to the interstate highway system? Why should the government (you) choose an optimal network structure rather than allow it to grow and evolve based on consumer-driven pricing signals?
3. You say a government-built and -operated wireless network will “create millions of jobs.” Won’t it just shift jobs from the private sector to the government?

Financing, innovation, and improvement over time

4. You say your “new paradigm … would require a single network that is virtually shared by retail providers.” Who will pay for building this network? Since the benefits of any private investments to build or upgrade part of such a network would be shared by retail providers, how does your proposal “rely on private capital?” Why would private firms invest to build or upgrade capacity? Are you proposing to turn telecom firms into regulated utilities and guarantee them a certain return?
5. Or do you assume the government would use scarce fiscal resources to build and upgrade the network over time? If so, what makes you think the taxpayer funds would be available, or that they would not be allocated based on political power in Congress?
6. Sometimes different private firms adopt different competing technologies (e.g., GSM vs. CDMA, VHS vs. Beta). Competition drives these firms to improve their technologies. In your plan, the government would choose a single technology and mandate its nationwide use. What makes you think the government (you) knows enough to pick the best technology?
7. Other than government fiats, why would anyone have an incentive to improve upon that initially chosen technology?
8. IT modernization at the IRS is a multi-decade disaster. The U.S. government was unable to build a health insurance enrollment website. FedEx, UPS, and Amazon run circles around the U.S. Postal Service. What makes you think a government-run wireless network will “enable innovation” or result in “more resilient and effective operations” compared to one built and operated by private firms?

Speed of deployment

9. You state the U.S. government will build a nationwide wireless network in three years. That fits with the end of the president’s first term, but is there anything more specific than “Inspired Leadership” which leads you to think this particular timeline could be achieved?
10. What makes you think equipment manufacturers could “move manufacturing facilities to the U.S. … in time to allow for a three year deployment timeline?”
11. More generally, what examples suggest the U.S. government could build a nationwide wireless network faster than could the private sector?
12. You point out that local siting rules slow down the deployment of new telecom infrastructure, and recommend the federal government override these local rules. This policy choice is independent of who builds the infrastructure, right? If made, such policy changes would also expedite private sector deployment, yes?

Security & privacy

13. Why do you think a single network would be more secure than multiple networks? Would it be more robust to a debilitating attack?
14. As someone who received an Office of Personnel Management notice that my federal government employee records were hacked by Chinese proxies, why should I trust the U.S. government’s ability to secure private wireless communications?
15. Your proposal would mean that every phone call I make, every email and text I send and receive, every photo I post, search I cast, app I run, and website I browse would be going through government-operated information systems, right? And my geolocation data as well? Do you consider this a feature or a bug?

Other

16. You propose the Department of Education “take the lead in developing training programs that ensure an adequate supply of skilled labor.” What existing government-run job training programs lead you to believe this can succeed?
17. You say private firms can be forced to “begin harnessing the secure network as soon as it is available” through imposing “corporate governance standards … for large and publically [sic] traded private entities.” Why should the government tell private firms what technology they must use and when?
18. You say the government will create “an air layer utilizing airline carriers and other public/private Unmanned Aerial Systems.” Does this mean the government will be flying planes and drones around to provide 5G coverage? Why is this a good idea?
19. The proposal seems to be inspired by and modeled after a Chinese government, top-down, centralized control approach. Is it? If so, why does it make sense to model U.S. policy after Chinese policy? If not, how is it different from what China does?
20. Who signed off on this? The Axios story says this document was produced and distributed widely by “a senior National Security Council official.” Do White House staff routinely circulate documents of this poor quality to senior decision-makers? Do policy decisions get made in the Trump Administration based on documents like this?

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First, a few words on Kirstjen. She worked on the Homeland Security Council staff when I worked on the National Economic Council staff. She was a skilled, effective professional who delivered results and could make cumbersome bureaucracies move. Some Cabinet secretaries play mostly public-facing roles, acting as the face and voice of the department while others do the inside management and policy work. While I think she can be an effective communicator, I support Kirstjen primarily because I know she will be a hands-on leader, driving policy (and the bureaucracies) forward to produce results. She has expertise in cyber policy and natural disasters, two important priorities for the department. She has the trust and confidence of the President’s Chief of Staff, and her stint as John Kelly’s White House deputy means she knows the President and the senior White House staff, increasing her effectiveness when she moves over to lead the department. General Kelly has McMaster at NSC, Mattis at Defense, Tillerson at State, Pompeo and Coats on intel, and he will have Nielsen at Homeland. That’s a solid and stable team that gives me confidence. In this dangerous world and with an unpredictable and sometimes volatile Commander-in-Chief, I want to have confidence in his national security team.

Nielsen’s confirmation will further increase that confidence, and I urge the Senate to quickly confirm her as Secretary of Homeland Security.

I likewise have confidence in and recommend the President nominate Kevin Warsh to be Chairman of the Board of Governors of the Federal Reserve Board beginning early next year. Kevin and I worked closely together for 3 1/2 years on the Bush National Economic Council staff, when he handled the financial policy portfolio. He went down the street to become a Federal Reserve Governor in early 2006, and I renewed regular contact with him from late 2007 through January 2009 during the financial crisis. I recommend him in part based on my experience working so closely with him. Kevin’s free-market instincts, his sound judgment, and his effectiveness in designing and implementing policy inspire my confidence. The President’s senior team trusted and relied on Kevin’s judgment, as did I on a daily basis. He is an expert in the practical aspects of economic policymaking, with experience honed during a financial crisis. He is also just a solid, good guy, and a pleasure to work with. Those personal characteristics are sometimes underappreciated among senior policymakers.

My recommendation of Kevin Warsh also derives from my policy views and my view of what we need in a Fed Chair.

I will start with monetary policy.

• I’m a dual-mandate discretionary inflation hawk. I support maintaining the Fed’s dual mandate: stable prices and maximum sustainable employment. Others right-of-center would like to move the Fed to a single, inflation-only, mandate. That’s not my policy preference. Even if it were I can’t see how one would enact legislation changing the mandate, and I don’t think it’s worth the legislative effort to try to change it.
• At the same time, I’m an inflation hawk. All things being equal, I would place more weight on avoiding inflation risk than maximizing short-term employment. Of course, all things are never equal, but that’s my general lean.
• I’m a discretionary guy, not a rules-based guy. I think monetary rules are useful inputs into a collective decision-making process that ultimately works best when relying on the FOMC members’ judgments, and especially the Chair’s judgment. While I’m attracted to the concept of a rules-based policy, I think the macro models and forecasting tools that would interact with such rules are so imprecise as to make it dangerous to rely too heavily on rules. Our sensor system just isn’t good enough to put the car on autopilot. Maybe someday macroeconomics will be closer to a real science and we can rely more on rules, but we’re not there yet.
• I place a high priority on keeping monetary policy independent of pressures from both the Executive and Legislative Branches. A strong, independent monetary authority is one of the great strengths of the U.S. economic system.

While none of the four candidates are a perfect match, my policy views most closely align with Warsh’s. Yellen is more dovish than I; Taylor would lean too heavily on rules for my taste; Powell is a policy enigma to me (in all respects). At the same time, I shouldn’t overstate the case here. The policy distance among the candidates here is not that big, even between the “extremes” of Yellen and Taylor. Yes, it matters a lot to short-term investors, and yes, I have preferences, but the policy differences among the candidates are not significant enough to determine my recommendation.

On regulatory and macroprudential policy, I’m an outlier. I think I’m more aggressive than Warsh, Taylor, or Powell on pre-emptive policy changes to reduce the risk of another TBTF (Too Big To Fail) scenario. We are once again bearing too much long-term crisis risk, and are still too vulnerable to large financial institutions failing again with potentially catastrophic effects. I favor even higher capital and liquidity standards, size caps on financial institutions (!!), and dramatically less complex detailed micromanagement of large institutions’ finances. I want smaller, more liquid, more highly capitalized banks that have more freedom to do what they want and can’t do major harm if/when they fail. I am fairly certain this is farther than any of these three (and Vice Chair Randy Quarles) would go, and it is a fundamentally different approach than the Dodd-Frank implementation path implemented by former Governor Dan Tarullo and continued by Chair Yellen. Given how far I am from all the candidates on these questions, this does not help me make a recommendation for Chair.

While I care a lot about these policy questions, the non-policy differences among the candidates are even more important in this personnel decision, and they drive my recommendation of Kevin Warsh.

My top priority for a Fed Chair is someone who can lead and manage effectively if we have another financial shock. This is where Kevin’s experience from 2007-09 distinguishes him from the rest. In addition to being a Fed Governor at the time, he was effectively Chairman Bernanke’s consigliere, his right-hand man. He helped Bernanke lead and run the Fed during a time of tremendous economic, financial, policy, and political stress. From a White House perspective, we could talk to Ben and/or Kevin almost interchangeably at any point during the crisis. We knew they were tightly coordinated and that Kevin could speak for the Chairman if needed. When “New York Fed weekend” happened, Chairman Bernanke sent Kevin to New York as his proxy. Kevin was also interacting with counterparts at the other major central banks, especially during the critical times in September and October of that year, coordinating central bank actions to slow and mitigate the global effects of the U.S.-centered shocks. Kevin was at the center of the action, exercising tremendous responsibility and authority, during the most significant financial crisis since the Great Depression. He was essential to the Fed’s component of preventing that crisis from being far, far worse and mitigating the damage. None of the other candidates have such experience. This distinction and Kevin’s experience are, by themselves, determinative for me. I know he can succeed in a crisis because he has already done so. I can’t say that for the other candidates, and that worries me a lot.

My second priority is someone with the strength and credibility to represent the U.S. at the G-7 Finance Ministers Meetings. The U.S. seats at those meetings are for the Treasury Secretary and the Fed Chair. Given Secretary Mnuchin’s inexperience in international economic policy, as well as the protectionist leanings and unpredictability of the Secretary’s boss, it is even more important that the Fed Chair be globally credible. Yellen and Warsh have this credibility from their global experience as central bankers. Taylor has international experience from his time as the international Undersecretary at Treasury, but from a fiscal rather than a monetary perspective. Again, I’m just not sure about Powell, who has been so low profile as to be almost invisible. He might be globally credible. I just don’t know, and that concerns me.

Third, given the instability in and ineffectiveness of other parts of the U.S. government right now, for the next few years I place a high priority on stability and incrementalism at the Fed (even given my somewhat radical views on structural reform of financial institutions). Just as John Kelly knows he can rely on the Mattis-McMaster-Tillerson-Pompeo-Coats-Nielsen team to address foreign military and terrorist threats, I want to know we can rely on the Fed Chairman to provide monetary policy stability and confidence. Warsh and Yellen fit this criterion. I just don’t know if Taylor or Powell can do this, and in the current environment, I very much want to know.

To those who have suggested 47-year old Warsh is too young to chair the Fed, I’d point out that Tim Geithner was the same age when he became Treasury Secretary. Kirstjen Nielsen is 45; Paul Ryan is 47; Ben Sasse is 45. Kevin’s seven years working in senior economic policy jobs and his experience in the heat of a financial crisis are far more important than his birth date. He has the judgment and wisdom essential to such a critically important role. And frankly, it’s time for the Baby Boomers to move over for a new generation of policy leaders, the next of whom are Kirstjen Nielsen and Kevin Warsh.

The post In support of Nielsen and Warsh appeared first on Keith Hennessey.

Even good referees sometimes make a bad call, and I think Mr. Kessler did so yesterday in his column, “Is the GOP plan for Medicaid caps really Bill Clinton’s idea?” I disagree with his conclusion and score of former Senator Rick Santorum’s quote (two Pinocchios). I have expressed my views directly to Mr. Kessler, who graciously included some of my input in an updated version of his column. I’d like to share here a fuller explanation of why I think Santorum was right, Kessler wrong, and the two Pinocchio score is undeserved and unfair. My disagreement with Mr. Kessler stems in part, from a different view about the role of someone labeled a fact-checker who scores policymakers with Pinocchios. It may seem like I’m splitting hairs, but the underlying policy issue is important, and Mr. Kessler has a big role on an influential platform. His columns carry weight and his scores have influence, especially because the Pinocchio label implicitly tags policymakers as liars.

The quote Mr. Kessler analyzes comes from former Republican Senator Rick Santorum:

As everyone knows, the Medicaid per capita cap was proposed by President Clinton. Now it is seen as this draconian measure.

As far as we can tell, Democrats never embraced the idea after Clinton abandoned it once he had struck a deal with Republicans on the budget. Thus it remains a tactical gambit, not a serious proposal. That’s demonstrated also by the fact that Clinton’s caps were so high that they were virtually meaningless in terms of saving money.

In making his rhetorical point, Santorum ignores this history. He earns two Pinocchios.

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QTIIPS stands for Quantitatively Trivial Impact + Intense Political Symbolism.

QTIIPS policy changes provoke fierce political battles over trivially small policy impacts. Passionate advocates on both sides ignore numbers and policy details while fighting endlessly about symbols.

A policy change is QTIIPS if:

• its direct measurable effects are quite small relative to the underlying policy problem to be solved;
• it is viewed both by supporters and opponents as a first step toward an end state that all agree would be quite a large change;
• supporters and opponents alike attach great significance to the direction of the change, as a precursor to possible future movement toward that quantitatively significant end goal; and
• a fierce political battle erupts over the symbolism of this directional shift. This political battle is often zero-sum, unresolvable, and endless.

Advocates on either side of a QTIIPS policy change have desired end states that represent fundamentally different policy outcomes. But while the policy gap between their desired end states is measured in miles, on a QTIIPS policy, actual changes are measured in inches. The battle rages over which end state is the right one, but when policy shifts back and forth it changes direction often but moves only a tiny bit each time. Political constraints make the theoretical debate about miles-apart differences irrelevant because neither end state will ever occur, but that does not deter the theoretical war from raging during the real-world battles over a tiny actual change in direction.

If you listened to President Trump’s remarks today you would think staying in the Paris Agreement would destroy the U.S. economy. If you listen to many advocates who support the agreement, you would think you need to start building an ark, soon.

I therefore read the text of the agreement to see for myself. Doing so reinforced the view I developed when the agreement was concluded. Relative to the scope of the problem it is trying to solve, the Paris Agreement is quantitatively trivial. It is a set of weak process agreements, with many areas of ambiguous language and “flexibility” for countries to reinterpret their only loosely binding quantitative commitments to reduce greenhouse gas emissions many years from now.

The national leaders who supported Paris, including President Obama, had a political interest in overselling their policy accomplishment. Similarly, President Trump has a political interest in selling today’s move to his base as an enormous policy win, when to me it appears he is nullifying American participation in an agreement that on policy grounds was insignificant to begin with.

QTIIPS policy changes rest on the assumption that the first step is likely to lead to that theoretical quantitatively significant outcome. Most supporters of the Paris Agreement would privately concede that it is only a modest first step, and would then express hope that it could/will/might/should lead to further progress in the future. Opponents of the agreement would share their fears that this first step could/will/might lead to an eventual outcome they fear.

But this shared assumption, of a first step or slippery slope, could easily be wrong. If the Paris Agreement were never to have led to a more significant next step, then a key premise of the fight is wrong. The intense political symbolism and the fierce battles waged over both President Obama’s and President Trump’s relatively small policy moves would then be unsupported by strong policy arguments.

I think that’s the case here. I think Paris was not just the first step, I think it was likely the last step, that those who hoped it would lead to “deepening future commitments” were fooling themselves and others. I think Paris was agreed to only because national leaders realized it was impossible to get a numerically meaningful set of binding national commitments to reduce greenhouse gas emissions by specific large amounts. They therefore grabbed the best agreement they could, however weak, kicking the can down the road in the hope that somehow their successors might have more luck. Because I am so skeptical about the first step claim, and because I care far more about the policy impact than about the symbolism, my reaction is mild both to President Obama’s signing in 2016 and to President Trump’s withdrawal announcement today. I think neither agreeing to Paris nor withdrawing from it would have changed future global temperatures by any meaningful amount. Even before today I was skeptical that it would lead to any significant next steps, so I conclude that these symbolic battles about the Paris Agreement are almost meaningless.

A surprising dynamic often surrounds QTIPS policy changes—the most passionate supporters and opponents have a common interest in arguing that this particular policy change is enormously important, while downplaying the reality that its direct impact is barely measurable. These mortal opponents have a shared goal of hyping the issue and the battle. Issue advocates on both sides can generate political and financial support by convincing you this fight is important, even when it’s not. If you hear advocates arguing fiercely about “what this policy change means more broadly” or “the precedent it sets for future action” or “what it says about us/America/society” rather than about “what it does” and “what effect it has,” there is a good chance it is QTIIPS.

QTIIPS issues are unfortunately great fits for our modern advocacy, political, and communications structures. Everyone can virtue signal to their heart’s content. No one has to read the text of the policy change, look at the numbers, or ask hard questions of a relevant policy expert. Political tribes can inhabit their comfort zones and preach to the converted while heaping scorn and derision on the other tribe. Passion abounds while everyone ignores the policy nerds saying “Um… I think the actual effect here is too small to matter.”

I’ll end with two questions for the reader.

Q: Do you agree with me that agreeing to and withdrawing from the Paris Agreement are QTIIPS?

Q: What other hotly debated policy changes are QTIIPS?

How about the 2014 debate about banning immigration of refugees from Ebola-infected West African countries? Or the debate about incremental changes to gun laws? Or other hot-button social issues that dominate news cycles? Are they QTIIPS? Can you think of others?

The post Is the Paris Agreement QTIIPS? appeared first on Keith Hennessey.

Trump Budget Director Mick Mulvaney testified at the House and Senate Budget Committees, while Trump Treasury Secretary Steven Mnuchin testified at the House Ways & Means and Senate Finance Committees. Director Mulvaney said President Trump was proposing that tax reform be debt-neutral without including the budget benefits that would result from faster economic growth, while Secretary Mnuchin said President Trump was proposing that tax reform be debt-neutral with including the budget benefits that would result from faster growth. These two views cannot both be true. I understood the Mnuchin position to be the Administration’s unified view before Tuesday’s budget release. The Mulvaney view is the only one consistent with the new budget documents. Davidson and Rubin are therefore correct when they write that the Mulvaney position would be a major fiscal policy shift for the President.

President Trump now has four options:

1. President Trump supports the position Director Mulvaney stated yesterday, consistent with the Trump budget release. Tax reform must be debt neutral, statically scored. The budget benefits of growth help the government reach balance in 2027, as presented in the just-released budget plan. Tax reform becomes dramatically more difficult to enact, since the President’s position now requires finding as much as $2 trillion* more revenue over 10 years from eliminating or scaling back tax preferences. That would mean either flipping to support a border adjustment tax and eliminating the deduction for interest expenses, or dramatically scaling back their proposed tax cuts from what they floated in April.
2. President Trump supports the position Secretary Mnuchin stated yesterday, consistent with the April tax reform release. Tax reform must be debt neutral, including the effects of growth. Director Mulvaney cannot count those additional revenues to help him balance the budget. He has to modify his budget proposal to cut a lot more spending ($496 B in 2027 to hit balance in that year) or he has to give up on balancing the budget.
3. President Trump splits the $2 trillion between the two goals. Mnuchin and Mulvaney each have to find more tax increases / spending cuts (respectively) to meet their stated goals of debt-neutral tax reform and a balanced budget.
4. Do nothing, remaining ambiguous and internally inconsistent. They stick with the mutually inconsistent policies and the $2 trillion double-count, and try to duck / ignore / power through the questions that point out this logical and arithmetic contradiction. The likely outcome is that House and Senate Republicans ignore the President’s inconsistent policies and make their own policy choice on this question. I’d guess they’d lean toward the Mnuchin approach, dynamically scoring tax reform and reaching a balanced budget by cutting spending more than the President proposes.

It is unclear to me why Director Mulvaney and Secretary Mnuchin are saying opposite things here. Does this reflect a policy disagreement between the two men that still needs to be resolved by the President, and we are seeing that disagreement play out in public? Does it reflect a new policy direction (debt-neutral tax reform, statically scored) to which Secretary Mnuchin has not yet adjusted his public rhetoric? Does it reflect a coordinated intentional choice to try to have it both ways so that the President did not have to make another $2 trillion of hard policy choices?

This is important. The principle of honest budgeting is amplified by the size of this hole and its impacts on core elements of the president’s economic agenda. Two trillion dollars is a lot of money, and the decisions yet to be made affect the chances for enacting tax reform and a balanced federal budget.

Technical addendum

* Correction to my “$2 trillion hole” number — Team Trump says that faster growth resulting from all the President’s policies, in total, will improve the budget picture by $2 trillion over the next decade, and they incorporate that full amount in their balanced budget plan, including $496 billion in the balance year of FY 2027. Traditional dynamic scoring of a tax reform would incorporate the budget benefits of only that additional economic growth which results from tax reform. If some fraction of the faster growth would result from non-tax policies (including regulatory reform, increased energy supply, infrastructure spending), then (traditionally) one could not “use” that to offset tax reform. This means that while Director Mulvaney could and did incorporate the full $2 trillion in his balanced budget plan, traditional scoring rules might allow Secretary Mnuchin to include something less than the full $2 trillion to offset gross tax cuts, if the President were to head in that direction. None of the Administration’s language reflects this difference, and it is secondary to the core problem the Administration faces, but I want to be as accurate as I can be in my explanation.

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Let’s look at three elements of President Trump’s economic policy and how they interact:

1. Last month he proposed tax reform with most of the key numbers left blank.
2. Today he proposed a budget that claims to reach balance in 2027 (year 10).
3. His budget assumes his economic policies would increase economic growth by a lot, to 3 percent per year.

In addition to proposing a budget that purports to balance in year 10, today Trump Budget Director Mick Mulvaney told us one key new fact about tax reform: the Administration now assumes tax reform will be debt neutral. Director Mulvaney used this to explain why the President’s top fiscal priority, his tax reform proposal, which would involve trillions of dollars of changes to tax policies, was omitted from the President’s budget. This omission is, to say the least, odd.

There is significant public debate about whether Team Trump’s aggressive growth assumption is reasonable given the policies he has proposed. For now let’s set aside this critical question and pretend it’s reasonable. Let us assume President Trump’s economic advisors are right, that his policies would result in 3% real growth per year, and that this faster growth would benefit the budget. Let us further assume their estimate of the [budget] Effect of economic feedback is correct. You can see it in today’s budget proposal (Table S-2, near the bottom of page 26, which is page 32 of the PDF). President Trump’s advisors assume this faster economic growth will reduce the budget deficit by $496 billion in 2027, their target year for balancing the budget.

The President’s balanced budget claim depends on this $496 billion effect of economic feedback in year 2027. They assume almost $500 billion of government spending bills in 2027 will be paid from additional cash inflows that result from higher government revenues resulting from faster economic growth, rather than from cash borrowed from financial markets. Faster growth —> higher government revenues —> less need for government borrowing to pay spending bills —> lower deficits and debt & budget balance in year 10.

This $496 billion is a really big number for a single year. For comparison, it is almost twice as large as the $251 billion the president proposes to cut non-defense discretionary spending in that year. It is three times as large as the $165 billion the budget proposes to save in Medicaid in that same year.

On that same line of Table S-2 you can see Team Trump assumes economic growth means the federal government will need to borrow $2 trillion less over the next ten years. That equals 6.6% of GDP in 2027, an enormous amount. When Director Mulvaney says President Trump’s budget would reduce debt/GDP from 77% this year to 60% in 2027, about a third of that reduction is from this single assumption.

So far, so good. Items (2) and (3) work together: the balanced budget promise and the positive budget effect of the 3% growth assumption, which for now we are stipulating is valid. The problem is fitting debt-neutral tax reform into this puzzle as well.

We don’t know how much the tax reform proposal would cut taxes because in April President Trump did not provide sufficient detail to estimate it. The President’s campaign proposal was roughly a $6 trillion gross tax cut. Let’s make a wild guess and assume his new proposal is smaller, a $5 trillion gross tax cut. The concept that follows is what matters, not the actual gross number.

If your tax proposal, which you left out of your budget proposal, is debt neutral, then you need to have the same amount of new revenues to fully offset the revenue lost to the government from your proposed gross tax cut. In our example you’d need to have $5 trillion in new revenues over ten years to combine with $5 trillion of gross tax cuts to result in a debt-neutral package. In theory, this offsetting revenue can result either from proposed tax increases or from the higher revenue that results from economic growth, or from a combination of the two. You’d also need to match your revenue loss and revenue gain in 2027 so that your proposal doesn’t affect balance in that year.

In our example, if you combined $5 trillion of gross tax cuts with $3 trillion of tax increases, your tax reform package would be a net $2 trillion debt increase over ten years. If, however, your tax cuts would also result in faster economic growth, and if you think that economic growth would result in an additional $2 trillion of government revenues, then your tax package in total would be fully offset and debt neutral. This dynamic scoring of tax reform would make it significantly easier to enact debt-neutral tax reform, because you would need to add only $3 trillion of painful tax increase policies to a package that includes $5 trillion of gross tax cuts that people and businesses like and support.

But you cannot have it both ways. If you try, you are double counting. Either the $2 trillion of added cash inflows resulting from faster economic growth can pay for more government spending and reduce the need for government to borrow, or that $2 trillion can replace the cash lost to the government from cutting taxes and reduce the size of painful tax increases you need to propose. Arithmetic forces you to choose one goal or the other.

Last month Secretary Mnuchin counted the (then unspecified) positive budget effects of economic growth to help offset their tax reform package. Today Director Mulvaney counts those $2 trillion of extra revenues to reduce government borrowing and achieve a balanced budget. Logic requires they choose one or the other, but today they chose both and Director Mulvaney said that choice was deliberate. There will be only one $2 trillion stream of cash (if you even believe it’s that large). By claiming they can do two things with each dollar of cash they have left a $2 trillion hole, either in the Trump balanced budget proposal or in the Trump debt-neutral tax reform proposal.

If they’re going to use growth effects to help balance the budget as proposed today, then Secretary Mnuchin either needs to convince President Trump to support $2 trillion of additional tax increases to keep tax reform debt neutral, or they need to support significantly smaller gross tax cuts. Secretary Mnuchin has so far opposed the two biggest tax increases needed for a big debt-neutral tax reform: a border adjustment tax and eliminating the business deduction for interest expenses (which, coincidentally, would together raise about $2 T of revenues over 10 years). If they want to use dynamic scoring to make tax reform easier to enact, then President Trump and Director Mulvaney do not have a balanced budget proposal until they find almost $500 B of additional deficit reduction in 2027.

You can’t have it both ways, and $2 trillion is a big hole to fill.

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Stanford
25 February 2017

MEMORANDUM FOR A MEMBER OF CONGRESS

FROM:           KEITH HENNESSEY

SUBJECT:      THE PRESIDENT’S DEBT TWEET

You asked whether you should echo or retweet President Trump’s tweet about declining debt.

The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo.

— Donald J. Trump (@realDonaldTrump) February 25, 2017

In a word, no.

It appears the president was repeating something Herman Cain said this morning on Fox & Friends Weekend. We know the president watches this show and his tweet appeared shortly after Mr. Cain was on-air.

The numbers are technically correct.

• Debt held by the public declined $19.6 B from January 20, 2017 to February 23, 2017, the most recent day for which data is available.
• In 2009 the same measure increased $222.6 B (more than the “$200 billion” the president cited) over the same timeframe.

But government cash flows are lumpy, leading to big daily fluctuations in government debt.

• Had the president / Mr. Cain ended his timeframe one day earlier this tweet would have been invalid and debt would have increased (by just $1 B) in “the first month.”
• This is why analysts look at debt on an annual basis rather than daily/weekly/monthly.

Neither president affected government borrowing in his first month.

• Government borrowing in January and February is the byproduct of spending and tax policies set by Congress the year before. President Obama signed the fiscal stimulus law on February 17, 2009, but it took months before that began to change government cash flows and borrowing requirements. President Trump has so far not measurably affected fiscal policy in general or government borrowing in specific.
• It’s unfair to assign any responsibility for borrowing in the first month to either president.

The big difference between early 2009 and now is the health of the economy.

• GDP was plummeting when President Obama took office. Tax revenues were down, automatic stabilizer payments (e.g., unemployment insurance and safety net spending) were up, and funds were being spent from the Troubled Asset Relief Program (TARP). In early 2009 government was borrowing a lot because the economy was weak, not because of President Obama’s policies.
• In contrast, the U.S. economy is now growing. The smaller borrowing requirement for this month is mostly a result of this economic difference, and may also in part be simply an artifact of choosing such a short timeframe for comparison.

Recommendation

Because of his unique communications advantages, President Trump may be able to get away with making an argument with such a weak foundation. You cannot, and you should not place yourself in the position of having to address the intellectual weaknesses described above.

More concerning, this tweet shows the president continues to rely on TV rather than his advisors for numbers and policy substance. Until his staff figure out a way to ensure he doesn’t make such easily rebutted claims, you should not echo the president’s economic arguments or claims without first verifying both their accuracy and substantive merit. This is particularly true of his early morning and late night tweets, when he’s probably in the residence and away from his staff. This unfortunate situation will persist as long as President Trump continues to take his numbers and policy arguments from TV pundits rather than from Mr. Cohn, Director Mulvaney, and Secretary Mnuchin.

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He follows a hallowed tradition of politicians emphasizing jobs and talking about the number of people employed as if it were the only measure of economic well-being. This is effective political communications about economics and quite common.

Any time a policymaker does this he or she is oversimplifying. Employment levels, that is, jobs, are an important metric of economic health. Maximizing the number of people working is a laudable goal for policy. But jobs are not the only thing we should care about. Economically we are more than just workers.

• We care not just about how many people are working but also about how much we are earning. We are wage-earners.
• We care not just about wages but also about non-wage benefits like employer-paid health insurance premiums and employer contributions to retirement savings. Wages plus benefits equals total compensation.
• We care about the prices of the goods and services we buy. Those prices can be affected by the extent of domestic and international market competition and also by inflation. We are consumers.
• We can only spend what the government doesn’t take from us, so we care about the taxes we pay. We are taxpayers.
• On the flip side, we may receive cash or other transfer payments from the government. Some of us are recipients of government benefits.
• And since many of us own financial assets we care about economic growth and its effects on financial returns. We are investors.

Politicians talk about economic policy as if having a job is the only thing that matters to you. While being employed is critical to your economic status, you are more than just a worker.

When thinking about economic policy, each of us is a worker and a wage-earner, a consumer, a taxpayer, and often an investor and a recipient of government benefits.

OK, but so what? Does it really matter if politicians oversimplify and talk only about jobs, rather than about jobs and wages and compensation and prices and taxes and benefits and market returns?

It matters if political rhetoric drives policy to prioritize one element over the others. If we ignore a policy’s effects on consumers and taxpayers and measure only its impact on jobs, then we are getting an incomplete view of that policy. If we measure a policy’s success only by counting how many more jobs will result without considering the effects on wages and prices and other measure that matter, then we’re going to choose bad policies.

I am not arguing we should ignore the employment effects of a policy; I am not arguing that jobs don’t matter. Quite the opposite. We should start by looking at the effects on jobs and then keep going, analyzing the effects on wages, non-wage benefits, prices, taxes, transfer payments and financial returns. We need to measure, estimate, and understand all the economic effects of a proposed policy change, not just the one effect that is easiest to communicate.

Example 1: Buy American provisions, aka domestic content restrictions, require the government to buy certain things only from American producers. This helps steelworkers while harming taxpayers and those who use the government’s services (a fixed number of tax dollars buying more expensive steel will buy fewer rail cars and buses). We should evaluate these policies not just on the American jobs they create or protect, but also on the Americans’ taxes they increase and the services they reduce for other Americans.

Example 2: Erecting trade barriers with China and other sources of inexpensive imported goods would help American workers in the protected industries, at least in the short run. It would also raise prices for those products. We should consider the effects on both American manufacturing workers and on American Walmart shoppers. If we ignore the latter, much larger group, we’re not making good decisions.

Example 3: A large deficit-increasing increase in government spending or cut in taxes next year (aka fiscal stimulus) could, by itself, increase employment and wages. It could also lead to higher inflation and harm consumers. Or the Fed could react to the fiscal stimulus by raising interest rates more rapidly. This would slow growth in interest-sensitive components of our economy, at least partially offsetting the effects of fiscal stimulus. Higher interest rates would also affect financial returns, the ability of American farms and firms to export goods, and the prices of things we import. Policymakers need to look at the complete set of impacts of a proposed fiscal stimulus, not just at the gross number of jobs someone thinks it will create.

Jobs are important and Mr. Trump deserves credit for signaling early that he will prioritize faster economic growth. We should not single him out for focusing his rhetoric solely on jobs, as most other politicians do the same. At the same time, each of us is more than just a worker, and the number of jobs is not the only measure of a good policy. When we forget this we risk doing more harm than good.

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Challenge #1: Any policy problem difficult enough to make it to the president’s desk is usually multidimensional.

Challenge #2: The work of government is often highly interconnected. What one department does affects another.

Challenge #3: Once you get past the analysis, most presidential decisions involve tradeoffs among competing values and interests. I believe those judgment calls should be made by the person selected by voters.

Let’s construct an imaginary example of what appears to be a straightforward, even simple, policy question, and then use that to understand how policy advice to a president typically works.

Suppose House & Senate Republicans are moving a bill to increase government infrastructure spending by $200 B over the next decade, fully offset by cuts to other government spending. Let’s pretend Senator Ron Wyden, senior Democrat on the Senate Finance Committee, proposes doubling that new spending to $400 B over ten years with the increment to be offset by a roughly ten cent per gallon tax increase on gasoline and diesel fuel. Suppose Senate Minority Leader Chuck Schumer has told White House Chief of Staff Reince Priebus that he wants to talk to President Trump about this proposal. Finally, suppose President Trump decides he wants advice on how to respond to Senator Schumer.

Thus the question is: How should President Trump respond to Congressional Democrats’ proposal to double the proposed government infrastructure spending increase to $400 B, offset by a tax increase of roughly ten cents per gallon on gas and diesel fuel?

Pretty straightforward, right? Let’s unpack the question the way a White House policy council staff would.

Policy dimensions

• Numbers: Are Senator Wyden’s numbers right? Will a ten cent per gallon fuel tax increase raise $200 B over ten years? A tax increase will increase the gross pump price, which will reduce demand for fuel, partially offsetting the initial price increase. What is the net effect on the pump price from a ten cent per gallon gross increase?
• More infrastructure: How much should the president value an additional $200 B of infrastructure spending? How much more economic growth and how much better of a quality of life will an additional $200 B buy? What does it mean for people and stuff traveling by air, rail, car, truck, bus, and ship?
• Economic effects of tax increase: What are the economic effects of tax and price increases of that size? Will they slow growth and by how much? What are the distributional impacts: regional geographic distribution, urban vs. rural, income distribution? What are the sectoral impacts: trucking, agriculture, Uber/Lyft/taxi, the transport component of the cost of consumer goods?
• Environmental: More expensive fuel —> less driving —> less pollution and fewer greenhouse gas emissions. How big are these effects and how do they compare with other policy tools like fuel economy requirements and limits on power plant and industrial emissions?
• Energy supply and demand; national security: How much will domestic fuel demand decline? How will that affect domestic oil and gasoline suppliers? How will it affect U.S. oil and fuel imports and exports? Will those changes affect our relationships with foreign oil suppliers like Venezuela and the Middle East?
• Other increments: What if we did half what Senator Schumer is offering, +$100 B for a 5 cent increase? What if we doubled Schumer’s proposal to $400 B / 20 cents? What if we did Schumer’s +$200 B paid for half by gas tax and half by further spending cuts, or all by spending cuts?

Legislative, political, and communications dimensions

• Communications: Fuel tax increases are extremely unpopular and communicating support for them is hard. What is the best communications strategy? What exactly will the president and his Administration say?
• The politics are multi-dimensional:

• left-right: The more
  [economically] conservative you are, the more you tend to oppose any tax increases, including these.
• urban-rural: City dwellers are affected less than rural folk. If you drive your F-150 forty miles to and from work each day, you care a lot about fuel taxes.
• infrastructure spending: Almost every Member of Congress wants to spend more money on infrastructure. Most will suck up a lot of other political pain if it means fixing a bridge in their district or State.
• campaign fear: The campaign attack ads against an incumbent who voted for a gas tax increase write themselves. I wonder if I can get an ad on that little TV built into the gas pump?
• political cover: Bipartisanship and/or presidential support might partially mitigate someone’s re-election risk.
• States and localities: When the Feds raise these taxes it makes it harder for Governors and Mayors to do the same, triggering political pushback from those officials.
• Legislative:
  • votes: How many Republican votes do we lose in the House and Senate if we support including a gas tax increase? How many Democrats do we pick up? Would we risk a Senate filibuster on the right? What would the votes look like if we counter-offered a different pay-for?
  • leadership support: Would Ryan and McConnell go along with it if the president insisted? They control the legislative process and without them we’re sunk.
  • other effects on the bill: If we lose Republican votes do we have to make other policy sacrifices because we now rely on Democrats to pass the bill? Will Congressional Democrats then demand further changes to the type or location of spending, or to union-related or environmental provisions?
  • legislative linkage: How would splitting Congressional Republicans and antagonizing their leadership weaken our ability to get them (the majority party) to help us with other parts of our legislative agenda? Would an alliance with Schumer on this bill provide other legislative benefits?

Someone needs to be able to educate the president about all these aspects of this decision as well as to answer these questions as needed. Let’s look at the president’s most senior advisors: Cabinet Secretaries and the most senior White House staff. Which of them have information, expertise, and/or formal responsibility for these questions and should be given an opportunity to advise the president on this decision?

Two Cabinet-level officials are particularly important:

• Secretary of the Treasury because it’s taxes; and
• Secretary of Transportation because of the infrastructure spending.

Six additional Cabinet-level officials can make strong cases that they should be part of the discussion:

• EPA Administrator because of the environmental impacts;
• Secretaries of Interior and Energy because of the effects on oil supply (Interior) and demand and import/export (Energy);
• Secretaries of Commerce and Agriculture because of the sectoral impacts;
• Secretary of Labor if a legislative alliance with Democrats necessitates changes in labor policy.

So far we’re between two and six Cabinet level officials who probably should be part of this decision. Now let’s look inside the White House (technically the Executive Office of the President, which includes the White House as well as other offices). We’ll start with the in-house policy experts.

• The President needs to have the Director of the Office of Management and Budget who manages both the spending and tax sides of the ledger. $200 B is a lot of money.
• He’ll need his chief economist (Council of Economic Advisers) to answer the economic questions. In theory maybe SecTreas or SecCommerce could do that, but while those two have economists working for them, you’d like to have an economist principal in the room. That’s the CEA Chair.
• If you include EPA you’ll also include the Chair of the White House Council on Environmental Quality (CEQ).

Then you need the non-policy advisors in the White House:

• the head of White House Legislative Affairs to address all the legislative complexities described above;
• the president’s White House political advisor to advise on how this affects politics, including popularity, partisanship, and interest group support and opposition; and
• the communications director and the press secretary to advise on how this fits (or doesn’t) in the president’s overall message and on how to talk about it publicly.

We’ve added another seven White House advisors so far. Just a few more:

• the Vice President;
• the White House Chief of Staff;
• the Deputy Chief of Staff for Policy; and finally,
• the Director of the National Economic Council, who corrals all these people, coordinates the process, produces the paper and runs the meetings.

Phew! That means the skinny version of this decision, with only two cabinet secretaries, has twelve senior people who merit advising the president on this simple question. The fuller version has up to nineteen advisors, each of whom has a strong argument for participating in the discussion leading up to this presidential decision. In practice nineteen is too many; you’d probably end up with around 15. And the president might take input from a dozen or more senior advisors, then have a follow-on smaller discussion with just a few of them. Even so, a lot of people need to advise the key decision-maker, even if they’re not all in the room when he makes the final call.

Why do you typically include so many people in providing input into a presidential decision?

1. These advisors have information and expertise—Each question listed above requires analysis and research. The experts who do this work report to these 12-19 principals throughout the Cabinet and White House. These principals also have personal expertise, experience, and judgment (if you hired right). And they are each in close and frequent contact with relevant constituencies (Congress, truckers, farmers, drivers, labor unions, the press, farmers…) and can therefore add useful context and texture to a policy discussion.
2. They have formal jurisdiction—Part of their job is to advise the president on policy issues within their portfolios.
3. Cabinet management, morale, and policy implementation—These senior advisors are successful people who were told they’d have an impact on policy. They’re working hard on the president’s behalf every day. Many have not-small egos. If you exclude them from the big decisions you’ll have to spend more time and energy managing them, and you’ll have a tougher time getting their portions of the bureaucracy to faithfully implement the president’s decision.
4. Cabinet effectiveness — A Cabinet secretary who is excluded from providing input directly to the president quickly loses the ability to be effective with others: Congress, the press, and interest groups. If you don’t have the President’s ear people figure that out quickly and work around you.
5. Reduce insularity — Mixing up and expanding the personnel involved reduces the chance the president and his closest advisors will get trapped in a small groupthink bubble.

Could President Trump delegate a policy decision like this to one person, either a Cabinet Secretary or someone in the White House? Sure, but which one? Either you delegate to one person who likely prioritizes their part of the problem, leading to an unbalanced decision that doesn’t account for all of the President’s interests. Or you simply push the advise problem down a level: if you delegate to the White House Chief of Staff, or the Vice President, or the DCOS or NEC Director, then that person needs to get advice from these other dozen or more senior advisors. You haven’t solved the advice management challenge, you’ve simply relocated it.

All of the above was to advise the president on an apparently easy question. Imagine how complex it gets when you’re dealing with something hard. Can the president rely on one person for policy advice? Of course. A president can make decisions any way he wants. If he wants to make the judgment calls, and if he wants to make a well-informed decision, he needs information and counsel that represents a wide range of experience, expertise, and viewpoints.

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• The President needs someone physically close to him whom he trusts to answer policy questions as they arise.
• When he has to make a policy decision someone has to get him all the information he needs to make a good decision, and he needs someone to sift through and mediate the oft-conflicting views of his advisors. This is an honest broker role.
• He may need someone with policy expertise to advise him on such decisions, someone who can see the big picture rather than just one part of it. This is an advisor role.
• When he makes a policy decision that spans Cabinet agencies he needs someone to ensure the different parts of his government are coordinated, implementing his policy decision rather than their own preferences.
• When problems crop up he needs someone to make sure they get solved, especially when the problems and/or solutions cross jurisdictional lines within the executive branch.
• Finally, he needs policy experts to work with his other advisors to explain and sell his policies to Congress, the public, the press, and the world.

The staffs of the White House policy councils do all these things for the president.

President Trump will inherit from President Obama three White House policy councils:

1. the National Security Council (NSC);
2. the National Economic Council (NEC); and
3. the Domestic Policy Council (DPC).

Each council has two components: the council itself and the policy council staff. There is a National Economic Council, which formally consists of eighteen people: the president, vice president, 12 cabinet-level officials and four senior White House staff. Then there’s an NEC staff within the White House, comprised of 15-25 people. Usually when people refer to the NEC they actually mean the NEC staff. The most senior of these has the title of Assistant to the President for Economic Policy and Director of the National Economic Council. President-elect Trump has named Gary Cohn to that position. Mike Flynn will run the NSC with the title National Security Advisor, and they still need someone to run DPC.

I know most about the NEC so I’ll use that for illustration. DPC is a parallel to NEC. NSC, the granddaddy of the three, is more than 15X the staff size (~350) and runs a bit differently, but the basic approach is quite similar.

The hypothetical examples in the first three bullets here are drawn from today’s Wall Street Journal.

• Information: President Trump calls NEC Director Gary Cohn, “Why are the Chinese halting trading in bond futures?” (Organizationally the President should probably call SecTreas on this, but Cohn was #2 at Goldman and started as a trader.) “Also,” says the President, “find out what Facebook is now doing about fake news and what Yahoo is doing about that huge privacy breach.”

• Advice: President Trump continues: “Should we be doing anything about either of these? Should I tweet something about Facebook or Yahoo, either to praise either firm or to scold them? Do we need to do something from a policy standpoint?”
• Policy development & decision support: More: “I see the Journal editorial page thinks we should fast-track approvals for liquified natural gas exports. That sounds like a good idea, as long as we don’t shortchange Americans. Get whoever we need together and present me with some options. Also, now that Harry Reid’s gone I think we should get Yucca Mountain restarted. Figure it out.”
• Implementation: Imagine President Trump has decided to implement his outsourcing tariff using authorities under current law. (Can he?) Doing so will require coordinating implementation work by Treasury (if it’s a tax), USTR (if it’s a tariff) and Commerce because of the trade and business implications, and State to work on the anticipated blowback from foreign governments whose exports to the U.S. will decline. Part of this would be coordination, part of it internal management to ensure that those within the various departments who recommended against the policy nevertheless work toward implementing the President’s decision.

• Sales and marketing support: Mr. Cohn may need to visit Capitol Hill to explain this outsourcing tariff and its implementation to Congress, or do press interviews, or meet with business and labor leaders. His staff may also help educate other senior White House advisors and Cabinet secretaries who need to help push this element of the President’s economic policy agenda.

The White House policy council staffs each run a manufacturing shop and a service operation. They help the president manufacture policy decisions and they provide policy services to promote those decisions and coordinate their implementation.

Gary Cohn, Mike Flynn, and an as yet unnamed DPC head will have their hands full.

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Firms 1, 2, and 3 close their New York widget factories.

• Firm 1 builds a new widget factory in Mexico.
• Firm 2 builds a new widget factory in South Carolina.
• Firm 3 does not set up a new factory anywhere. Instead, it buys widgets from a separate company which built a widget factory in Mexico and imported them into the U.S. This separate company never had a U.S. factory.
• Firm 4 closes its New York call center and lays off all its employees. The firm opens a new call center in the Philippines.
• Firm 5 keeps its New York widget factory open but replaces half its employees with robots.

In all five cases New York workers lose their jobs. Firms 1 and 4 move New York jobs to foreign countries while Firm 2 moves New York jobs to South Carolina.

President-elect Trump’s proposed new 35 percent tariff would apply to Firm 1, and specifically to goods imported into the U.S. from the new Mexican factory that replaced Firm 1’s now closed New York factory.

It appears his policy would not apply to Firms 2-5. Based largely on his recent interview on Fox News Sunday with Chris Wallace, here is my best read of Mr. Trump’s intent.

• The policy clearly does not apply to Firm 2, which “moves jobs” within the U.S.
• He said the policy would apply to a company that “wants to move to Mexico or another country.” Firm 3 isn’t moving anything. Firm 3 shuts down a U.S. factory, while a separate firm makes the replacement goods and imports them.
• Firm 4 is outsourcing services, not goods. (I think) his policy would apply only to manufactured goods.
• The tariff also doesn’t apply to Firm 5, since while jobs are lost, no jobs are moving.

Over the next few months Team Trump will have to address the following four questions about his proposed tariff.

Question 1: Will it work? Will the threat of an import tariff prevent the case of Firm 1? In the short run, yes. A punitive tariff can be set high enough that it outweighs the cost advantages of cheaper foreign labor and a less burdensome foreign regulatory environment. The tariff would in effect trap domestic manufacturing capacity and prevent it from moving outside the U.S., and that’s the intent.

At some point, however, another firm without existing U.S. manufacturing workers can set up a factory in Mexico and start making similar goods at lower cost than Firm 1’s trapped U.S. manufacturing capacity. Those goods would not face the import tariff since this separate firm didn’t move jobs out of the U.S. Firm 1 will struggle to compete with these less expensive imports and may eventually shut down its New York factory despite the policy designed to help those workers. In the long run Firm 3 can probably beat Firm 1.

Question 2: Is the Firm 1 case the result of unfair trade? Chris Wallace described Firm 1 as making a free market decision. The president-elect replied “No, that’s the dumb market… I’m a big free trader, but it has to be fair.” Mr. Trump seems to be conflating two things:

1. a foreign government’s trade policy or a negotiated trade agreement (“bad trade deal”) that disadvantages U.S. producers relative to foreign producers; and
2. a competitive market advantage to producing goods overseas unrelated to trade policy: things like cheaper labor or resource inputs, or lower tax and regulatory burdens.

The president-elect and his advisors now need to explain why, in the absence of the first, the second is not a free market, why they think it’s unfair trade. If there is something in NAFTA that tilts the playing field away from the U.S. and toward Mexico, I’ve never heard Team Trump explain it. In the case of Mexico, Mr. Trump’s “dumb market” is also a free market, just one in which he doesn’t like the outcome of competition.

Question 3: What share of laid off manufacturing workers see their jobs outsourced to foreign countries? New Yorkers in all five of the above cases are laid off. How many of them are in the first case relative to the others? To answer this you’d need to measure automation vs. outsourcing, domestic vs. foreign outsourcing, and services vs. manufacturing, as well as make a guess about how many firms would choose the Firm 3 path when confronted by a tariff that applies only to Firm 1.

If laid off Firm 1 New Yorkers are only a small portion of all laid off New Yorkers in Firms 1-5, by itself that doesn’t mean you shouldn’t try to help those in Firm 1. It does mean you’ll need to explain why you’re trying to help some laid off workers and not others. That brings us to the political and communications challenge…

Question 4: Is the policy fair and will it be perceived as fair? What do you tell the laid off workers of Firms 2-5 when they ask why you’re not helping them as well? The affected workers, their families, and the local economy, probably care less why New York jobs disappeared than how many did. Team Trump could argue their policy is narrowly tailored to solve only a specific problem, that of manufacturing jobs outsourced overseas because of unfair trade policies or bad trade deals. The laid off New Yorkers probably don’t care whether their jobs were shipped to Mexico, shipped to South Carolina, or taken by robots. If Team Trump can’t answer question 2 convincingly and explain why Firm 1’s workers were harmed by unfair trade policies or agreements, rather than by the harsh realities of the free market on a level playing field, then their justification for helping some workers but not others could fail. And if Firm 1’s laid off New Yorkers are only a small portion of those laid off in all five firms, then Team Trump will face an even greater political and communications challenge.

Rather than an import tariff that may not work in the long run, is unfair to other laid off workers, and undermines free market competition, I’d like to see President-elect Trump dedicate his energy to pushing the other policies he referenced on Sunday: those that make it less costly for firms to employ American workers by lowering tax and regulatory burdens. Make America a great place to invest, expand, and create new jobs. A flexible and rapidly growing U.S. economy is also the best way to help Americans who lose their jobs (for any reason) find new ones quickly.

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What are the most powerful policy jobs in the White House?

First, a few caveats.

• In this post we’ll look only at the top tier of White House staff, each of whom has the rank of Assistant to the President. That’s an oversimplification but a useful starting point.
• My answer is based on my experience in the George W. Bush (43) White House. Your mileage may vary.
• The various senior roles have different forms and tools of policy power. I may write about that in a separate post later but won’t do so here.
• Here I’m focusing on the power that derives from the position and the operating patterns of the White House. Some particularly effective advisors “punch above their weight” and have a policy impact larger than their role might suggest here.
• I’m using White House a bit loosely. Technically a few of these advisors (OMB, CEA, CEQ, OSTP) are part of the broader Executive Office of the President and aren’t formally in the White House. In practical terms there’s little difference.
• I’m excluding “policy czars” that existed in the Obama White House but not in Bush 43.

OK, let’s dive in. I’ll divide the senior White House advisor jobs into three buckets:

1. five policy advisors who run the policy processes within the White House;
2. six non-policy advisors who have a different principal function but nevertheless play a major role in advising the president on big policy decisions; and
3. four policy advisors that are the leads for specific areas of expertise.

In terms of total policy impact I rank the buckets 1-2-3. Those in bucket 2, however, often are more powerful than the policy council directors in bucket 1 if we’re thinking about more than just policy impact, and also when we’re talking about tradeoffs among issues.

I’m going to leave the Vice President and the White House Chief of Staff out of the following. Both play at a level above all of what follows.

Bucket 1: The most powerful policy-only jobs in the White House are:

• Deputy Chief of Staff for Policy
• Assistant to the President and National Security Advisor
• Assistant to the President for Economic Policy and Director, National Economic Council (aka “NEC Director”)
• Assistant to the President for Domestic Policy and Director, Domestic Policy Council (aka “DPC Director”)
• Director, Office of Management and Budget (aka “OMB Director”)

Within the White House these policy positions have the greatest impact on policy because (a) that’s their job and responsibility, (b) they run the policy decision-making and implementation coordination processes, (c) they work with agencies on policy on a daily basis; and (d) part of their job is to “own” the policy issues within the White House, acting as the keeper of the answer to every question of the form “What is the president’s policy on ________?” In the Bush 43 White House the Deputy Chief of Staff for Policy had an oversight role over the NEC, DPC, and OMB, so you should think of that slot as a notch above those three.

Bucket 2: The non-policy White House jobs that have the biggest policy impact are:

• Assistant to the President for Legislative Affairs (aka “Leg Affairs”)
• Senior Advisor or Counselor or Strategic Advisor (the political advisor, e.g., Karl Rove, Valerie Jarrett, and soon Steve Bannon)
• Assistant to the President for Communication (aka “Communications Director”)
• Assistant to the President and Press Secretary
• Chief of Staff to the Vice President
• Staff Secretary

These six roles each have a non-policy principal function within the White House. They are major players in all the big presidential policy decisions because (a) they are close to the president, (b) they are each the principal advisor on a key element of a president’s policy decision (Congress, politics, communications, press), and (c) they do that for every single policy decision (i.e., maximum breadth). The first five of these six advisors were in every NEC Principals meeting we had, and, more importantly, were in every economic policy decision meeting we had with the president. Bucket 2 advisors often play a smaller role in national security issues because some presidents are reluctant to politicize national security decisions.

The Staff Secretary is a special case with enormous potential to influence policy almost invisibly. I may write about that separately but won’t spend time on it here.

I have excluded the Chief Speechwriter because the role comes with little formal policy power. This, however, is one of those roles where a particularly influential chief speechwriter can occasionally have significant influence on certain policies.

Bucket 3: The White House policy specialists are:

• White House Counsel (the president’s lawyer)
• Chairman, Council of Economic Advisers (aka “CEA”, the economist)
• Chairman, Council on Environmental Quality (aka “CEQ”, the environmental expert)
• Director, Office of Science and Technology Policy (aka “OSTP”, the scientist)

Each of these is a subject matter expert. Each plays in a wide range of policy issues and has a seat at every policy table where his or her expertise is relevant. These slots are different from the first bucket in two ways. First, these jobs are best held by true experts (e.g., a brilliant legal mind, an accomplished economist and scientist, etc.), where the Bucket 1 policy process management jobs can be held by generalists. The head of CEA has to be a terrific economist, the NEC Director can but doesn’t have to be. Second, these specialist advisors have somewhat narrower subject matter scopes than the policy process managers. For our purpose here we’re looking at the White House Counsel as the legal expert. He or she also has a separate role as the president’s lawyer.

I’ll end by reinforcing yesterday’s post about the policy importance of White House advisors relative to the Cabinet. On national security issues SecState and SecDef are often heavy hitters relative to the White House staff, but on other issues the White House staff’s policy impact often significantly outweighs that of the relevant cabinet secretaries.

Take a straightforward issue like pension reform that involves three cabinet departments: Treasury, Labor, and Commerce. In the Bush White House a policy meeting with the president to get decisions on pension reform would have the following principal-level attendees:

• Vice President
• Chief of Staff
• Deputy Chief of Staff for Policy
• NEC Director (runs the meeting)
• Leg Affairs
• Senior Advisor
• Communications Director
• Press Secretary
• VP’s Chief of Staff
• CEA Chairman
• White House Counsel or Deputy Counsel
• OMB Director
• Secretary of the Treasury
• Secretary of Commerce
• Secretary of Labor

Excluding the president and VP, count ‘em up: three cabinet secretaries and eleven senior White House aides (counting OMB as White House). That partly demonstrates the policy power of White House staff.

The post What are the most powerful policy jobs in the White House? appeared first on Keith Hennessey.

• Most big policy issues cross multiple jurisdictions within the government, especially outside the national security realm. This makes it hard and at times illogical to entrust one cabinet secretary to make decisions that so directly affect parts of the government for which he is not responsible and does not have expertise.
• It is quite difficult to get one cabinet Secretary to take orders from another. Cabinet and especially sub-cabinet officials will take and follow orders from White House staff that they will not take from their peers in other departments, because they perceive those White House staff as speaking for the president. Cabinet secretaries are successful people who when hired were told they’d report to the president, not to another cabinet secretary. Not a lot of small-ego type-B personalities here.
• While you could delegate a certain amount of money to a cabinet secretary, it’s hard to delegate amorphous resources like “political capital” or “legislative priority.” To make these tradeoffs the president looks to those with responsibility for his entire agenda and all of his interests, not just a subset. His White House staff are the only ones with responsibility for that breadth.
• Cabinet secretaries and their staff have institutional interests that overlap with but differ from the president’s. Treasury staff of course ultimately work for the president and they try to advance his agenda. They also have narrower, more local and self-interested priorities. This leads them to think about the Treasury Department’s issues, problems, responsibilities, powers, and points of view; the same goes for other agencies. White House staff think first, second, and third about what the president needs to succeed.
• Time and place matter. The senior White House staff sit in the West Wing with the president while the cabinet secretaries are in other buildings, some more than a mile from the White House. The president naturally relies on people close to him. Cabinet secretaries spend little time with the president. White House staff are with / near him every day and have a better sense of what he wants and needs. They are closer when he needs information or to make decisions, and they are better aware of his mindset and perspective.
• Early in an Administration the senior White House staff slots are filled by campaign aides who are close to the president and are deeply committed to him and his agenda. The president knows, trusts, and relies on them. Cabinet picks are often new hires, and even the best of them take time to earn the trust and respect of their new boss.
• Some cabinet secretaries are newbies to government, and some just aren’t great decision-makers. Some are chosen for reasons other than their policy expertise or judgment: some are good managers, others are great communicators, and still others are chosen to check political boxes.
• While there are plenty of cases of White House staff seizing/holding power for their own reasons, in most cases the centralization comes from the president’s desire to make decisions for himself rather than to rely on others, including the Cabinet. It’s the president who centralizes power; his White House staff help him do that. People who run for president tend to like to make the big decisions themselves. They have the ultimate responsibility when things go wrong, so they choose to keep the authority to match that. The buck really does stop at the Resolute desk in the Oval Office.

Update: I struck the opening line about my view of the President-elect’s initial Cabinet picks. It was distracting readers from the main point of the piece.

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1. It is unfair to other Americans.
2. It weakens American firms relative to their foreign competitors.
3. It does long run economic harm to the U.S.
4. It abandons any pretense of free trade on a level playing field.
5. It is easily abused.

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I will not vote for Donald Trump for the Republican presidential nomination. If he wins the nomination I will not vote for him for President.

This is not a tough call.

Donald Trump is an ignorant, unprincipled, amoral policy lightweight opposed to free market capitalism and limited government.

… Donald Trump is dangerous.

… Donald Trump acts like an eighth grade bully.

… Donald Trump lacks the character, the values, and the sound judgment essential to fulfill this awesome responsibility. He is unqualified and unfit to be President of the United States.

Over the past seven months Mr. Trump has repeatedly reaffirmed my March viewpoint. I continue to oppose Donald Trump and I will not vote for him for President. For me it’s a matter of conscience — I simply cannot vote for him no matter what the alternative or consequence. As I did in March, I again conclude that a President Trump would be a disaster for America, a danger to the world, and destructive of those values and ideas most important to me.

I find that this year I am not thinking of my vote as a choice between two bad alternatives. Maybe I should be; maybe I should vote for whichever major party candidate is less worse for America.

But I cannot. My mindset is more selfish: no one “deserves” my vote, especially if their principal case is a negative one. My vote is mine and you have to earn it by convincing me to vote for you, not just against your opponent. Has Mr. Trump earned my vote? No. OK, then has Secretary Clinton earned it?

Also no. Given my starting point it wouldn’t have taken much. I was gettable. She could have tacked back to the center in the general election rather than continuing to pander to her progressive base. She could have said something positive about free trade, or slowing entitlement spending growth, or keeping taxes low, or reducing the burdens on the private sector of an ever-expanding administrative state. She could have accepted responsibility for her past poor judgment and ethical lapses. She could have taken steps to show that she had learned from these mistakes and that she would not make similar ones in the future. She could have signaled that a Clinton presidency would sometimes be bipartisan, would occasionally be centrist, would always respect the rule of law and behave ethically.

Since she has done none of those things she has not earned my vote.

This means I’m stuck. Donald Trump must not become president but I cannot justify voting for Hillary Clinton. So a write-in it is for me—tomorrow I will write in Jeb Bush as I did in the California primary. I would vote for Clinton if she had tried just a little, so great is the threat that Trump poses. I comfort myself somewhat with this unsatisfying middle ground by remembering that my vote here in California is purely symbolic, and for once I am happy that I don’t live in a swing state.

I am not trying to tell you how to vote, and I respect others who are making different choices. I write this today simply because I want once again to be on record opposing Donald Trump while it still counts.

The post I still oppose Donald Trump appeared first on Keith Hennessey.

We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.

Supplementing Glenn Kessler’s excellent analysis in today’s Washington Post, let’s examine Secretary Clinton’s argument that the Bush tax cuts “in large part” caused the 2008 financial crisis.
The Kessler column cites Alan Kreuger and Simon Johnson, offered by the Clinton campaign to back up her argument. Neither does. Each defends his own reinterpretations of what she might have meant or could have said.

Folks on the left often have other reasons to oppose (or to have opposed) the Bush tax cuts, and I am happy to debate those points. Similarly, the argument that President Bush and Congressional Republicans “failed to invest in the middle class” is a common refrain. But those arguments are separable from whether these policies caused or contributed to the financial crisis. To me linking tax policy to the crisis is nonsensical, as is the “failed to invest in the middle class” causal linkage to the crisis. The “in large part” further amplifies her error.

Some (e.g., Simon Johnson) argue that higher debt levels restricted fiscal flexibility in responding to the crisis. I was enmeshed in the design, proposal, enactment, and initial implementation of all financial crisis rescue actions. With debt then at 38% of GDP, fiscal flexibility did not constrain our financial rescue efforts in the last months of the Bush Administration.

As Kessler points out, the same appears to be true for Team Obama’s big initial macroeconomic recovery effort, the early 2009 fiscal stimulus. Larry Summers’ December 15, 2008 transition memo to then president-elect Obama says their fiscal stimulus recommendation was constrained by their inability to figure out how to spend money any faster, not by debt levels.

More importantly, whether higher debt resulting from the Bush tax cuts (and other spending policies) constrained the response to the crisis is irrelevant, because Secretary Clinton claimed these policies caused the crisis, not that they made it harder for policymakers to respond once the crisis had occurred. “Tax policies that slashed taxes on the wealthy,” she argued, “created a perfect storm.”

Others argue: The Bush tax cuts increased high-end income, and increased income inequality —> increased purchase of mortgage-related lending by the rich –> credit/mortgage bubble –> over-leverage –> financial crisis.

There are at least two problems here.

• Income inequality has been increasing for more than three decades, and the housing bubble began in the late 90s, a few years before the initial round of Bush tax cuts. Her timing doesn’t work.
• The most prominent explanations for the 00s’ credit bubble point instead to some combination of increased global capital flows (mostly from China and oil-producing nations to the U.S. and Western Europe) and U.S. monetary policy. I have not seen anyone argue that in an open economy like ours the 2001 or 2003 tax cuts and resulting higher incomes for the rich caused either the credit bubble or the bubble in housing-related financial assets.

Many on the policy and political left argue the 2008 crisis was “Wall Street’s fault, stemming from greed, arrogance, stupidity, and misaligned incentives, especially in compensation structures.” Had she stuck with this argument Secretary Clinton would have been able to point to others who make similar arguments and she would have had a more defensible position (albeit one with which I still disagree). Senators Sanders and Warren, Brooksley Born, and Phil Angelides all fall into this camp.

Instead, her argument that fiscal policy “in large part … caused a perfect storm” broke new ground. I think this argument was politically driven and this new ground is intellectual quicksand.

U.S. fiscal policy, including the Bush tax cuts, did not cause or contribute to the 2008 financial crisis. Secretary Clinton was incorrect in arguing that it did.

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This is false. President Bush imposed tariffs on imported steel in 2002. A month ago the Obama Administration imposed duties on Chinese steel of more than 200 percent and up to 92 percent on steel imported from South Korea, Italy, India, and Taiwan.

Steel is an intermediate good. When you raise protectionist barriers against imported steel as Mr. Trump threatens, you temporarily help U.S. steelworkers. You also raise input prices for American firms that use steel to build bridges and buildings and make cars, and trucks, trains and train tracks, appliances, ships, farm equipment, drilling rigs and power plants, and tools and packaging. Higher input costs hurt American workers in those factories and on those construction sites.

Mr. Trump should ask the workers who make dishwashers at Whirlpool’s plant in Findlay, Ohio whether they’re in favor of more expensive steel. Or he can ask the John Deere workers who use steel at their factories in Iowa, Kansas, Louisiana, North Carolina, North Dakota, Tennessee, and Wisconsin. Or the auto workers at almost any U.S. car and truck assembly line. Raising prices for imported steel hurts all of these American workers.

Yes, the Chinese are selling steel in the U.S. at a low price, called “dumping.” Yes, this hurts the owners and employees of U.S. steel manufacturers. It also helps many other American workers and even more American consumers. And the Obama Administration is using the tools in current law to respond to the Chinese actions.

Trump: “A Trump Administration will also ensure that that we start using American steel for American infrastructure. … We are going to put American-produced steel back into the backbone of our country. This alone will create massive numbers of jobs.”

No, it won’t, and the downside is it would cost taxpayers more. Put another way, any given amount of tax dollars will build less infrastructure. We’ll repair fewer bridges but, by golly, the fixed ones will have American steel. I’d rather get the best value for every tax dollar we spend on infrastructure, thus ensuring we fix as many bridges as possible.

Mr. Trump’s lines may sound good in steel country, but his policies would harm other American workers, drivers, and taxpayers. On the whole Donald Trump’s steel policy would be bad for America.

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This is not a tough call.

Donald Trump is an ignorant, unprincipled, amoral policy lightweight opposed to free market capitalism and limited government.

• His ignorance of economic and national security issues is breathtaking. He makes up most of his policy views on the fly in interviews. He knows far less about policy than does a regular Wall Street Journal reader, and he cannot hold a coherent in-depth conversation about the economy or America’s role in the world. I don’t expect him to be a national security expert but it would be nice if a future commander-in-chief understood the strategic importance of NATO rather than thinking of it as a potential revenue source. In transcripts of two recent interviews he reminds me of students who try to answer questions in class when they have not done the reading. He is faking it on policy, and not that well.
• He is not doing his homework. I don’t blame him (much) for starting his campaign as a policy novice. Yet he appears to be no better informed today than when his campaign began. Policy is serious, hard work. He shows no interest and no effort in learning anything about the issues and decisions he might face as President. As a result he babbles in interviews, avoids Q&A sessions with voters, and changes the subject whenever he is stumped (several times per interview on average). He should be improving over time and he’s not. Even if he intends to reject the advice of experts and be an outside-the-box thinker, he should at a minimum understand what he is rejecting and where that will lead him.
• His policy views are cartoon-like when not entirely absent. Shouting STRENGTH is not a policy. His views seem to be unmoored by any intellectual structure or philosophical approach. He is unprincipled: he appears to view the world through dual lenses of transactions and of people he likes and dislikes. He treats other nations as competing firms and acts as if America’s only overseas interest is in maximizing revenue streams paid by foreign governments. His fiscal solutions are to cut waste, fraud, and abuse and to get other nations to pay America for military protection. He wants to disengage from the Middle East, destroy ISIS, and take Iraqi oil. America faces far more important questions than who will pay for a wall, and economic policy is more than renegotiating trade agreements.
• He promises strong but amoral leadership. He promises to make America great again, but great alone is insufficient. America must also be good. A President’s job is in part to make value choices and he cannot explain his values. I know what the other nominees think a good America looks like. All I know about Mr. Trump’s America is that it will have a huge wall and new trade deals.
• To the extent he has expressed views on economic policy I strongly disagree with them. I want to like his tax cuts but at some magnitude you also have to propose accompanying spending cuts. He threatens a global trade war while I am a free trader. By ruling out changes to Social Security and Medicare he would guarantee massive future tax increases. He has supported single payer health care reform. He boasts that he would order firm leaders to build their factories in the U.S. and then threatens to punish them if they do not. Business leaders, not politicians, should be deciding where to invest their firm’s capital. He seems to think of the federal government as a big firm; it’s not. I have yet to see an instance of a policy view from him consistent with free market capitalism and limited government intervention in the economy.

Donald Trump is dangerous.

• He has created conditions at his rallies that led to violence, then winked after it occurred, encouraging even more. He is not solely responsible for this outcome. Left-wing provocateurs are the flint while he provides the tinder. Together they spark violent outbursts. Part of being a political leader is taking responsibility to tamp this down whether or not you caused it. Instead he escalates.
• He seeks out and provokes conflict. So far he has alienated 1.6 billion Muslims and he got into an argument with the leader of 1.25 billion Catholics. He claims to be a counterpuncher but kicked off his campaign by labeling most Mexicans as rapists. That was not a counterpunch. Every day he is in a new fight. In a political campaign this is dispiriting. In the Oval Office this behavior would place American lives at risk.
• He sounds like a tyrant. I worry he could (try to) become one. His instincts and rhetoric lean authoritarian. He praises foreign despots and characterizes their repression of dissent as strength. I question his commitment to freedom and the rule of law.
• His poor judgment and lack of self discipline are astonishing. He could start a war by acci-tweet. I will not vote to give control of nuclear weapons and the world’s most powerful military to a man who trolls on Twitter after midnight.

Donald Trump acts like a eighth grade bully.

• He is vulgar.
• He mistakes bullying for strength.
• He is bigoted—against women, against certain religions and nationalities. This is not political incorrectness. Mel Brooks movies and George Carlin skits are politically incorrect. Donald Trump’s insults are just crude and self-serving. Whether he is actually bigoted or just playing to the crowd is irrelevant. The effect is the same and some people will follow his repulsive lead.
• He lies frequently and apparently without compunction. To support his views he cites as evidence “I read it on the internet.”
• He personalizes every professional disagreement, smears his opponents with innuendo, and facilitates others who do the same. No matter who is the counter party, public arguments with him invariably finish at a lower level than they began. He drags all of us down into the muck.

I had no idea how difficult the job of president was until I saw it up close. For more than six years and through hundreds of briefings I helped advise a president and coordinate the implementation of his economic policy decisions. A successful president must be smart, disciplined, and tireless. He or she has to use expertise effectively and to make sound decisions based on core principles and values. At the same time being president is not just about effectiveness and efficiency, it’s also about moral leadership and character.

Donald Trump lacks the character, the values, and the sound judgment essential to fulfill this awesome responsibility. He is unqualified and unfit to be President of the United States.

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Last night on the CNN debate in Flint, Michigan, Secretary Clinton said of Senator Sanders,

I voted to save the auto industry. He voted against the money that ended up saving the auto industry. I think that is a pretty big difference.

The Michigan primary is tomorrow so this is a big deal. I have no dog in a primary fight between Secretary Clinton and Senator Sanders.

During the time in question I was serving as Director of the White House National Economic Council staff for President Bush and was heavily involved in this issue.

Here is the full Clinton quote:

CLINTON: Well — well, I’ll tell you something else that Senator Sanders was against. He was against the auto bailout. In January of 2009, President-Elect Obama asked everybody in the Congress to vote for the bailout.

The money was there, and had to be released in order to save the American auto industry and four million jobs, and to begin the restructuring. We had the best year that the auto industry has had in a long time. I voted to save the auto industry.

(APPLAUSE)

He voted against the money that ended up saving the auto industry. I think that is a pretty big difference.

…

Now let me get back to what happened in January of 2009. The Bush administration negotiated the deal. Were there things in it that I didn’t like? Would I have done it differently? Absolutely.

But was the auto bailout money in it — the $350 billion that was needed to begin the restructuring of the auto industry? Yes, it was. So when I talk about Senator Sanders being a one-issue candidate, I mean very clearly — you have to make hard choices when you’re in positions of responsibility. The two senators from Michigan stood on the floor and said, “we have to get this money released.” I went with them, and I went with Barack Obama. You did not. If everybody had voted the way he did, I believe the auto industry would have collapsed, taking four million jobs with it.

Key conclusion

While she gets a few details wrong, Secretary Clinton’s story is roughly correct right up until you get to her punchline. Then she blows it. In addition she ignores a more important vote from six weeks earlier in which she and Senator Sanders voted the same way, in favor of helping the auto industry.

Secretary Clinton’s attack misleads Michigan voters and others who supported the auto loans. She is playing semantic games in an attempt to create a policy difference where none exists.

As with all things Clinton, you have to parse her phrasing carefully. The sleight-of-hand is quite clever.

The details

Three votes matter:

• On October 1, 2008, Senator Clinton voted for TARP while Senator Sanders voted against it. TARP became law.
• On December 11, 2008, Senators Clinton and Sanders both voted for cloture on the motion to proceed to a bill to provide loans to the auto industry, a Senate attempt to marry up legislation with a bill passed by the House the previous day. That cloture vote failed and the bill died.
• On January 15, 2009, Senator Clinton voted against a resolution of disapproval to release the second $350 B of TARP funds while Senator Sanders voted for this resolution. The vote failed and the resolution died, thus allowing the full TARP funding to be used by President Obama and his team when they took over. This is the vote she highlighted last night.

There are two key legislative realities to understand about these three votes.

1. The first and third votes were principally about TARP and not about auto loans. The second vote, the December vote on which Clinton and Sanders agreed, was clearly about the auto industry.
2. The January vote was substantively meaningless since everyone knew that President Bush would have vetoed the resolution had it passed, and that he could have easily sustained his veto. This vote was symbolic, not substantive.

From a Michigan perspective Senator Sanders cast one “wrong” vote that in hindsight was essential to helping the auto industry: he voted against TARP in September 2008 while she voted for it. Had TARP not become law there would not have been funds available for the initial Bush auto loans in late December or for the Obama auto loans the following spring. The logic Secretary Clinton used last night applies well to her September 2008 vote, which differed from that of her primary opponent.

But the logic applies to that vote only when we look at its practical effect in hindsight. At the time no one anticipated using TARP funds for the auto industry so she cannot argue that Senator Sanders chose in September not to help Detroit. Since she did not mention the September vote last night, she did not make this mistake, but we’ll see that she did make a variant of it when characterizing the January vote.

On the vote most directly applicable to the auto industry, the one in December, Senators Clinton and Sanders voted the same way: aye. They can both legitimately argue that with these votes they explicitly chose to try to help Michigan. Despite their votes that legislation failed, leading to President Bush’s decision shortly thereafter to use TARP funds for auto loans.

By mid January the initial round of TARP loans to GM, Chrysler, and their finance companies was underway. We (the Bush team) coordinated with the Obama team to have President Bush trigger release of the second $350 B of TARP funds in his last few days, a mechanism in the TARP law enacted three months prior. We did this before January 20th so President Obama would have the additional funds available on day one if a crisis struck, and so that he didn’t have to take the political hit for vetoing a resolution of disapproval if necessary.

That release triggered the resolution of disapproval mechanism we created in the TARP law. In theory this process would allow the Congress to stop release of the second $350 B by enacting a resolution of disapproval. In practice everyone knew this was impossible. Even if the House and Senate had passed the resolution (and we were confident they would not), President Bush would have quickly vetoed it and we let people know that. To override that veto would have required more than two-thirds of the House and more than two-thirds of the Senate. That scenario wasn’t just infeasible, it was legislatively impossible. Every Senator voting on the resolution of disapproval knew, with certainty, that their vote would not have any practical effect on the release of the second $350 B or the funds available for banks, President Obama’s subsequent mortgage relief, or a second round of auto loans.

This is the key to understanding Secretary Clinton’s sleight-of-hand last night. She is technically correct when she said, “If everybody had voted the way he did, I believe the auto industry would have collapsed, taking four million jobs with it.” If every House and Senate member had voted to disapprove the release of these funds, then a Bush veto would have been overridden and there would have been no funds available for a second round of auto loans.

But in practice these votes were symbolic rather than substantive, and they were symbolically about TARP, not auto loans. Only now, in hindsight, can she frame them as having been about the auto industry. I am glad she voted symbolically the way she did, in support of and defense of TARP, and I disapprove of Senator Sanders’ no vote. But it is absurd for her to claim both that with this vote Senators Sanders chose not to help the auto industry, and that this January no vote could have had any practical negative effect on Michigan.

Upon careful examination her quote is quite carefully constructed. “I voted to save the auto industry. He voted against the money that ended up saving the auto industry. I think that is a pretty big difference.”

A fair reading instead would be:

• She voted in September 2008 for legislation to rescue the global financial system while he voted against it. Although no one knew it at the time, they later learned this vote provided the funds essential to save GM and Chrysler from collapse.
• In December 2008 they both voted for legislation specifically aimed at helping the auto industry. That legislation failed.
• In January 2009 she cast a substantively meaningless but symbolically important vote supporting TARP while he cast a parallel vote opposing TARP. That vote had no practical effect on the auto industry, and at the time was not framed as a choice to help or not help autos. She is now misleadingly reinterpreting it as a substantively important vote against the auto industry and the State of Michigan.

I hope this clarifies things a bit.

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In particular I agree with this Blahous quote:

The chairmen needed to find someone with impeccable academic credentials, and they did (Hall not only has his economics PhD from Purdue, but also served as chief economist for the White House’s Council of Economic Advisors (CEA)). They needed to find someone with the demonstrated ability to manage CBO, and they did (Hall previously ran the Bureau of Labor Statistics). They needed someone manifestly even-tempered and evidence-driven, and they got that in spades. Hall will quickly come to be recognized more widely as the soft-spoken and objective analyst his associates already know him to be. He has been particularly good as a witness delivering congressional testimony, where his “just the facts” style suits what Congress needs from CBO.

I am optimistic that Dr. Hall will continue the excellent work of outgoing director Dr. Doug Elmendorf and further reinforce CBO’s role as a highly credible, nonpartisan, and unbiased referee in the budget process.

The post Keith Hall, the new CBO Director appeared first on Keith Hennessey.

• Blue line (President Obama’s Budget): Table S-1 of the President’s budget.
• Gray line (historic debt): Historical Budget Data from January 2015 Baseline from CBO, Tab 1. The parenthetical about pre-crisis average debt/GDP between 35 and 40% similarly comes from this table.
• Yellow line (CBO long-term baseline): July 2014 Release from The 2014 Long-Term Budget Outlook from CBO, Tab 6. This is their “extended alternative fiscal scenario,” roughly CBO’s view of a current policy baseline rather than a current law baseline.
• Green line (Bowles-Simpson proposal): Report of the National Commission on Fiscal Responsibility and Reform Figure 4 and Figure 16. I interpolated the intervening years in table 4 to fill in the long-term line to fit the 5-year intervals they specified.
• Red line (House Republican 2014 proposal): House Budget Committee’s Summary Tables S-1 and S-6. I interpolated the intervening years in table 4 to fill in the long-term line to fit the 5-year intervals they specified.

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But wait, you say. That’s not stabilizing. That’s not “flat” debt/GDP, that’s a declining path. And it doesn’t look like a high level. If we zoom out we gain additional perspective. Let’s add 10 years of historical data and CBO’s projected long-term baseline forecast.

Now you see why I said “at a high level.” Under both a current policy baseline and the President’s budget, debt/GDP is in the mid-70s for the next five years, more than twice as large a share of the economy as it was pre-financial crisis. (The same is true if we go back even farther in time. The pre-crisis average debt/GDP varies between 34 and 40% of GDP for any start year from 1965 through 2007.) While the long-term baseline starts to climb about five years from now, the President proposes to keep it roughly flat through the next decade.

Let’s see what a “real” declining debt/GDP path looks like. I am going to add what Messrs. Bowles & Simpson proposed in 2010.

Now you can see why I use “stabilize” and “flat” to refer to the President’s proposed debt/GDP path. Technically both President Obama and Bowles-Simpson propose declining debt/GDP paths, and it’s just a difference of degree. But the difference is so quantitatively significant that they are fundamentally different proposals, representing different underlying premises about what is the preferred path of future government borrowing. Arithmetically, the President’s proposal would reduce debt/GDP by two-tenths of a percentage point per year. That’s basically a rounding error.

Bowles & Simpson said that debt/GDP in the 70s is too high, and that significant policy changes should be implemented to bring debt back down to its historic share of the economy. They proposed specific policies to back up this proposed debt path.

President Obama in contrast is implicitly saying “Now that the recession is over and high cyclical deficits are no longer increasing debt relative to the economy, my work is done. We do not need to bring debt down relative to the economy. I have higher [spending] priorities.”

That yellow line should terrify you. What’s even scarier is that I think the President’s blue line would start growing in parallel with the yellow line after ten years. He has not specified what he would do to keep the blue line flat beyond 10 years, so I can’t prove it. But as best I can tell, in addition to choosing not to reduce debt from its current high level, President Obama has no answer for how to continue to hold debt/GDP stable in the long run when entitlement spending pressures keep pushing it up.

The key question provoked by the blue and green lines is therefore “Is stabilizing debt/GDP in the 70s OK? Or should policymakers cut spending and/or increase taxes to put debt on an aggressively declining path relative to the economy?”

For five years President Obama and his team have argued that aggressive deficit reduction would jeopardize the recovery. This was always a red herring argument, because nothing precluded policymakers from immediately enacting into law deficit reduction that would not have taken effect until after the recovery was well underway. Team Obama misdirected the public debate by conflating the date of enactment with the dates of first implementation and effect.

But never mind that now. The recovery appears well underway and the “stimulus vs. austerity” false choice is receding into the past. Although the President’s proposed debt/GDP is similar to that which he has proposed in his last four budgets, it takes on a different meaning today. With the weak economy excuse behind him, this year President Obama is choosing not to take advantage of a recovering economy to begin repairing the federal government’s fiscal balance sheet. He seems to think debt/GDP is OK where it is now, or at a minimum that he’d rather use his proposed higher taxes to offset new spending increases rather than to pay down debt.

Some on the left argue that there is nothing magic about debt/GDP in the mid 70s, that the U.S. government can borrow much more without risking investors losing confidence and triggering a new kind of financial crisis. That’s a judgment call that can be neither proven nor disproven, but let’s set that debate aside for the moment. There are other costs to high government debt.

• High debt means high interest payments, especially once interest rates return to historic norms. Higher government interest payments either crowd out other government spending or create pressure for even higher taxes or more government borrowing. These are the real, quantifiable, and immediate costs of not reducing debt.
• For fans of fiscal stimulus there is less room to do another round if (when?) another recession hits, since policymakers would be starting from a higher/weaker starting point.
• Left unchecked, entitlement spending pressures will soon cause debt and deficits to begin climbing again. A higher debt starting point means bigger future deficits, which will divert capital away from productive new investments and toward financing past government consumption. Capital formation and productivity growth will slow, resulting in slower real wage growth over time.

OK, who else wants to reduce debt/GDP dramatically from where it is now? House Republicans. Here is what they proposed in the budget resolution they passed last year.

Let’s not get too carried away in precise comparisons of the red and green lines. They were done four years apart from different baselines, so it’s not fair to say that House Rs would reduce debt/GDP faster than Bowles-Simpson, or to precisely compare the percentages shown on the graph. Instead, you should conclude that House Republicans (last year) and Bowles-Simpson (in 2010) expressed the same rough policy preference about present-vs-future: both groups said that stabilizing debt/GDP in the 70s was insufficient, and both groups proposed significant fiscal policy changes to dramatically change the path of future debt, to bring it down over time to its historic share of the economy.

This does not mean that House Republicans and Bowles-Simpson proposed similar means to reach that common goal. Quite the opposite. House Republicans allowed taxes to climb to 19% of GDP but held them there, relying on spending cuts to achieve the rest of their proposed debt reduction. In contrast Bowles & Simpson proposed higher taxes even than did President Obama, combined with less aggressive spending cuts than proposed by House Republicans. These are quite significant differences, and I do not want to belittle the policy gulf between the paths proposed by the centrists and by House Republicans.

I know that many left-of-center folks also (a) hate the House Republicans’ proposed spending cuts; and/or (b) think they are absurdly unrealistic. In my view both are critiques of the particular path chosen by House Rs, not their choice of a debt goal. Given the option I would hit the shared Bowles-Simpson-House Republican debt path with a package of fiscal policy changes different from either of their proposals.

But the centrists and the House Republicans at least share a common judgment about how much government borrowing is too much, and a common goal for how rapidly to reduce that future borrowing. Both propose to radically change the path of future borrowing relative to current policy. And President Obama’s debt goal is fundamentally different from the shared debt goal of the centrists and House Republicans. Agreement on a debt goal is a necessary (but not sufficient) precondition for reaching a significant fiscal policy agreement, and the debt goal gap between President Obama and the centrists is a fundamental problem.

In effect there are four possible paths:

1. the current policy path of stable debt/GDP for the next five years, followed by ever-increasing debt;
2. President Obama’s path to stabilize debt/GDP for the next ten years, [followed by ever-increasing debt?];

3A. the Bowles-Simpson path to rapidly and sharply reduce debt/GDP to historic levels through a mix of higher taxes and spending cuts; and

3B. the House Republican (2014) path to rapidly and sharply reduce debt/GDP to historic levels almost entirely through spending cuts.

I know that in the current partisan environment one’s temptation is to focus on the contrast between President Obama and House Republicans. I also know that the President’s defenders correctly point out that House Republicans rejected the Bowles-Simpson recommendations as did President Obama. But while the gulf between Republicans and the centrists on the path to the shared goal is large, the disagreement between President Obama and the centrists on the underlying goal is more basic.

Elected Democrats who plan to be making policy after President Obama leaves office need to decide whether they are for the blue or the green debt line. If they hate the entitlement spending cuts proposed by Bowles and Simpson, they need to decide whether they will propose other policies (tax increases, mostly) to reduce debt/GDP to match the centrist/House R debt path. Or are future Democratic leaders going to agree with President Obama that debt/GDP is OK where it is now, that it does not need to be reduced from the 70s?

This is therefore not a decision for President Obama. He haalready made his choice. It is instead a decision for any remaining moderate Democrats in Congress: Are you going to plot a third way, a path that agrees with Republicans on reducing debt but disagrees with them on how to do it? Or are you going to use your minority party status as an excuse to duck saying what you’re for and let Sen. Bernie Sanders, President Obama, and Sen. Elizabeth Warren represent your views as being the party of high and ever-increasing debt?

Here’s what I think happens if future Democratic policymakers allow President Obama’s goal of stabilizing debt in the short term rather than reducing it to become the unified position of the entire Democratic party.

• They will tee up an advantageous policy and political contrast with centrists and especially with Republicans who will be proposing specific painful fiscal policy changes.
• But they will be forced to defend the specific policy costs of higher debt described above: higher interest costs crowding out other government spending and eventually slower wage growth.
• And they will sacrifice to Republicans the political turf of being “for less borrowing from future generations.” Republicans will claim the mantle of lower debt and greater fiscal responsibility toward younger generations. Democrats will argue they are protecting seniors while Republicans will show they care more about the Nation’s fiscal future and long-term wage growth.
• Finally, by splitting with the centrist debt hawk point of view, future Democratic policymakers risk alienating the substantial communities of fiscally conservative, socially moderate Democratic voters and supporters outside the Beltway.

DC Democrats used to be split, with a sizable and influential fiscally moderate minority fighting a larger and stronger liberal base. Bill Clinton, Bob Kerrey, John Breaux, Sam Nunn, Joe Lieberman, the former Democratic Leadership Council, Robert Rubin, Max Baucus, Ben Nelson, John Spratt, Erskine Bowles, Leon Panetta, Alice Rivlin, Tim Geithner, and Bruce Reed all fit this profile.

None of these moderate fiscal Democrats are in power today and I see no successors. The Democratic party’s fiscal policy shift away from debt reduction results from a combination of (1) the retirement of these moderates, (2) the rise of the progressive base and its strong new leaders, and (3) President Obama’s rejection of the Democratic moderates’ traditional debt reduction goal.

Will the last remaining moderate fiscal Democrat in Washington please turn out the lights?

Data sources and further detail on the charts are here.

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While at first blush it may seem counterintuitive, the best move for fiscal and economic conservatives is to reappoint Doug Elmendorf. If Chairmen Price and Sessions won’t do that, then I recommend they choose Kate Baicker. If any key Hill Rs want to know why I think Dr. Baicker is the best new candidate, please contact me privately. Here I’m going to focus on why I hope Chairmen Price and Sessions reappoint Dr. Elmendorf.

Dr. Elmendorf is not a conservative. He was originally chosen to head CBO by Congressional Democrats. He came from the left-of-center Brookings Institution. I think he is registered as an independent. I don’t know how he votes but I’d bet he’s a moderate/centrist Democrat.

I want to move economic policy to the right, not to the center-left. I think Dr. Elmendorf is the best pick for CBO because (a) he is unbiased and intellectually honest; (b) his background insulates his rulings and the Congressional Republicans who choose to reappoint him from accusations of bias; and, most importantly, (c) this combination greatly disadvantages the progressive Left who both dominate current economic debate within the Democratic party and who cannot refrain from intellectual overreach.

There are two ways to move economic policy debate to the right. One is to make stronger free market and small government arguments. The other is to rebut the wackiest arguments made by the Left. Congressional Republicans should do the former and lean on Dr. Elmendorf and CBO for help with the latter. Over the past few years an Elmendorf-led CBO has weakened a few key support pillars of the Left’s big government intellectual edifice, not because Elmendorf leans right but because the Left is dominant and nuts and their most outrageous arguments just beg to be debunked by a neutral referee.

• Team Obama overreached, arguing that a minimum wage increase would result in no job loss, that an increase to $10.10/hour would benefit millions and harm no one. Under Elmendorf CBO destroyed this claim, pointing out that the President’s favored policy would reduce the labor supply by about half a million workers. For once economic conservatives were on strong ground not just because we had facts and logic on our side, but also because the press repeatedly wrote that “the nonpartisan CBO said the President’s minimum wage increase would reduce the labor supply by half a million workers.” We won those debates in part thanks to an assist from a CBO that was and was described as unbiased and nonpartisan.
• Elmendorf’s CBO analyzed the reduced labor supply that would result from ObamaCare, a 1.5-2 percent reduction in hours worked. CBO applied routine analysis straight out of a microeconomics textbook. In doing so they rebutted absurd free lunch claims made by the Obama White House and their allies on the Left. And again, the press (even all the biased ones) had no choice but to report these findings as definitive, since they had no opportunity to accuse the director of Republican bias.

Had CBO been led at the time by a director chosen by Republicans, the exact same conclusions would have been dismissed or caveated by many (most?) of the press. The press coverage and public debate would have instead been about how “Congressional Republicans and their hand-picked conservative CBO Director said ______________.” The identical conclusions from a director chosen by Republicans would have had far less impact on the public debate. That is unfair. It is also an unavoidable consequence of a biased press corps that free market and small government conservatives would be foolish to ignore.

I am not arguing that Republicans should always choose a Democrat to run CBO, or that only a Democrat can have this  public credibility, or that the press credibility of choosing a Democrat is worth appointing someone biased to the left. I think Dr. Kate Baicker would quickly build Elmendorf-like credibility if chosen to lead CBO. And I think Dr. Peter Orszag, chosen by Democrats to head CBO before he became President Obama’s OMB Director, ran CBO as an advocate and policy entrepreneur, not as a neutral referee.

Just as I sometimes disagree with and even yell at the fairest football and basketball refs, I disagree with some of the judgment calls Dr. Elmendorf and CBO have made. But I don’t want the ref to be biased right or left. I don’t even think a right-leaning ref would be that valuable to winning these debates, given the higher press hurdle that would be set by a biased press corps. I also think fiscal and economic conservatives benefit from an institutionally strong CBO, as the Left far more often wants to ignore arithmetic and cost-benefit tradeoffs than do the Republicans now taking the helms of the key economic committees in Congress.

I think CBO is too wedded to assuming large and unproven short-term Keynesian multipliers, but their approaches to estimating long-term tax, debt, labor, and health insurance policy changes support those of us who prioritize increasing the supply of labor and capital. As I noted earlier, an Elmendorf-led CBO showed that ObamaCare and a minimum wage increase would both reduce employment. Under Elmendorf, CBO said that increasing marginal tax rates dampens economic growth because it reduces incentives to work, save, and invest. Elmendorf’s CBO said that transfer payments reduce work incentives and shrink the labor force. In contrast to President Obama and Dr. Krugman, Elmendorf’s CBO warned that high and rising debt levels will lower future income, increase pressure for higher taxes or less defense spending, and increase the risk of a fiscal crisis at some uncertain future date. In contrast to the Piketty Fan Club, CBO’s distributional analysis showed that the burden of financing government is even more distributed toward the high end than is income, and they integrated into their analysis the effects of both taxes and transfer payments.

Many Congressional Republicans need to learn how to use CBO better. They need to actually read what CBO writes and to figure out how to ask questions of CBO and of Dr. Elmendorf that will highlight the ways in which left-wing dogma contradicts straight-up-the-middle economic analysis. If Hill Republicans learn how to do this more effectively, the debate will move rightward as the Left’s case weakens.

I hope Congressional Republicans who want smaller government and freer markets think strategically about this post. Keep CBO strong and unbiased both in fact and in appearance. Win the economic policy debate by keeping the valuable asset they now have, the public and press credibility of a fair ref who often rebuts wacky dangerous arguments made by the Left. Learn to use CBO’s analyses more effectively and to ask them the right questions. Reappoint Dr. Doug Elmendorf to head the Congressional Budget Office.

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In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in – you made explicit healthy people pay in and sick people get money, it would not have passed… Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical for the thing to pass.

In 14 years of policymaking I encountered this word “stupid” and this attitude many times. I am certainly not arguing that all Democrats or all progressives think like this. I hope it’s only a tiny fraction. In my experience it’s a mindset that reveals itself every once in a while from a small but influential set of progressive policymakers and outsiders who participate in and comment on the policy process.

At the same time, the progressive idea of “stupid Americans justify paternalism” is a composite concept. Let’s try to unpack that composite. Here are six variants I have seen expressed by some of my policymaking counterparts who reside on the far left of the spectrum.

1. “The American voter is stupid because he is less well educated or less credentialed than I am.” This one is self-explanatory, a combination of arrogance + entitlement. Educational credentials are of course highly imperfect measures of intelligence. False positive and false negative errors abound. This variant is sometimes combined with a regional component, a coastal big city elitism embodied in snarky terms like “fly-over country” and bias against those with rural upbringings or southern accents.
2. “The American voter is stupid because she ignores scientific evidence by opposing progressive policy X.” Popular discussion of this variant often begins with the progressive habit of seeing scientific ignorance only on the right, ignoring parallel problems on the left from those who reject scientific consensus on, among other issues, the safety of vaccines and of genetically-modified food and the environmental safety of fracking. While the issues and causes differ, scientific ignorance exists across the full range of the policy and political spectrum. A deeper flaw occurs when some progressives reframe a value difference as a rejection of a scientific conclusion. I can accept certain widely held scientific conclusions about greenhouse gas emissions and still believe that a particular cap-and-trade proposal is bad policy. This doesn’t make me anti-science or stupid, it just means that my values lead to a different view on what is good policy.
3. “The American voter is stupid because he doesn’t know what’s in his own best interest. I, the progressive policymaker, therefore must enact a policy that will give me the power to make decisions for him.” This logic underlies many paternalistic expansions of government–benefit mandates in ObamaCare, the Consumer Financial Protection Bureau, outlawing Super Big Gulps in New York City. Sometimes using behavioral economics as intellectual cover, this logic creates a slippery slope whereby progressives start imposing policies that represent not just what they think is best for us stupid people, but what they think is best for us even when we might disagree if fully informed. The policy question is not whether people make stupid decisions every day. Many do. The policy questions are whether substituting a centralized, bureaucratic, and politicized authority subject to interest group pressure will result in fewer mistakes than we would make on our own, and whether we value the freedom to control our own lives, even when that freedom will lead us to make mistakes. I am for letting the American people make their own mistakes.
4. “The American voter is stupid because, if he had the same information and understanding of the situation as I do, he would support less redistribution of society’s resources than I would.” This, of course, is not stupidity, it’s simply a different value choice. And it provokes a hard question for honest, well-intentioned and ethical progressives who believe in democracy: Are you willing to tell the truth to, honestly inform, and then accept the will of the American people, as expressed though our highly imperfect representative democracy, if it results in less redistribution than you would prefer? Which is more important to you: democracy or redistribution? Are American voters stupid if they don’t want quite as much redistribution as you?
5. “The American voter is stupid because she was unable to see through my efforts to obfuscate the true redistributive effects of my policies.” It’s not just the malevolence behind this view that frustrates me. It’s the arrogance. Dr. Gruber may be the only one to have admitted to this line of thinking, but he is far from the only policymaker to use it.
6. “The American voter is stupid for trusting that I believe in democracy, that I will use the policy power I am granted only to enact policies that reflect broad American values when they differ from my own.” This is why Dr. Gruber and those who think like him should not be trusted with power. It is especially true for those who hold power but were not elected by a popular vote: staff, appointed officials, and outside advisors. It is also an argument for smaller government. The greater the reach of government into our lives, the more tools and opportunities exist for those who cannot be trusted with power to abuse it.

If American voters are stupid because they think academic credentials do not perfectly equate with intelligence…

If they are stupid because they think policy decisions should be informed both by sound science and values…

If they are stupid because they would rather let people make their own mistakes than allow government to make different mistakes for them…

If they are stupid because they support less redistribution than certain progressive policymakers and their allies in academia…

If they are stupid because they don’t spend all their time trying to sift through policies intentionally designed to deceive them…

If they are stupid because they trust that elected and especially appointed American officials will not abuse the power temporarily granted to them…

… then I’m with stupid.

(photo credit: Andres Musta)

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This bill was written in a tortured way to make sure CBO did not score the mandate as taxes. If CBO scored the mandate as taxes, the bill dies. Okay, so it’s written to do that.  In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in – you made explicit healthy people pay in and sick people get money, it would not have passed… Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical for the thing to pass. It’s a second-best argument. Look, I wish Mark was right that we could make it all transparent, but I’d rather have this law than not.

This provokes four questions:

1. Is Dr. Gruber right that lack of transparency was a huge political advantage in enacting ObamaCare?
2. Do Dr. Gruber’s allies in Congress and the Obama White House agree that ObamaCare cross-subsidies were intentionally obscured to avoid politically unpopular votes?
3. Do they agree with the more general principle, that some large, explicit, and transparent subsidies will be unpopular, and that the only way to enact them is to hide and obscure them?
4. If so, is it ethical to hide and obscure large cross-subsidies (or large costs), in ObamaCare and elsewhere, so they can be enacted into law? Does the end of greater redistribution justify the means of obfuscation, of lying to voters?

Here are my answers.

1. Yes. Dr. Gruber is right that lack of transparency provided a huge political advantage in enacting ObamaCare. He is correct that the cross-subsidies within that bill would have doomed it had they been explicit, transparent, and well understood. If your goal is to enact unpopular subsidies then hiding them is an effective means to doing so.
2. Yes. I would bet heavily that both Team Obama and key Congressional Democrats involved in enacting the Affordable Care Act intentionally obscured these policies as Dr. Gruber described and for the reasons he gave. I think this logic permeates the construction, drafting, and enactment of this law.
3. Yes. I think this tactic is core to progressives’ long-term success in expanding government’s function as a massive income redistribution machine. This logic underlies hidden cross-subsidies in many of our largest government programs and the taxes imposed to finance them. It is on occasion embraced across the political spectrum, but it’s a tool used far more often  by the Left to redistribute society’s resources behind our backs.
4. No. I think this tactic is repulsive and unethical in a representative democracy.

Here are a few areas where American economic policy hides or obscures subsidies or costs, I believe intentionally.

• As Dr. Gruber points out, in ObamaCare the healthy cross-subsidize the sick. He does not point out that embedded within this the healthy subsidize the sick for the portion of their sickness related to unhealthy behaviors. A Congressional floor vote to defend such a value choice, if made transparent and explicit, would certainly fail.
• ObamaCare also forces young people to subsidize older people by limiting the width of premium “rating bands” for insurance sold in the individual market. This was the result of closed-door lobbying by AARP. This one might pass Congress if voted upon explicitly, but the ACA’s architects hid it to avoid admitting that they were shafting young people.
• Social Security conflates forced individual retirement saving, insurance programs, and massive cross-subsidies, in part to hide the latter.
• So does Medicare. The biggest cross-subsidies are across birth year cohorts but there are plenty of others as well. Don’t get me started on trust fund accounting.
• The employer-side half of FICA payroll taxes that finance most of Social Security and part of Medicare are often framed as if they “are paid by the employer” when their true economic burden is borne by the employee in the form of lower wages. If all FICA taxes were imposed on the employee-side they would be more transparent and less popular.
• A minimum wage increase forces low-skilled unemployed workers to subsidize the wages of the low-skilled employed. Expanding the earned income tax credit is a more transparent way to help the low-skilled unemployed but it puts the costs on budget and in full view. The Left pushes to hide the costs and lies, claiming it’s a free lunch.
• CAFE fuel economy requirements are less transparent than a gas tax that would achieve a similar goal. But gas tax increases are wildly unpopular while raising CAFE standards appear only to make things harder “on the auto companies.”
• A global CO2 cap-and-trade system would have obscured the redistribution of global economic growth from developed economies to developing economies. An explicit and transparent carbon tax imposed only on developed economies would achieve a similar endpoint but would have made explicit this massive proposed global redistribution.
• For years policymakers used Fannie Mae and Freddie Mac to subsidize homeowners through hidden credit subsidies. The Left pushed this for low-income homebuyers through affordable housing goals, while elected officials across the political spectrum supported the same thing for all homebuyers through special advantages conferred by government on these two firms.

I could go on. Corporate incomes taxes hide the costs imposed on the people who work for, own, and buy from these firms. Many agricultural subsidies are intentionally obfuscated to enhance their bipartisan support.

Apparently Dr. Gruber thinks it’s OK to lie to American voters when his allies are in power to enact policies that he wants but the voters wouldn’t. He then says American voters are “stupid” both for not agreeing with his value choices and for not figuring out the deception.

I disagree.

When you strip away all the complexity, economic policy is ultimately an expression of elected officials making difficult value choices. If over time these officials make value choices that do not reflect the values of the people whom they represent, they can, should, and will be replaced.

When these same elected officials, and those who advise them, deliberately construct policies to hide value choices that would be unpopular were they transparent and explicit, we end up with two terrible outcomes. We get policies that do not reflect our values, and we re-elect representatives who are lying to us.

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• “There’s almost no economic measure by which we’re not doing better than we were when I took office.”

• “But people are still anxious. And they’re anxious for three reasons.”

  1. Overseas uncertainty: ISIL + ebola + Russia/Ukraine;
  2. “Although the economy is doing better, wages and incomes have not gone up. And the vast majority of growth, productivity increases, profits, wealth has accrued to folks at the very top of the economic pyramid, and we have not seen wages and incomes for ordinary folks go up for a couple of decades.  And that makes people feel, even if things have gotten better, that they’re still concerned about not only their future but their children’s futures.”
  3. “
     [T]here’s a sense that things simply don’t work in Washington, and Congress, in particular, seems to be completely gridlocked.”

While true, his first point is a self-centered perspective for someone whose job this month is to support the reelection of his party’s Congressional candidates. If President Obama were running for re-election it might be important to compare today’s economy to that when he first took office. But your typical Democratic candidate for Congress isn’t running on President Obama’s economic record, and that six year time frame is irrelevant to candidates like Michelle Nunn and Alison Lundergran Grimes who have not been part of the past six years of governance+stalemate in DC. President Obama’s analysis centers on progress made during his tenure, while many Democratic Congressional candidates want this campaign to be about anything other than him.

President Obama also implies that because the economy is stronger than it was six years ago it is strong today. That does not necessarily follow, especially given the depth of the 2008-2009 recession. The U.S. economy has been climbing out of that hole for five years but it still has a long way to go.

From the President’s perspective, voters feel economic anxiety principally (only?) because of the decades-long maldistribution of economic growth. But if these distributional trends have been building for decades then it is unlikely they can explain a recent change in sentiment.

I suggest instead that voters’ economic anxiety is justified.

• In my judgment the U.S. economy is still quite weak (I won’t get into a statistical cherry-picking battle here) and voters know or can sense it. It can of course be simultaneously true that the economy is at the moment weak and that it is nevertheless stronger than it was six years ago. I think that’s the case.
•  The rate of economic recovery over the past five years has been tepid and voters can feel it. Macroeconomists (including President Obama’s first NEC Director Larry Summers) are debating why the rate of recovery has been so surprisingly slow while the President is boasting about the length of the recovery but ignoring its abnormally slow pace.
• While GDP growth accelerated significantly in Q2 of this year to a 4.6% annual rate, that’s after a 2.1% decline in Q1. Should a simplistic straight-line projection of the trend assume the 4.6% rate will continue? If so then the future GDP path should look much brighter than it has over the past five years. Should it instead assume the 2.5% average rate over the past two quarters will continue? That would be moderate growth but nothing to write home about given how far we still are from our maximum potential output. Should we be even more pessimistic as Europe and China weaken? Voters might not be as willing to assume strong growth going forward as a President trying to draw an economic happy face the month before Election Day.

I think voters are anxious about the economy because despite five years of GDP growth the recovery has been too slow to make voters feel good. Today the economy is still weak, employment is still low, real wages aren’t growing rapidly, and stronger future growth, while possible, is by no means certain. In short, voters have good reason to feel economic anxiety.

The upside of all this is that ongoing economic weakness creates an opportunity for sound policies to substantially improve medium- and long-term U.S. economic growth. Policymakers have lots of room to improve policy and plenty of upward potential for a much stronger economy if only we can get the right combination of leaders in Washington and policies in place. The downside is we probably have to wait two more years to have a shot at such a leadership arrangement no matter what happens this November 4th.

(photo credit: The White House)

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blockquote>To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.  Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages …

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(Real world export subsidies are much smaller, of course, but the principle is the same. Foreign customers of a domestic exporter get taxpayer-subsidized discounts, not totally free stuff.)

Who wins? Kenyan customers and Liugong’s owners and employees, who now have a huge increase in demand for their product.

Who loses? Chinese taxpayers, who must foot the bill, and the owners and employees of Liugong’s Chinese and foreign competitors, who don’t have this generous taxpayer-subsidized benefit and can’t possibly compete with free.

Now let’s journey to America to meet an (imaginary) executive from Caterpillar, an American firm competing with Liugong to sell wheeled loaders and excavators to Kenyans. Caterpillar can’t give their product away, they need to sell it. This executive goes to a U.S. policymaker and asks for a similar export subsidy to what Liugong received from the Chinese government.

Imaginary Caterpillar executive: “Caterpillar is losing business in Kenya to our Chinese competitor Liugong. The Chinese government buys equipment from Liugong and gives it to Kenya. The U.S. government needs to do the same for us. If they don’t we’ll completely lose the Kenyan market to the Chinese. American taxpayers need to put up money to buy Caterpillar wheeled loaders and excavators and then give that machinery to Kenyans. If you don’t, we’ll lose that export business and American jobs.”

American policymaker: “Let me get this straight. We should take money from American taxpayers, use it to buy equipment from your company, and then give that equipment to the Kenyans, all because the Chinese are doing the same thing with your competitor?”

Cat exec: “I agree it sounds silly, but if you don’t do this we’ll lose American jobs. It would be better if neither China nor the U.S. did this, but as long as the Chinese do, you have to as well. Unless you want to put America at a competitive disadvantage and lose the Kenyan heavy equipment market…”

American policymaker: “There’s a difference between what’s good for America and what’s good for one firm in America. China’s policy puts one American company (yours) at a tremendous disadvantage in winning business in one foreign market. I feel bad about that, but I’m not sure the solution you propose makes things better for America as a whole. For instance, while I like Kenya, aren’t you asking me to have American taxpayers subsidize your Kenyan customers? That’s not my policy goal. If I wanted to help Caterpillar owners and employees, wouldn’t it be more efficient to just have the U.S. government write a check to Caterpillar? That way we wouldn’t dilute the help by giving most of it to foreigners.”

Cat exec: “Yes, that would be more efficient, but we both know there’s no way you could sell that to Congress or the American public.”

American policymaker: “So you want me to support a less efficient policy because the more efficient one would be unpopular. What about your American competitor John Deere? Wouldn’t I be giving you an unfair advantage over them?”

Cat exec: “Well, technically, yes, but…”

American policymaker: “Technically nothing. You’re asking me replace one tilted playing field with another. And what if China decides to do the same thing for the Rwandans? Do I have to match those subsidies as well?”

Cat exec: “Unless you want us to lose that business, sure…”

American policymaker: “What if Liugong got its subsidy from the Chinese government through less-than-noble means? What if a Liugong executive’s brother-in-law’s cousin is the guy who works for the key Chinese decision-maker? Are you saying that U.S. taxpayers should target American subsidies for American firms to match foreign subsidies determined by cronyism in a foreign government? Is that right? Where does it end?”

Cat exec: “Well, when you put it that way it doesn’t sound quite as attractive. But surely you don’t want America to unilaterally disarm.”

American policymaker: “Sorry, but I don’t buy your ‘disarmament’ analogy. China’s export subsidies of Liugong don’t only hurt Caterpillar, they also hurt Chinese taxpayers and Liugong’s Chinese competitors. They distort decisions and redistribute economic resources in China in ways that make their economy less efficient. While they undoubtedly help Liugong’s owners and employees, China’s export subsidies harm other parts of the Chinese economy. You’re asking me in turn to help your firm’s owners and employees at the expense of American taxpayers and the owners and employees of your American competitors. I don’t see why I should replicate their mistake here, even the alternative is that your firm loses the Kenyan market to Chinese subsidies. Seems to me the alternative you propose is better for Caterpillar but worse for America as a whole. A better analogy would be if you said I should not quit smoking until all my friends also quit. I should quit smoking if it’s healthier for me even if my friends continue to smoke. If China wants to harm itself, there’s no reason I should do the same just to match their mistake.”

Cat exec: “And therefore you’re going to force Caterpillar to compete on an unlevel playing field with Liugong. You’ll be responsible for the layoffs at Caterpillar that result because you refused to help us.”

American policymaker: “The alternative is that you want me to force American taxpayers to subsidize foreign consumers and the owners and employees of one American firm, and to create a new titled playing field at the expense of the owners and employees of your American competitors, based in part upon decisions made in foreign capitals that may have been determined by cronyism. You agree that this policy is less efficient than one that would be unpopular in the U.S., and you’re advocating this one because you think you can disguise that it’s a worse policy. No thank you.”

Cat exec: “How about if, rather than buying the equipment in total, you just give us a partial taxpayer subsidy? We can make it either a direct subsidy or a taxpayer-backed loan guarantee, and we can do it through the government run Export-Import Bank. That way nobody will understand it.”

My view

The U.S. government should not engage in industrial policy, choosing to help certain American firms and thereby indirectly punishing other American firms. Government should not be picking winners and losers.

American taxpayers should not be subsidizing any particular subset of American business owners and/or workers. American taxpayers should also not be subsidizing foreigners, even when they are foreign consumers of American exports.

Export subsidies are bad policy. Even when well-intentioned and designed to “level the playing field” to match other countries’ export subsidies, they create other tilted playing fields and do more harm to the economy as a whole than the problem they purport to solve for one firm. They also create opportunities for cronyism and other forms of influence-based rent-seeking.

Deep and liquid private credit markets exist today that did not exist when the Export-Import Bank was created in the 1930s. Ex-Im’s primary function now is to pass though implicit taxpayer subsidies to a select group of American firms.

Export subsidies should be eliminated and the Ex-Im Bank should be killed. Export credit finance should be done, without subsidies, by private markets.

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In this post I’m just going to compare the short-term deficit and debt effects of the two proposals. While I’d like to use comparable numbers, CBO has not yet rescored President Obama’s proposal because the President released his budget six weeks late. So for now I’ll compare Ryan’s numbers to Obama’s. That is suboptimal but the best we can do for now, and I am confident it doesn’t change the overall picture. Let’s start with deficits.

A few things jump out.

• Chairman Ryan’s deficits are lower than President Obama’s throughout the budget window.
• The difference is significant in the early years.
• President Obama’s budget would reduce deficits below their historic average only after he leaves office.
• The gap between the two stabilizes around 1.5 percentage points of GDP.
• Chairman Ryan’s budget gets to balance, President Obama’s does not.

The most politically potent aspect is balance vs. no balance.

Now let’s compare the short-term debt effects of the Ryan and Obama budgets. Debt held by the public is (sort of) the accumulation of past deficits and a few surpluses.

• Both propose to reduce debt/GDP over the next decade.
• Chairman Ryan’s debt is in all cases lower than the President’s.
• Over time the difference is significant: Ryan’s 10th year level is 13 percentage points lower than Obama’s (caveat: This will change a bit when we get the CBO rescore of the President’s budget).

The notable points here are (1) the growing gap over time and (2) the President’s decision to reduce debt/GDP over time, albeit slowly. In past years he was content to stabilize debt/GDP in the short run.

Fiscal politics and strategy

At first glance the Obama and Ryan budgets appear quite similar to what each proposed last year. Because the downward slope is so gentle, President Obama’s declining debt/GDP path is more significant politically than as a policy matter. It allows him to say his budget would reduce debt over time, at least in the short run. He couldn’t say that last year.

In this midterm election year, Chairman Ryan has offered House Republicans a tremendous political advantage: BALANCE. This reminds me of 2011.

The two political parties have traditionally competed over which party was “the party of lower deficits and less debt.” Many elected officials and their campaign advisors have traditionally seen significant political advantage in labeling their opponents as being for higher deficits and more debt.

This debate is somewhat silly, as the principal fiscal policy difference between the two parties has usually been more about the size of government than about which party wants to borrow less from the future. Nevertheless, the political effects of deficit/debt comparisons are significant.

The same is true for a balanced budget. The economic difference between balance and a 1 percent deficit is not dramatically different from the difference between a 1 and a 2 percent deficit. But the politics of a balanced budget can be powerful.

In 2011 President Obama proposed his budget in February. Chairman Ryan then proposed a budget with a significantly more aggressive deficit and debt reduction path, thus seizing the political advantage in this partisan competition. The numbers clearly showed that (House) Republicans were for much lower deficits and debt than the President.

And then the President modified his budget in April, proposing significantly lower deficits than he did two months prior. He purported to match the deficit reduction in the Ryan budget–this was a lie, but he claimed it. (See Bob Woodward’s book for details on both the internal process and the lie.) What’s significant today is that in 2011 President Obama reacted to the political weakness he then faced by being for higher deficits and debt than House Republicans. He proposed more policy changes, some of which involved more political pain, just so the could claim to match House Republicans on deficits and debt.

Fast forward three years. It’s happening again.

Chairman Ryan has teed up a significant political tool for House Republicans: they can be for a balanced budget, in contrast both to President Obama’s higher deficits and debt and to the Senate Democrats’ lack of a budget.

This is a potent weapon for the mid-term election battle. Congressional Republicans can be not just opposed to something unpopular (Obamacare, of course), but for something popular. They can expand their topline economic message to have three legs rather than just one.

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I’ll end with three important strategy questions:

1. Are House Republicans a governing majority? Ryan’s balanced budget provides a political advantage only if House Republicans pass it. Can Chairman Ryan and Boehner/Cantor/McCarthy find 218 R votes for the Ryan budget?
2. Will Republicans recognize the political and rhetorical advantage that a balanced budget gives them and integrate it into their core election message, putting it on a level playing field with both “weak Obama recovery” and Obamacare? Or will they bet all their mid-term election prospects on a single issue?
3. Will President Obama react to House passage by modifying his budget proposal as he did in 2011? Or will he cede the rhetorical high ground on deficits, debt, and a balanced budget in favor of attacking the details within the Ryan budget?

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Over the last five years, our economy has recovered faster and stronger from the worst financial crisis and economic crisis since the Great Depression, better than any other developed country on Earth.

President Obama’s is drawing on the Economic Report of the President released by his Council of Economic Advisers on Monday. Here is the relevant chart, showing the U.S. at a higher relative GDP level than the major European economies, with 2007 as the starting point for the comparison.

Here is the CEA’s accompanying text:

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Over the last five years, our economy has recovered faster and stronger from the worst financial crisis and economic crisis since the Great Depression, better than any other developed country on Earth.  And you can take a look at the charts and see that because of the actions we took — because of the Recovery Act, because of the Fed — because of swift, coordinated action, we have bounced back.

We’ve created 8.5 million new jobs over the last five years. We’ve had four years of consecutive job growth as well as economic growth.  We have seen an auto industry that was basically flat-lining rebound in ways that very few people would have anticipated.  The stock market is close to the highest that it’s ever been; close to $10 trillion of wealth has been recovered that was lost.

Presidents always want to be optimistic, but even so this is a very positive framing. He then offers his analysis of why, notwithstanding this good news, Americans are so “anxious and uncertain” about their economic future:

That’s not bad.  And yet, if you talk to folks around the country, there is still enormous anxiety and people feel uncertain about their futures, and more importantly, their children’s futures.  And why is that?  Because although we have rebounded and we are growing and there are all kinds of indicators that tell us that the 21st century can be the American Century just like the 20th was, that growth has been uneven and the beneficiaries of that growth have been uneven.

Set aside for the moment the irony of President Obama saying the problem is increasing income inequality when speaking at a $32,400/plate fundraiser in Manhattan. There’s a better explanation than the increasing income inequality explanation offered by the President. CBO gives it to us:

Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.

President Obama’s thesis is that the economy has “bounced back,” things are looking pretty good in the aggregate, and people are down because income inequality is increasing and the middle class isn’t benefiting sufficiently from economic growth.

The reality is that the economy is growing, but way too slowly, and only fast enough to roughly keep up with population growth. The economy is still about 6 million jobs short of where it should be if it were firing on all cylinders. Income inequality is increasing, but that trend goes back to the 1970s. It’s not a credible explanation for recent economic pessimism.

President Obama’s diagnosis is wrong in two respects. While the economy is growing slowly, it has not “bounced back.” And people are pessimistic about the economy because there aren’t enough jobs, period. Even worse, President Obama has no proposal to even try to fix that.

(photo credit: Family O’Abé)

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DEFENSE SECRETARY HAGEL: To close these gaps, the President’s budget will include an Opportunity, Growth and Security Initiative.  This initiative is a detailed proposal that is part of the President’s budget submission.  It would provide an additional $26 billion for the Defense Department in Fiscal Year 2015.

Source for $88 B number: Congressional Budget Office, “Insurance Coverage Provisions of the Affordable Care Act–CBO’s February 2014 Baseline,” Table 1 (Net cost of coverage provisions for FY 2015).

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THE VICE PRESIDENT:  It’s great to see you all.  And I don’t know about you all, I had a great time last night and got a chance to actually do what we should be doing more of — talking without thinking about politics and figuring how we can solve problems.

And here is President Obama, speaking at a dinner last Thursday night to just the Democratic Governors:

THE PRESIDENT: Now, unfortunately, state by state, Republican governors are implementing a different agenda.  They’re pursuing the same top-down, failed economic policies that don’t help Americans get ahead.  They’re paying for it by cutting investments in the middle class, oftentimes doing everything they can to squeeze folks who are bargaining on behalf of workers.  Some of them, their economies have improved in part because the overall economy has improved, and they take credit for it instead of saying that Obama had anything to do with it.  I get that.  There’s nothing wrong with that.  But they’re making it harder for working families to access health insurance.  In some states, they’re making it harder even for Americans to exercise their right to vote.

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• likely result in 500,000 fewer workers, with a range of roughly 0 to 1 million fewer;
• increase wages for about 16.5 million workers who now have wages between $7.25/hour and $10.10, as well as for some others who now have wages a bit above $10.10.

I think CBO’s analysis is improving the minimum wage debate. President Obama and his allies have been selling this proposal as a free lunch, a policy that will raise pay for some with no costs for anyone: “Give America a raise.” Proponents of raising the minimum wage now must contend with a reputable nonpartisan analysis that the proposal has costs as well as benefits. Congress must decide whether higher wages for some are worth destroying jobs for others. Every responsible news story will now include a sentence like, “At the same time, the Congressional Budget Office projects the President’s proposal would result in lost jobs for half a million low-skill workers.”

I doubt the new numbers will change the minds of many proponents of a higher minimum wage. If you were previously inclined to support an increase, either for policy or political reasons, you can easily use CBO’s analysis to reinforce that conclusion: there are 16-31 times as many winners as losers.

The principal impact will come for a Member of Congress who thinks (knows?) that wage controls are bad policy and who opposes a higher minimum wage on policy grounds but was previously afraid to take the political risk to vote no. CBO has made it easier and more credible for this Member to explain to his or her constituents why he will vote no and why that’s good policy for those trying to enter the workforce. Here’s an example.

Q: Congressman, why do you oppose raising the minimum wage? Don’t you want to give Americans a raise?

A: You’ve heard the saying “There’s no such thing as a free lunch?” The President’s proposal to raise the minimum wage would put between half a million and a million low-skilled people out of work. Sure it would mean higher wages for some, but it would destroy jobs for others, and those others are the lowest wage, lowest skilled workers whom we should want in the workforce. It’s particularly important to have as many low-skill jobs available as employers want to offer so that people can grab the first rung of that ladder of opportunity and start to climb.

I appreciate that others may make a different judgment call, but when our biggest economic problem continues to be that not enough people are working, I want to make it easier for employers to hire people, not harder.

This Congressman or woman (probably a Republican) could have made this argument before CBO’s report, but now he has CBO to back up his numbers and his logic. That helps mostly with the press and also with some voters who are undecided on the merits. In the past Congressional Republicans who opposed a minimum wage increase would typically argue that it “hurts small businesses.” Now they can and should argue that it “will destroy jobs for low skill workers.”

In short, CBO’s analysis makes it easier for a free market member of Congress both to vote against expanding wage controls and to convincingly explain why doing so is motivated by a compassionate goal.

The Obama team had two options in choosing to react to the CBO report. They could have accepted CBO’s analysis, embraced the tradeoff between higher wages and fewer jobs, and used CBO’s numbers to support their judgment call on that tradeoff.

Instead, they went the other way, sticking with their disingenuous “free lunch” logic and attacking CBO’s credibility. The path they chose was both intellectually and politically weaker. Now they’re fighting with CBO (rarely is there an upside to that), they’re indirectly highlighting CBO’s conclusions for the press, and they’re fighting what we all learned in first semester microeconomics, that when you raise the price of something people buy less of it. They are also making this not just a dispute about the measure of the costs and benefits, but whether there are any costs to their proposal. They will lose that fight, especially with CBO on the other side.

Team Obama could have argued “We agree with CBO that there are costs to raising the minimum wage, and we think those costs are worth it.” But if they had done this, they would be forced to acknowledge that opponents of raising the minimum wage have a point, that one can want to help poor, low-skilled people and just come to a different conclusion about whether this proposal does so. Had Team Obama granted this point they would have sacrificed their specious claim that opponents of a minimum wage increase hate the poor. This would then become a disagreement about judgment calls on a difficult policy tradeoff (which it is for many), not a battle between the forces of good and evil.

In a market economy prices play the central role in balancing supply and demand. Government should let market forces determine prices. In my view the only case where there’s even theoretical support for government intervention in the price mechanism is when there’s an externality, and even then I’d be cautious to make sure that a well-intentioned but poorly implemented government interference in a market price to address an externality doesn’t do more harm than good.

If you don’t like the results of how a free market allocates resources, then adjust the outcome through explicit after-the-fact transfers, not by interfering in the market mechanism that determines wages or prices. If you want to help the poor more now, expand the Earned Income Tax Credit and use taxpayer dollars to subsidize those lowest on the wage scale rather than forcing an employer to pay them more.

Policies that destroy jobs are bad. Let’s instead maximize the opportunities for people at all levels of education, skills and abilities to find work.

(photo credit: Maryland GovPics)

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THE PRESIDENT: … that has jeopardized middle-class America’s basic bargain — that if you work hard, you have a chance to get ahead.

I believe this is the defining challenge of our time: Making sure our economy works for every working American. It’s why I ran for President. It was at the center of last year’s campaign. It drives everything I do in this office.

Source: President Barack Obama, Remarks by the President on Economic Mobility (The ARC, Washington, DC, December 4, 2013.)

CBO: Once fully implemented in the second half of 2015, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.

Source: Congressional Budget Office, The Effects of a Minimum-Wage Increase on Employment and Family Income (February 18, 2014) Summary, page 1

CBO: The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers for about 2.0 million in 2017, rising to about 2.5 million in 2024.

Source: Congressional Budget Office, The Budget and Economic Outlook: 2014 to 2024, Appendix C, “The Labor Market Effects of the Affordable Care Act: Updated Estimates” (February 2014) page 117.

CBO: About one-tenth of a percentage point is attributable to the incentives generated in 2013 by extensions of UI benefits (from the usual 26 weeks to as much as 99 weeks), primarily because the program’s rules led some people to remain in the labor force and to continue to search for work in order to remain eligible.

Source: Congressional Budget Office, The Slow Recovery of the Labor Market (February 2014) page 8.

THE PRESIDENT: So our job is to not only get the economy growing but also to reverse these trends and make sure that everybody can succeed. We’ve got to build an economy that works for everybody, not just the fortunate few.  Opportunity for all — that’s the essence of America.  No matter who you are, no matter where you come from, no matter how you start out, if you’re willing to work hard and take responsibility, you can succeed.

Source: President Barack Obama, Remarks by the President on Fuel Efficiency Standards of Medium and Heavy-Duty Vehicles (Safeway Distribution Center, Upper Marlboro, Maryland, February 18, 2014).

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I don’t. Look at this graph from CBO.

In their recently released annual Economic and Budget Outlook CBO lays out the four costs of higher debt (page 7).

1. “Federal spending on interest payments will increase substantially as interest rates rise to more typical levels;”
2. “Because federal borrowing generally reduces national saving, the capital stock and wages will be smaller than if debt was lower;”
3. “Lawmakers would have less flexibility … to respond to unanticipated challenges;”
4. “A large debt poses a greater risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”

CBO attributes these damaging effects to “high and rising debt,” and doesn’t distinguish between high (where we are now, in the mid 70s as a share of GDP) and future entitlement spending-driven growth. The same logic applies both to today’s high debt and to future even higher debt. These are real and significant costs we are bearing today.

It’s obvious that we can’t allow debt to increase forever as it will begin to do a few years from now but there’s an additional important question that is being largely ignored. Momentarily setting aside future projected debt growth, is debt/GDP in the mid-70s acceptable? Should the goal be to not let the problem get worse, or both to solve the future debt growth and, over time, to reduce debt/GDP to be closer to the historic pre-crisis average?

CBO has done policymakers a great service by explaining these four costs of high and rising debt, and I wish more members of Congress understood them and talked about them. This is important enough that it’s worth the time to understand it well. You can find a slightly expanded version from CBO on pages 9 and 10 here.

I want to expand a bit on CBO’s points. I’ll take them in reverse order and start with the last one, the increased risk of a fiscal crisis. Those on the left who argue that high debt isn’t a problem like to (a) pretend that this increased risk is the only consequence of high debt, and then (b) dispute that the higher risk is significant enough to cause concern. I worry that when the U.S. has doubled its debt/GDP in five years, and when our future debt path looks like it does, that the risk of a fiscal crisis is significant. But this risk is unknowable, and even if we could somehow measure this risk, we can never know when that crisis would occur. My stronger arguments are (1) fiscal crisis risk is undoubtedly higher at a higher debt level; (2) the risk is only going to increase on our current path as debt increases; and (3) there are three other costs to higher debt, so even if you’re not worried about crisis risk, you need to address those other costs.

Moving up the list we get to CBO’s “less flexibility” point. CBO’s projected debt path assumes a (very) slow but basically steady return to macroeconomic health. If we have another recession, terrorist attack, or war, the numbers will be worse, and whatever increased government spending or fiscal stimulus we will then need will be initiated from a much weaker starting point (a much higher level of debt). Because our debt is so high we are poorly prepared to address future risks that require significant short-term deficit spending or tax relief.

Then we get to the cost with the greatest political impact: lower future wages. This is really a cost of the big recent deficits that resulted in today’s higher debt, and an additional cost of projected future deficit growth. The reduced national saving caused by big deficits leads to a smaller capital stock. This lowers productivity and therefore wages. To reduce our public debt government would have to save more (or even, perish the thought, balance the budget), leading to higher national saving, a bigger capital stock, higher productivity and higher future wages. To be politically crass: lower government debt means more shiny new factories with high wage American jobs. I’m willing to sacrifice quite a lot of government spending in exchange for higher future wages.

Finally, the item at the top of CBO’s list is the one most likely to drive Congressional action. Our government debt is now 37 percentage points above its pre-crisis average, but government interest payments are relatively low because interest rates are low because the short-term economy is still weak. When the economy eventually recovers and the government debt rolls over, that additional debt is going to increase government net interest payments by about 1.85 percent of GDP (37% X CBO’s 5% 10-year Treasury rate). Relative to the rest of the federal budget, 1.85% of GDP is enormous. That increased interest cost is as much as the federal government will spend this year on all military personnel (uniformed + civilian) plus all science, space, and technology research plus all spending on the environment, conservation, national parks, and natural resources plus all spending on highways, airports, bridges, and all other transportation infrastructure. Higher debt means higher interest costs which will squeeze out spending for other things that government does. It will also increase pressure to raise taxes even further.

Government debt is twice as large a share of the economy as it was before the financial crisis. In addition to increasing the risk of another catastrophic financial crisis, high government debt squeezes out other functions of government, creates pressure for higher taxes, leaves policymakers less able to respond to future recessions, wars, and terrorist attacks, and lowers future wage growth. This problem will only increase as entitlement spending growth kicks into high gear a few years from now, but simply stabilizing debt/GDP in the mid 70s is an insufficient goal. Don’t rest on your laurels because deficits are smaller than they used to be. High government debt is a big problem.

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The single thing that Republican politicians hate and fear the most, and that is when they’re forced to tell the truth. It makes their heads explode. And actually look, this debt ceiling example is a perfect example. The Republican members of the Senate, they all wanted the perfect show vote. So the whole fight was, was every Senator in the Senate going to consent to allow a clean debt ceiling, to allow Barack Obama to get a blank check to raise our debt, while doing nothing about spending, with just 51 votes? Now in order for that to happen, all 100 Senators have to consent to it. Now there were an awful lot of Republican Senators who thought that was perfect, cause then they could all vote no, and go home and tell their constituents, “See, I voted no, I did the right thing.” But it only happens if they allow it to happen. And all I did was very simple, I said, listen, when I told Texans when I ran for office, that I’m going to fight with every ounce of strength I have to try to help pull this country back from the fiscal and economic cliff, I wasn’t lying to them, I meant it. So if your ask of me is will I consent to let Harry Reid to do this on 51 votes, the answer is no. I will vote no at every stage against it, because it’s irresponsible, because it’s wrong, because we’re bankrupting our children. And Republicans’ heads exploded, because it meant … Look, make no mistake about it. This was their desired outcome. An awful lot of Republicans wanted exactly what Barack Obama wanted, exactly what Nancy Pelosi wanted, exactly what Harry Reid wanted, which is to raise the debt ceiling, but they wanted to be able to tell what they view as their foolish, gullible constituents back home they didn’t do it, and they’re made because by refusing to consent to that they had to come out in the open and admit what they’re doing and nothing upsets them more.

In one respect I agree with Senator Cruz. Senate Republican Leaders did “want” the clean debt limit bill to pass the Senate and they wanted the political cover of voting no. Senator Cruz exposed this through his objection, forcing not just Senators McConnell and Cornyn, but a bunch of others as well, to vote aye on cloture so that they could get to a final passage vote where the bill passed but all Republicans voted no.

But they were right to vote aye on cloture. Senator Cruz skips over why the others wanted this outcome: the only other legislative alternative was not increasing the debt limit. At that point no one, including Senator Cruz, had an alternative strategy to pass a debt limit bill that cut spending, or repealed or modified ObamaCare, or made any other good policy change.

If you want to defeat a bad bill you need both a better policy and a viable legislative strategy to achieve it. In some cases that legislative strategy could be blocking enactment of any bill, but that would not have worked here. In this case I believe strongly that not raising the debt limit is far worse than enacting a clean debt limit increase.

This then provokes a series of questions for Senator Cruz.

Q1: “Do you agree that not raising the debt limit is a worse policy outcome than enacting a clean debt limit increase?”

If the answer is yes, then:

Q2: “What was your alternative legislative strategy for enacting a debt limit increase that also contained some other reform?”

If the answer is “I didn’t have one,” then:

Q3: “Weren’t the Senate Republicans who supported cloture therefore doing the right thing, even at some political cost to themselves?”

It’s easy for any one person to design a bill that is (debt limit increase + X), where X is a good fiscal or other policy reform. It’s much harder to get a lot of votes for any particular such bill. House Republican leaders were unable to pass such a bill in the House with any X, good or not-so-good.

And once the House had passed the only debt limit increase it could pass, Senate Republicans were stuck in a take-it-or-leave-it position. Informally we say the House jammed Senate Republicans: Senate Rs were forced to choose between two outcomes, both of which they hated. Had House Republicans been able to pass a debt limit increase with an additional reform attached, then Senate Republicans would have had available another, less worse, option.

Last year I proposed a legislative strategy (including in the Wall Street Journal) to get a small policy concession along with a debt limit increase. The House did a version of this strategy and, as a result, successfully pressured a Democratic Senate into passing a budget resolution. I pushed a variant of this strategy again in September, but this time House Republicans couldn’t execute because they didn’t have the votes.

As was the case in last fall’s CR/shutdown battle, this week Senator Cruz did not have a legislative strategy with an endgame. He neither presented an alternative strategy to his colleagues nor pursued one as a lone wolf on the Senate floor. In both cases he simply made a single aggressive tactical legislative move that didn’t point toward an alternative outcome, then accused his colleagues of being cowardly, unprincipled, and deceptive for not following his lead into a blind canyon.

Some will say, “At least Senator Cruz was willing to fight!” Unfortunately, this argument always stops there, and never explains how a willingness to fight without a strategy translates into a policy win. Legislative conflict is not a schoolyard tussle in which the bigger or tougher guy usually wins. It’s not a Hollywood movie in which the hero triumphs simply because he is virtuous. Legislative conflict is more like chess in that the battle is waged according to strict rules. Those who favor bigger government know how to play chess and some of them are quite good at it. Many of those who favor smaller government now seek praise for tipping over the board or eating the pieces. While momentary rebellion is flashy and can feel good for a moment, it’s not a strategy to win, not how you change policy. And the goal is to change policy for the better, not just to build a bigger mailing list, right?

It’s frustrating because I agree with many of Senator Cruz’ substantive policy goals. I want a smaller government and a larger private sector, less government spending, and less debt. I want to replace ObamaCare with consumer-driven health policies. I am frustrated by the President’s economic policies, by those who twist policy to suit their self interests, and by politicians in both parties who facilitate that behavior.

But having the right policy goal isn’t enough to succeed, to change policy. You also need a legislative strategy with an endgame and some chance of success. As best I can tell Senator Cruz didn’t have one last fall and he didn’t have one earlier this week. His tactical legislative moves, then and now, need to be considered in that context. The same is true for his public comments surrounding those legislative moves. His objection this week served only to expose that Republicans were boxed in, forced to choose between facilitating passage of a bill they didn’t like and an even worse policy outcome. And they were boxed in because they could not build sufficient support for a unified legislative strategy that had a chance of success.

I hope that in the future Senator Cruz can use his intellect, political savvy, and external base of support to produce effective strategies that produce the good policy results we both support, instead of using his prodigious skills and resources only to assign blame for the bad outcomes.

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And this week, I took action to lift more workers’ wages by requiring federal contractors to pay their employees a fair wage of at least $10.10 an hour. … This will be good for contractors, for taxpayers, and for America’s bottom line.

I see how a higher mandated minimum wage benefits low wage workers working at federal contractors. I don’t see how increasing labor costs is good for the contractors that employ those workers or how it’s good for the taxpayers who pay those federal contracts and must now spend more for a given amount of labor.

The President further says:

These are workers who serve our troops’ meals, wash their dishes, care for our veterans …

OK, I agree that employees of some federal contractors do things that I think are good. But raising their wages means that any given amount of tax dollars spent on troops meals and veterans’ care will buy fewer hours of labor delivering those services. While those who serve the food and give the care (and still have their jobs) are better off, those eating the meals and receiving the care are worse off because fewer hours are being spent delivering those services, right? The only way to make both the workers delivering the care and the veterans receiving that care better off, after a wage increase, is for taxpayers to pay more.

In other places the Administration cites research that workers who are paid higher wages have more job satisfaction, do better work, and quit less frequently. The logic is that higher paid workers are happier workers, and happier workers will move the food line faster and deliver better health care to veterans. That seems reasonable, but employers, including federal contractors, have economic incentives to take those benefits into account when they decide how much to pay their employees. As employers try to get the most output for each dollar they spend on labor costs, they are (if they want to be competitive) balancing the morale, productivity, and turnover benefits of paying higher wages with the costs of hiring fewer higher-wage workers for fewer hours. What President Obama did was instead substitute his judgment for where that balance point should be set, and we know he has to be getting it wrong in a lot of cases because that balance will differ from one employer to the next.

The President says:

The opportunity agenda I’ve laid out is built on more new jobs that pay good wages … Right now, there’s a bill in Congress that would boost America’s minimum wage to $10.10 an hour. … If they don’t support raising the federal minimum wage to ten-ten an hour, ask them “why not?”

I oppose any increase in the minimum wage because it lets government decide to sacrifice more jobs for some, to get higher wages for others. I don’t think government should make that call.

The higher the government-mandated minimum wage, the fewer jobs and hours of labor employers will buy. Those on the Left don’t dispute this, they instead respond, “But it’s not a big cut in jobs and hours.” While I think many of the advocates for a higher minimum wage cherry-pick their studies, I also don’t think the government should force any cut in jobs and hours, even a small one. I therefore think the market should determine this trade-off, not politicians running for elected office and courting the support of organized labor.

President Obama is for higher wages for some, with fewer jobs and hours for others, with both determined by politicians. I’m for more jobs and hours, with wages determined by competition in a healthy and growing market economy.

The best ways to help low skill workers are (1) to help them raise their skills over time through education and job training so they are worth more to potential employers; (2) to have government policies that encourage strong short-term and long-term economic growth so that employers want to hire more people and bid wages up in a competitive and flexible labor market; and (3) to reduce government barriers, like high implicit effective tax rates, that make it harder for these workers and their families to reach the middle class. If those policies don’t raise their incomes enough in the short run, then the way to help them is through explicit redistribution policies like the earned income tax credit and food stamps, not by substituting campaigning politicians’ judgment for that of the market.

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In other words, there’s a trade-off between the ladder and the safety net. The higher we make the safety net the less economic sense it makes for someone in that safety net to grab the bottom rungs of the ladder and begin to climb. Rather than becoming a net that protects us from hitting the hard ground, we get caught in it and cannot escape, not because we don’t want to, but because government policies financially discourage us from doing so.

Politicians, especially on the left, love to express/feign outrage when this point is made, and suggest that (a) it’s not true and (b) the person suggesting it is accusing people of being lazy. But while the magnitude of the incentive effect is often subject to debate, the existence and direction of those effects is most often not. CBO’s latest analysis of the labor supply effects of ObamaCare reinforces this point: if you make work less financially rewarding you’ll usually get less of it.

Poorly designed policies don’t change the motivations of people with modest income, they change the calculations people make about whether they should make short-term economic sacrifices for longer-term economic gain. Why pay $500 for a night course (and give up your evenings) to get a $1,000 annual raise if the government will “grab back” a significant portion of that extra $1,000 by reducing your benefits? You may be driven to advance yourself professionally but make the rational decision that it’s not worth the sacrifice because of the amount of government subsidies you receive and the way they’re designed to phase out as your income climbs. CBO’s labor supply conclusions assume people who cut back on paid work because of their big new health insurance subsidies are rational, not that they are lazy.

Let’s look at three examples.

1. Extended unemployment insurance: The academic evidence is pretty clear that extending unemployment insurance benefits increases the amount of unemployment. In some cases that’s driven by individuals, some of whom ramp up their job search only as their UI checks are running out. In other cases it’s driven by employers who temporarily lay off workers (like an auto manufacturer closing an assembly line) and keep the line closed until right before benefits run out. I’ve seen estimates that the current extended UI benefits add anywhere from 0.1 percentage points (CBO) up to 0.5 percentage points to the unemployment rate.

Does that mean UI benefits should not be extended? No, it simply means that there is a cost to do doing so that should be weighed against the benefits. Policymakers must balance the compassion benefits of helping those who don’t have jobs and are trying to find them, with the costs of providing taxpayer assistance to those who could find jobs but just aren’t looking, and the broader macroeconomic costs of slowing the pace of economic recovery. Reasonable people can disagree on where and how to draw this line based on how they value those conflicting goals. But it’s silly to suggest, as President Obama has done, that there isn’t a trade-off, or that it’s somehow offensive to suggest that extending UI benefits could hurt workers and economic growth. There is a trade-off, an unavoidable one, between helping those now unemployed pay their bills and getting the most people back to work as quickly as possible.

2. Minimum wage: If you’re now making $7.25 an hour and the minimum wage were increased to $9 an hour you would fall into one of three categories. If you still have your job after the minimum wage increase, then you’re better off. If your employer replaced you with a friendly robot that was cheaper than paying you $9/hour, then you’re worse off. If your employer cut back your hours, you may be better or worse off, depending on how much your hours were cut back and what else you can do with that time.

This then provokes a value-neutral analytic question and a values question. We ask the economists, “For any given proposed minimum wage, how many people will fall in each category?” Then we must ask if the benefits to those in category one are worth the costs paid by those in categories two and three.

Reasonable people can disagree on the values question, and depending on where policymakers fall, they tend to pick and choose the economic analyses for the analytic question that support their value choice. But if you listen to President Obama you’d conclude that raising the minimum wage has only benefits and that anyone who opposes a minimum wage increase is driven only by selfishness and malevolence toward low wage workers. That’s absurd. Increasing the minimum wage will reduce constrain the available labor supply and hurt some low-skilled workers. We can debate how much and whether it’s worth it, but there are unquestionably winners and losers.

3. ObamaCare: Providing low and moderate-income individuals and families with subsidies to buy health insurance outside of employment helps the bottom lines of those families. Phasing those subsidies out as income climbs allows taxpayer resources to be targeted based on economic need. But it also changes the incentives people have to work, to go to school, to get additional job training, and to try for a promotion. The bigger the subsidies and the sharper the slope of the phaseout, the bigger the disincentive created for people to try to make more money so they can get off these government subsidies and provide for themselves. This disincentive matters: CBO says ObamaCare will reduce hours worked by 1.5 to 2 percent, and that “the largest declines in labor supply will probably occur among lower-wage workers.” Fewer people will work, and others will work fewer hours. Total wages will decline by about one percent.

I am not arguing for no social safety net or for no unemployment insurance. I am instead arguing what should be obvious and shouldn’t need saying, but does: every time we raise the safety net, we provide immediate beneficial aid to many, and we make it less profitable for them to “climb onto the ladder of opportunity” and push themselves to earn more, and this calculation has an effect on people’s behavior. Ongoing UI checks help pay the bills but also relieve the pressure to find a job immediately. A higher minimum wage increases the wages of those low-skilled workers who still have jobs, but it also reduces the opportunities for an unskilled teenager to learn how to hold down a first job and learn basic professional skills. Subsidized health insurance helps the people who receive it. When those subsidies phase out as income increases, they also reduce both the number of hours worked and the number of people working. The reduced labor supply hurts the economy as a whole and is generally bad for those people receiving subsidies as well, because they are being pushed by government policies to forego economic opportunities that could help them even more in the long run than do the immediate benefits they are getting.

And these government programs and subsidized benefits stack. The cost-benefit calculation of short-term compassionate aid and long-term compassion to create opportunity depends on your starting point. Most everyone would say that some unemployment insurance is good, but it’s not surprising that there is disagreement about the costs and benefits of providing more than three years of UI benefits. Similarly, there are few who would say we shouldn’t subsidize health care for the poor, but when CBO says that a new law will reduce labor supply by 1.5 to 2 percent, that’s a really big cost. And it’s bigger because ObamaCare’s subsidies are layered on top of other programs that also have income phaseouts.

The costs of all three of these policies include higher structural unemployment and fewer people building additional skills to move up the income scale over time. When the U.S. economy eventually recovers fully, our unemployment rate should be in the low 5s. Because they keep layering on “protections” and “assistance,” France’s comparable rate is around 10 percent. Imagine if the U.S. steady-state unemployment rate were 10 percent. We’re not there yet, but all of President Obama’s policies push us toward a European-style model.

I think movement in that direction is a huge mistake, but my point today is a more basic one. These trade-offs must be considered and debated openly, and the Obama Administration is doing a disservice by suggesting that no trade-offs exist, and that those who oppose these programs do so because they are mean. Extending unemployment insurance benefits, raising the minimum wage, and ObamaCare have long-term labor supply costs that must be weighed against their more immediate benefits. There is no free lunch here. Do you want a stronger ladder or a higher safety net?

(photo credit: Jonathan Khoo)

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Let’s say you choose the donut.

Now I pour rancid ketchup on the donut and offer you the choice again.

You now choose the cookie.

Based on his press briefing yesterday, the President’s CEA Chairman, Dr. Jason Furman, would say I didn’t kill the donut option because taking the cookie was your choice.

The individual health insurance market subsidies in the Affordable Care Act do two things: they subsidize some low wage workers, and they make work less attractive for those workers by increasing the effective marginal tax rate on higher income.

Because the ACA premium subsidies depend on income, the higher your income, the smaller your premium subsidy. This makes sense if a policymaker has limited resources to spend and wants to help those who need it most. The problem is that it also means that as your income climbs you lose some of those government subsidies. It works the same way as a marginal tax rate increase: you get less net financial benefit for additional income. This is an unavoidable downside of a social safety net based on income.

This downside is independent of what the subsidies are used for. This same problem applies to food stamps, the Earned Income Tax Credit, low-income housing vouchers, and in fact any government benefit that gets reduced as one’s income climbs. The effect results from phasing out subsidies as income climbs, any kind of subsidies.

ObamaCare’s defenders are taking two tacks today. First, they are emphasizing the significant financial benefits of those subsidized premiums to the people who receive them. That’s totally fair. They are also trying to argue that, when people choose not to work after the government increases their [effective] marginal tax rate, that’s OK because it’s the person’s choice not to work. That is Orwellian.

Here is CBO:

For example, some provisions will raise effective tax rates on earnings from labor and thus will reduce the amount of labor that some workers choose to supply.

If you choose to work less because you want to spend more time with your kids, that’s a good thing. If you choose to work less because the government raised your marginal effective tax rate and made work less financially rewarding, that’s a bad thing.

Here is an example:

• A family of four with one wage-earner has $35,300 of income this year and no health insurance through work. Because of the significant Affordable Care Act subsidies, this family can buy health insurance for only $1,410/year.
• The other spouse wants to take a part-time job to supplement their family income. This part-time job would earn them an additional $12,000 per year (gross).
• But this additional income would reduce their ACA premium subsidy, so they would now have to pay $2,970/year for the same health plan.
• This reduced subsidy, a direct result of the spouse’s part time work and higher family income, reduces the value of the $12,000 of added income by $1,560 (=$2,970 – $1,410). That subsidy reduction is 13 percent of the gross income increase.
• So maybe this spouse chooses not to take the new part time job because the net financial benefit of additional paid work just isn’t worth it.

My back-of-the-envelope calculation, using H&R Block’s tax calculator, is that the ACA increases this moderate income family’s marginal effective [federal] tax rate by 13 percentage points, from about 37% to about 50%. The 37% includes very little income taxes, but a lot of reduced EITC and reduced refundable child credit, as well as higher employer and employee-side payroll taxes. The ACA subsidy phaseout adds another 13 percentage points, getting this family up to about a 50% marginal effective tax rate. I doubt State taxes change it much for a family with this moderate level of income. I may be understating the base 37% rate because I’m not looking at other in-kind benefits for which this family might be eligible. I’m confident in the 13 percentage point increase number for this income change.

Do the ACA premium subsidies help this family afford health insurance? Absolutely.

Is that a good thing for this family? Yes.

Does the 13 percentage point increase in this family’s effective marginal tax rate harm them? Everyone except the Obama Administration and a few of its doublethink allies would say yes.

Does the spouse take a part-time job? It depends. The higher marginal tax rate could cause her [him] to work more to get a higher net income, or less because the additional work just isn’t worth the additional pay. Economists call the first the income effect and the second the substitution effect. CBO’s analysis says that, on net, the second effect dominates, and the premium subsidy phase-outs as income rises will cause people to work less.

A lot less.

Finally, the hard one: Do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement? I say no, but that’s a value choice where others might differ.

Team Obama and their allies don’t want to debate it, though, and for good reason. They’d lose. Nobody wants to trap people and discourage further economic advancement, even if they do so by helping that family with generous subsidies. Unfortunately you can’t have one without the other, and so Team Obama obfuscates.

For the past month elected officials have been talking about making sure the “bottom rungs of the ladder of opportunity” are strong. If, however, you raise the safety net so high that it is above those bottom rungs, then people would be irrational to start climbing the ladder at the bottom. That’s the unavoidable downside of the generous income-targeted premium subsidies in the Affordable Care Act. Choose your poison: give these people less immediate assistance, or punish them more as they try to improve their own lot. President Obama and ObamaCare’s supporters chose the latter course.

Note also that this subsidy phaseout doesn’t only discourage additional work, it discourages anything that increases one’s income, including additional job training, education, or even a promotion to a better-paying job. The marginal benefit one gets from any of these income-increasing opportunities is smaller because the government “claws some of it back” by reducing the generous ACA premium subsidies as one’s income grows.

Yes, many ObamaCare critics were imprecise yesterday when they said “2 million jobs” would be lost. CBO actually said the ACA would reduce “the number of full-time-equivalent workers” by about 2 million in 2017, rising to about 2.5 million in 2024. Some of that will be people choosing not to work at all (like maybe our example spouse), while the rest will be people choosing to work less. Both are reductions in the labor supply, and both are indisputably bad when they result from government making work less financially rewarding. This is, however, a minor language error, not a core flaw in the argument being made by ObamaCare’s opponents.

Now is it fair to say that ObamaCare “kills jobs?” I think it is. Some on the Left argue that since the reduced employment comes from workers “choosing” not to work rather than employers choosing not to hire them, it’s somehow not a lost job. That’s silly. There will be fewer people employed and fewer hours worked because of this law. Jobs result from the interaction of supply and demand curves for labor. If policy moves the demand curve down or the supply curve left, the number of jobs will decline and jobs will be “killed” by the policy change. And please don’t tell me that it’s OK because these workers are choosing to work less, unless you also think that me pouring rancid ketchup on your donut didn’t make you worse off because you then chose the cookie.

But the new policy vulnerability revealed by CBO does not rely on the phrasing “killed X jobs.” If my semantic argument is too confusing, there are plenty of other simple ways to make the same underlying point and explain the damage this law does to employment, income, and opportunity, especially for those with moderate incomes who are trying to improve their economic situation.

What should opponents of ObamaCare say? Here are a few variants of the same concept.

• ObamaCare contains a big hidden [effective] tax rate increase on moderate income workers and families trying to climb the economic ladder to the middle class.
• ObamaCare encourages moderate income people to work less, and drives some out of the workforce entirely, by effectively raising their taxes. (hat tip: Charles Blahous)
• ObamaCare will shrink our economy by driving millions of moderate income people to work less, and discouraging some of them from working at all.
• ObamaCare pairs generous premium subsidies for moderate income individuals and families with a massive hidden tax rate increase on additional work.
• ObamaCare punishes additional work, especially for those who want to climb into the middle class. A family of four with income in the mid 30,000 range would face about a 50 percent effective tax rate.
• ObamaCare punishes additional work, education, job training, and professional advancement, anything that generates additional income, for those trying to climb into the middle class.

Finally, I think Paul Ryan nailed it today with the word trapped. Yes, these new subsidies benefit the families who receive them. They also trap these workers and families by killing much of the economic benefit one gains from additional hard work. Elected leaders across the policy spectrum have been stressing the importance of making it easier for people to improve their own lot. This law undermines that goal for millions of people.

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I’m sure President Obama understands just how constrained are his options for executive action. Even with lawyers willing to push the constitutional envelope and a friendlier DC Circuit Court to back them up, the president’s ability to make major economic policy changes without Congress is quite limited, and he has to hope a future Republican president won’t unilaterally undo what he unilaterally does. His pen is more like an erasable pencil, and the “he has a phone” argument is a bit pathetic. Without a legislative agenda and the ability to enact it, a president can affect economic policy only around the edges.

I therefore don’t understand the next step in President Obama’s “phone and a pen” argument. While the Senate majority is in play this November, the House majority is not. It is extremely likely that Republicans will keep the House, and almost as likely that they will continue to struggle to function as a governing majority party in 2015 and 2016. Next year and the year after President Obama will face a legislative challenge as big or bigger than he faces now.

I agree that it’s quite hard to build a legislative strategy in the current legislative and political environment. But does that mean you don’t even try? Working with a Republican House and Senate, President Clinton signed Gramm-Leach-Bliley into law in 1999, the year after Republicans impeached and tried him. Working with a Democratic House and Senate, and when he was fiercely unpopular with Democrats, President Bush enacted an energy law in 2007 and TARP in 2008. All three of these laws were enacted in intensely partisan legislative environments only because of strong presidential leadership.

If President Obama has given up hope of finding principled economic policy compromises with a Republican majority House this year, what is his game plan for his final two years? Next year will he try to figure out a way to cut the legislative Gordian knot, or instead just recharge the phone and buy some more pens and pencils? Has President Obama given up on Congress, and therefore on economic policy, for the next three years?

(photo credit: White House photo by Pete Souza)

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blockquote>But there’s an economic case for

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We want to maximize the pace of our recovery, but most importantly, we want to make sure that every American is able to benefit from that recovery, that we’re not leaving anybody behind and everybody is getting a fair shot.

With “but most importantly,” President Obama is prioritizing distribution over growth. He is saying that helping some Americans is more important than economic growth for all Americans.

Kudos to the President for actually making a choice–most politicians would falsely assert that there is no tradeoff between faster economic growth and greater equity. There often is.

Too bad he’s chosen the prioritization that’s opposite of my own: growth, growth, growth, in the short run and the long run.

Here is what I wish the President had said instead.

We want to maximize the pace of recovery. The surest way to help the greatest number of Americans is for government to create conditions that allow for rapid economic growth and job creation. And the best way to make sure every American has the chance to benefit is to create an expanding economy with opportunities for all.

(photo: Official White House Photo by Pete Souza)

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I was wrong.

In an interview with Chuck Todd yesterday, President Obama spoke about the 8-10 million Americans whose insurance policies are being canceled:

THE PRESIDENT: So — the majority of folks will end up being better off, of course, because the website’s not workin’ right. They don’t necessarily know it right. But it — even though it’s a small percentage of folks who may be disadvantaged, you know, it means a lot to them. And it’s scary to them. And I am sorry that they — you know, are finding themselves in this situation, based on assurances they got from me. We’ve got to work hard to make sure that — they know — we hear ’em and that we’re gonna do everything we can — to deal with folks who find themselves — in a tough position as a consequence of this.

… But obviously, we didn’t do a good enough job in terms of how we crafted the law. And, you know, that’s somethin’ that I regret. That’s somethin’ that we’re gonna do everything we can to get fixed. In the meantime —

MR. TODD: By the way, that sounds like you’re supportive of this legislation.

THE PRESIDENT: Well, you — you know — Various things that are out there.

We’re — we’re looking at — a range of options.

On Air Force One today, Deputy Press Secretary Josh Earnest followed up by answering a reporter’s question:

Q    Josh, the President last night mentioned, when he apologized for problems with the cancellations of policies, that he was going to instruct his administration to go back with some sort of a loop.  Can you flesh that out?  What are you guys looking at in terms of canceled policies?

MR. EARNEST:  I’m not in a position to add a whole lot of additional detail to what the President said last night.  The President did acknowledge that there are some gaps in the law that need to be repaired.  He has directed his team to consider some administrative solutions to those problems, some steps that his administration could take unilaterally that would address some of those gaps.

Sounds good, right? There’s a problem, that “a small percentage of folks” (8-10 million people) are facing canceled individual market health insurance plans, and some of them are “disadvantaged” by the new options, or will be once they can see them on a functioning healthcare.gov. The President has directed his team to consider some administrative solutions to fix the problem, to “address some of those gaps.”

The problem with the President’s public statement is that he has now frozen the individual insurance market in place until he announces his new solutions. If you are one of the 8-10 million Americans with a canceled insurance policy, President Obama just created an enormous incentive for you to hold off on buying a new policy, to wait for the Administration to offer you a new solution.

Had they announced a new solution today, they would not have created this problem. The disincentive to buy a new plan comes from offering hope of a better outcome with no specificity or timeframe.

This new disincentive to buy insurance applies nationwide and is independent of the broken federal exchange website. I expect states running their own exchanges like California and Colorado, Minnesota and Maryland, DC, New York, and Connecticut, will see their new enrollments now drop as those with canceled policies wait for the President’s next move. States participating in the federal exchange won’t see any drop because the broken website is already preventing signups. Still, even in those states the President has created a new reason not to buy insurance on the exchange when it eventually does work, at least until he announces his new policy.

Because the story is so hot, and because the President’s allies in Congress are desperate to offer their angry constituents some hope, we can be assured that the President’s ambiguous offer of future hope, and the purchasing disincentive it creates, will get a lot of attention.

The optimistic interpretation for this new policy signal is that President Obama and his team understood this balance when the President spoke yesterday, that they weighed the cost of further discouraging new signups against the benefit of partially relieving growing pressure to help angry citizens who liked their canceled policies.

The pessimistic interpretation is that this is yet another unforced error, another self-inflicted wound.

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One was my former White House colleague Marc Thiessen’s column, “A Dishonest Presidency.” The second was Ron Fournier’s column: “Lying About Lies: Why Credibility Matters to Obama.” The third was this Wall Street Journal article last Saturday.

In that third article this sentence grabbed my attention:

One former senior administration official said that as the law was being crafted by the White House and lawmakers, some White House policy advisers objected to the breadth of Mr. Obama’s “keep your plan” promise. They were overruled by political aides, the former official said.

Overruled by political aides? On a question of accuracy and honesty?!?

I won’t belabor the substance of the “keep your plan” promise. It is unequivocally and incontrovertibly inaccurate. Glenn Kessler does a good job of walking through it. I instead want to focus on the process point from the WSJ story and compare it to my experience.

In more than six years on the staff of President George W. Bush’s National Economic Council, I had the type of conversation described in the WSJ article hundreds of times. As a policy aide one of my core responsibilities was to make sure the President’s policy was accurately communicated and that we could back up every word in the President’s prepared remarks. This was mission critical for us policy aides–I knew that if President Bush said something incorrect on which I had signed off, I was at serious risk of being fired, even if it was just an honest mistake.

While the most important of these discussions were about upcoming Presidential speeches, I had similar conversations several times each day. A huge part of a White House policy aide’s job is to be the internal “official” explainer of the President’s policy. As a White House policy aide you don’t get to decide the policy, but you are the keeper of the flame once the President has made his decisions. You answer questions like “What is the President’s policy on X,” and “Can I say Y about the President’s policy?” You help the White House press shop, legislative affairs and political staff, Cabinet Secretaries and subcabinet officials, and occasionally outside allies who want to know, with certainty, that they are accurately describing the President’s policy views. You live and breathe this stuff.

As presidential speeches were being drafted White House staff had different roles in the process. The speechwriters had the pen. They emphasized simplicity, persuasiveness, intellectual consistency, tone, and writing in the President’s voice. We policy advisors pushed for clarity, accuracy and strong advocacy of the President’s policies. The legislative affairs shop weighed in to have desired impacts on Congress. The press and communications shops focused on how the press would interpret and react to the President’s words, and the political advisors had similar filters thinking about outside allies and opponents.

The White House policy council staff (National Economic Council, National Security Council, Domestic Policy Council and at the time, the Homeland Security Council) had reinforcements as well. Fact checkers working for the speechwriters footnoted every speech. There were other policy shops in the Executive Office of the President, including economists at the Council of Economic Advisers, budget experts at the Office of Management and Budget, and the Vice President’s policy staff, who were similarly focused on making sure we didn’t let the President say something inaccurate or overstate anything.

When things worked well, as they usually did, the speechwriters and policy advisors found language that was accurate, defensible, simple, and persuasive. This often involved many iterations, usually in a debate about accuracy vs. simplicity, as the WSJ reports was the case with President Obama’s “you can keep your health care plan, period” promise. I remember spending close to an hour once trying different iterations to ensure the accuracy of a single sentence for the President.

Sometimes White House staff would disagree on what the President should say. When we couldn’t work out mutually acceptable language, we’d elevate the disagreement.

Ninety-nine times out of 100 this would be elevated to the White House Staff Secretary and/or the White House Deputy Chief of Staff for Policy. We’d have a discussion involving three to five people: the speechwriter, policy expert, someone from leg affairs or press/comms as needed, and the Staff Sec or DCOS as the arbitrator. Maybe one time in 100 we’d elevate it further to the White House Chief of Staff.

On significant disagreements of framing, prioritization, emphasis, and rhetoric, I struggled to maintain a .500 batting average. I often deferred to the speechwriters or other Presidential advisors rather than elevate such a dispute. I knew I’d probably lose.

But in more than six years of working in the Bush White House as a policy advisor, I was never overruled when I argued that a particular statement, uttered by the President, would be inaccurate. As far as I know, my three bosses at the NEC and every economic policy advisor working for us, over the course of six years, had a similarly perfect record. We never knowingly allowed an inaccurate or indefensible statement into the President’s remarks.

Frankly, we didn’t have to fight that hard because the culture of the Bush White House leaned heavily against testing these limits. All my team or I had to say was, “We can’t say that, it’s not accurate,” and the other member of the White House staff would yield. They would press us (sometimes quite hard) to explain and defend why the language was inaccurate, but as soon as it was obvious we weren’t overplaying our “honesty card” to achieve some other goal, the other party would back off and try to find different language on which we’d sign off. In effect, the Bush White House policy staff had a veto over any proposed presidential language that we deemed to be inaccurate or an overstatement, no matter how vigorous the advocacy from the political staff.

This culture existed principally because of a White House norm set by President Bush and reinforced by his Chiefs of Staff Andy Card and Josh Bolten. It didn’t appear to require a lot of effort on their part, because no one challenged the presumption–of course we’d never risk letting the President say something we knew to be wrong. To suggest otherwise was heretical. We’d be criticized and sometimes attacked for the President’s views and policies, but everyone insisted that we’d never knowingly allow ourselves to be attacked for intentional misrepresentations.

As a practical matter we also knew that any overstatement would do far more damage to the President than any temporary rhetorical advantage it might offer. We knew, with certainty, that even the slightest inaccuracy would immediately generate aggressive questions from a press corps that mostly leaned against us. The New York Times would go after us at the first opportunity unless others beat them to the punch. We knew we’d then have to help the Press Secretary defend the President’s statement under repeated and ruthless attacks from a press corps that was constantly probing for such weaknesses. If this sounds a tad paranoid, remember the old saying: Just because you’re paranoid doesn’t mean they’re not out to get you. Our relationship with the White House press corps was quite different than that facing Team Obama.

The internal honesty and accuracy norm, supplemented by a healthy fear of an unfriendly press corps, was reinforced by the pain we felt when we made occasional mistakes. The most visible of these were the “16 words” about uranium in the President’s 2003 State of the Union address. That statement was technically true but based on flawed intelligence. Because it was so important to subsequent policy, this error later subjected President Bush to fierce criticism. Neither I nor anyone on our policy team wanted to take any risk of a similar event in the economic lane, so we fought as hard as necessary to eliminate such risk.

Like many others, I’ve been extremely hesitant to use the word lie to describe President Obama’s oft-repeated statements that “If you like your health plan, you can keep it, period.” A lie incorporates both inaccuracy and intention. While I am and have been a fierce critic of the Affordable Care Act, I have been extremely hesitant to write that President Obama lied. But based on all the available evidence I can’t reach any other conclusion, and the importance and impact of this lie justify the accusation.

Senior White House staff debated whether the President should say this, knowing it was inaccurate. This isn’t a point one could have missed–a principal goal of the ACA was to change (they argue “strengthen,” I disagree) the individual insurance market, to replace old plans with new ones. The statement is patently false and its legislative and substantive impact were crucial. Policy staff were overruled by “political aides.” The President and his advisors knew both that this promise was essential to rounding up the votes in 2010, and that it would not be true for something like 10 million people. For me the kicker is that President Obama said it more than two dozen times, including as recently as six weeks ago. The President knew it was false and he knew it was important, and still he said it over and over again.

President Obama lied to the American public and to Congress when he was trying to enact the Affordable Care Act. He lied after the ACA became law. He repeated this lie more than two dozen times, including as recently as six weeks ago. And then two days ago he offered a new lie about what he had previously said. I can reach no other conclusion.

As someone who spent countless hours ensuring Presidential policy accuracy, the idea that an Obama White House staffer would lose such an internal battle, that they would give President Obama a speech staff knew was wrong, is beyond my experience. A White House Chief of Staff who permits President Obama to say something he knows is false violates everything I learned about serving a President. A President must not lie to the American people and Congress about a core element of his signature domestic policy initiative, even if doing so is necessary for that initiative to become law. When he did this, President Obama breached the trust America needs to have in her President.

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Writing a Budget to Prevent Another Shutdown

Dr. Bernstein now works as a senior fellow at the Center on Budget and Policy Priorities.

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Congressional Republicans will only agree to sequester relief if offset by mandatory spending cuts, but President Obama and Congressional Democrats will only agree to mandatory spending cuts if taxes are also increased, and Republicans won’t raise taxes.

This fiscal Gordian knot caused the Super Committee to break down in late 2011. There was no agreement to replace the automatic discretionary spending cuts (aka the sequester) that President Obama proposed and signed into law in the Budget Control Act of 2011. He made a fundamental miscalculation when negotiating that law: he mistakenly assumed that Republican defense hawks would squawk so loudly at the disproportionate defense cuts imposed by the sequester that some Republicans would be willing to support tax increases in exchange for higher defense and non-defense discretionary spending.

The sequester replacement negotiations earlier this year were a second attempt by the President to untie the knot. That time he used political force, trying to bludgeon Republicans into agreeing to tax increases. Again he failed.

As the Republican demand to defund ObamaCare dissolved last week, the President and Leader Reid once again erred. Unsatisfied with a straight extension of current law spending and the debt limit and a political victory over Republicans, they increased their demands. They shifted from a sure-win defensive posture to an aggressive but risky offensive posture, demanding higher spending offset in part by tax increases.

House Budget Committee Chairman Ryan floated a sound and predictable Republican alternative: substituting mandatory spending cuts (specifically, changes to entitlement programs proposed by the President in his budget) to offset higher discretionary spending for defense and (I think) non-defense. This formed the core of Speaker Boehner’s recent offer to the President. The President rejected this offer because House Republicans were unwilling to also raise taxes. For a third time the President failed to untie the fiscal Gordian knot.

The negotiation now lies with Senate Leaders Reid and McConnell. (VP Biden, the only member of the President’s team with a proven track record of closing deals with Republicans, has apparently been locked away at Leader Reid’s insistence.) While the form of the Reid-McConnell negotiation is about the timing for when short-term extensions of the continuing resolution and the debt limit would next expire, the underlying substance of the negotiation is this fiscal Gordian knot. Both leaders are trying to structure both this negotiation and the next to maximize their leverage to achieve their respective fiscal goals.

Democrats had the advantage last week when they were playing defense, trying to block Republican demands to defund or delay parts of ObamaCare. The combination of the Cruz-Lee vaporware defund strategy, a House Republican conference unable to agree on anything, a Republican party message that was muddled at best, and an effective use of the bully pulpit by the President led to plummeting poll numbers for Congressional Republicans. Many Senate and some House Republicans seemed anxious to negotiate a deal that would temporarily both end the government shutdown and extend the debt limit deadline. With Leader McConnell’s tacit approval, Senator Collins kicked off the compromise attempt by initiating a rump group negotiation with a few Democrats. Leader Reid killed this fledgling bipartisan negotiation and once again took matters into his own hands, leading to the current discussion with his Republican counterpart.

Republicans now have a slight medium-term advantage for three reasons. I suspect that Democratic appropriators don’t feel as strongly about wanting to raise taxes as Congressional Republicans feel about not wanting to raise taxes. When they are eventually forced to choose, I’ll bet that enough Democrats (specifically, the appropriators) will accept entitlement spending cuts to fully offset higher discretionary spending, without any tax increases.

In addition, current law defaults to a position Republicans are more willing to accept than Democrats. Senators Cruz and Lee learned that he who favors current law has a significant tactical advantage in a shutdown fight. President Obama’s sequester in current law means the same is true on spending, but this time it favors fiscal conservatives.

Finally, when the public debate was “government shutdown vs. defunding ObamaCare,” Democrats had a communications advantage. Now the debate is shifting to “whether to bust the 2011 bipartisan budget deal by increasing spending and taxes.” That is right in the wheelhouse of today’s Republican party.

By insisting on tax increases to offset higher discretionary spending, Leader Reid and President Obama are doing what neither Boehner nor McConnell has been able to do for several weeks: unite Congressional Republicans. And Republicans have a strong counter: we will agree to higher discretionary spending as long as it’s offset only by entitlement spending cuts proposed by the President. I appreciate that many Democrats think it’s outrageous not to also raise taxes (and they’re nuts for thinking that), but that’s not the point. The key is that while most House and Senate Republicans felt forced into a shutdown over “defunding ObamaCare,” I’d bet that most of them will reject any Reid proposal to unravel the only bipartisan fiscal success of the past five years or to increase spending funded by higher taxes, even if such a rejection means that the government shutdown continues.

If Leader Reid and the President continue to insist on more spending and higher taxes, and especially if they want to try to enact it now, I think it backfires on them. They will reunite Congressional Republicans and give Republicans a much stronger rhetorical perch than they have had so far. Unfortunately, they would also continue the current stalemate.

(photo credit: Jay Allen)

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The federal government’s fiscal year begins October 1, so federal fiscal year (FY) 2013 just ended and FY 2014 just began last week. In FY 2013 the federal government collected about $2.813 trillion in revenues and spent about $3.455 trillion. The difference between those two numbers, $642 billion, is the unified budget deficit for Fiscal Year 2013. We say unified budget deficit because we’re looking at all money flowing into the federal government (revenues) and all money flowing out (spending), and not distinguishing among different sources or uses of those funds. In other contexts, usually having to do with Social Security, we might want to treat on-budget and off-budget spending and taxes differently, but for this discussion we will use unified numbers.

I think of these enormous numbers as representing flows of cash. (Please see the footnotes below for two caveats: [1] [2]) The key question: if last fiscal year the government spent $3.455 trillion in cash but collected “only” $2.813 trillion in cash, where did it get the other $642 billion in cash it needed to pay the rest of its bills?

The federal government borrowed it. The Treasury department sold IOUs that we call Treasury bonds (technically bills, notes, and bonds, depending on the timeframe). Investors paid cash for these IOUs, and in exchange they got a promise that Treasury will pay them back later, in full, with interest, and on time. We say that Treasury issued debt to raise cash. Treasury’s issuance of debt is a means to an end: it is the mechanism Treasury uses to get the cash it needs to pay all the government’s bills (which we call government obligations) on time.

Treasury needs to borrow a lot because the deficit is big, and the deficit is big because the federal government is spending a lot more than it collects in revenues. If Congress and the President cut spending and/or raised taxes, then we’d have a smaller budget deficit and Treasury would need to borrow less. If we had a balanced budget, Treasury wouldn’t need any new borrowing, except to “roll over” past borrowing as it comes due.

The $642 billion deficit for last year is what we call a flow measure. It measures the difference between two numbers that represent money flowing into and out of the government over a particular time frame (in this case, a year). The total amount the government has borrowed in the past is the debt. That’s a stock measure, an accumulation of past flows (including a few years of surplus in the late 90s). Each year’s deficit (flow measure) gets added to the debt (stock measure) left over from past years. So the federal debt increased by about $642 billion last fiscal year because the U.S. government spent that much more than it collected. (Another caveat/complexity: [3])

Unfortunately it gets a little messy here. Most economists and budget wonks care about the total amount the U.S. federal government has borrowed from the rest of the world, including from American citizens, private firms and investment funds, foreigners and foreign governments, and anyone else who wants to buy Treasury debt. We call this total amount that the U.S. federal government owes to the rest of the world the debt held by the public, where “public” really means “everyone except for the U.S. federal government.” [4] As of last Thursday, debt held by the public was $11,937,127,964,522.94. If you ask me the size of the federal debt, I’d tell you almost $12 trillion. That’s how much the U.S. federal government currently owes everybody else.

The messiness arises because the U.S. federal government also issues debt to itself. Much of this intragovernmental debt is for Social Security. Treasury’s site shows us that intragovernmental debt is now about $4.8 trillion. This debt represents a promise from one part of the federal government to another. There’s a whole philosophical debate about how “real” this intragovernmental debt is and how it relates to the unfunded liabilities of the Social Security program, but we can ignore that debate here.

If we add these two numbers together, the $11.9 trillion debt held by the public and the $4.8 trillion intragovernmental debt, we label the sum total public debt. Total public debt at the end of last Thursday was about $16.7 trillion.

The debt limit, then (subject to yet another complexity/caveat [5]) applies to total public debt, both the amounts Treasury borrows from the rest of the world and the amounts the federal government borrows from/lends to itself.

What, then, is the debt limit? The President can only borrow cash from the rest of the world because Congress allows him to, and Congress doesn’t give him unlimited authority to borrow. A law limits the total amount of debt that can be issued (remember, including intragovernmental debt since the legislated limit is on total public debt and not on debt held by the public). Treasury is not legally allowed to issue more debt once total public debt has reached the limit specified in law. The debt limit is a legislated cap on the total public debt that Treasury can issue (skimming again over caveat [5]).

Remember that cash flows into and out of the government every day. The bad scenario that’s triggered by “bumping up against the debt limit” (or debt ceiling, which is the same thing) is that, because our government is spending more than it collects, and because it soon will not be allowed to borrow any more cash from the rest of the world, Treasury won’t have the cash it needs to pay somebody on time.

That’s it for the beginner lesson. You now have the basics of:

• the unified budget deficit;
• debt held by the public;
• intragovernmental debt and total public debt;
• and the debt limit.

And you understand that, if crunch time occurs, the inability to borrow is the intermediate problem, while the ultimate problem is a lack of sufficient cash to pay all the bills on time.

Now that we have built this foundation, we can look into the particulars of the current debt limit stalemate. Stay tuned.

[1] Flows of “cash” is an oversimplification.  Technically a lot of that money is flowing in the form of checks (you write a check to the IRS or the government writes a check to a Social Security recipient) or electronic transfers.

[2] There’s an exception to the idea of the deficit measuring the difference between two cash flows.  Government accounting rules say that the deficit effect of certain credit programs, like student loans, is measured in terms of present value rather than cash flows. This changes the numbers but not the concepts for this introduction, so I’m going to ignore it here.

[3] Because of government accounting conventions, there are some things which affect the debt without affecting the deficit. We’ll ignore those here. And the credit program caveat in [2] also has an effect here.

[4] Is the Federal Reserve part of the U.S. federal government? For this purpose, the best answer is “it depends.” Nothing in government accounting is easy. <sigh>

[5] A few “federal entities” like the Tennessee Valley Authority and Fannie Mae and Freddie Mac (now effectively owned by the government) can issue debt that gets counted as part of total public debt but isn’t part of that limited by the debt limit law. There are a couple of kinds of debt that count as total debt but not as debt subject to limit, including debt issued by the Federal Financing Bank and “Hope Bonds,” created in 2008.  This makes total public debt a bit bigger than debt subject to limit, and the latter is what is restricted by a debt limit law.

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This strikes me as an irrelevant threat. As best I can tell, no one was proposing such negotiations. Indeed after the tax increase fight last December, Speaker Boehner made a point that he would henceforth return to regular order rather than engage in ad hoc one-on-one negotiations with the President.

To increase the debt limit one needs the House and Senate to pass identical bills which raise (or suspend for a time) that limit, and then for the President to sign that bill, or at least not veto it. To pass identical bills it may be necessary for Speaker Boehner and Leader Reid to negotiate. But the President and his advisors don’t have to be part of that discussion. Speaker Boehner needs only the President’s reluctant after-the-fact acquiescence to a House-Senate agreement legislated without the President’s direct participation. To succeed Speaker Boehner does not need President Obama’s up-front and public approval.

Had the President wanted to make a threat that mattered, he would have told the Speaker “If you send me anything other than a clean debt limit bill, I’ll veto it.” That would have been a red line. He didn’t make such a threat, and that’s intentional. But the actual threat made by the President sounds tough to his allies without actually constraining his future options. The President won’t have to retreat (again) from a red line threat, because he hasn’t actually drawn a red line.

The legislative reality is that in the current House-Senate configuration, President Obama will never veto a debt limit bill.

He won’t have to. If there’s a provision that he hates enough that he would veto it if it were attached to a debt limit bill, he can simply threaten a veto, publicly and/or privately. He can tell Leader Reid, “Harry, don’t send me that bill or I’ll have to veto it.”  And, if the threat is unequivocal enough, Leader Reid will then ensure that a bill containing that provision does not pass the Senate.

Alternatively, the President can use his bully pulpit to urge his allies in Congress to block any bill that contains the offending provision. The bully pulpit and the hammer of a veto threat (rather than a veto) are sufficient tools for President Obama to prevent big policy changes that he detests being attached to a debt limit extension.

The simplest example would be if the House were to pass a debt limit extension that also “defunds” ObamaCare. While President Obama could threaten a veto of such a bill, and he might, it’s likely an unnecessary threat. Acting on their own, Senate Democrats and Leader Reid would never allow such a provision to pass the Senate, thus obviating the need for a Presidential veto. In this case the veto threat matters only if it’s needed to shore up Democratic votes.

Now let’s return to the actual threat made by the President. It’s easy to imagine Speaker Boehner turning to his staff and saying, “The President just cut himself out of our debt limit negotiations with the Senate. Let’s see what we can work out with them.  If the White House doesn’t like something we want attached, they can try to convince Harry to block it. We can’t big stuff like defunding or even Keystone on this bill, but there may be a small win or two that Harry would accept despite carping by the White House.”

Now it may happen that Leader Reid, either on his own or at the behest of the President, refuses to allow the Senate to consider anything other than a clean debt limit bill. The President might still get his desired result, if Leader Reid is on exactly the same page and if the Senate position prevails in the upcoming back-and-forth with the House.

But by saying “I won’t negotiate,” the President has moved himself into the background, into a position of indirect influence through his allies on the Hill. This is most likely to matter on important but second-tier issues, things which the President opposes but which Senate Democrats may be willing to accept, or may find they have no alternative but to accept because no other legislative path to enacting a debt limit increase is possible.

The key for Congressional Republicans is then to exploit whatever procedural leverage they can generate, combined with policy differences (or differences in intensity) between the President and Congressional Democrats.  House Republicans can attach a modest policy change to a debt limit bill and maybe get enough Senate Democrats to swallow it. If they do, the President will have to accept it, because he can’t risk vetoing a debt limit extension over the inclusion of a second-tier policy he doesn’t like.

House & Senate Republicans did this last spring. They attached a “no budget no pay” provision to a debt limit extension. Senate Democrats accepted it, and the President signed the bill after insisting on a clean bill. As a result of this provision, the Senate passed a budget resolution for the first time in years. This was a modest policy and process win, but a win nevertheless.

The President says he refuses to negotiate on this bill.  That should suit Congressional Republicans just fine.  They can and should instead try to work something out with their colleagues on the other side of the aisle. The President’s ineffective threat may provide an opportunity to get a small policy win or two as an attachment to a debt limit extension.

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Bush ended financial crisis before Obama took office — three important truths about 2008

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Here’s the op-ed:  Who really fixed the financial crisis?

And here again is the paper:  Observations on the Financial Crisis.

As with most publications, we didn’t choose the title of the op-ed, although in this case it worked out fine.

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Ed was chairman of President Bush’s Council of Economic Advisers when I was director of the National Economic Council.

Here are the 19 observation headlines. I urge you to read our supporting arguments, especially if you’re going to comment on or respond to them.  Each argument takes only about a page.

1. “The recession that began in late 2007” conflates two distinct time frames.
2. The financial panic began in September 2008. The financial crisis began long before, and first showed significant signs in August 2007.
3. The shock and panic of September 2008 were triggered by a sequence of events, not just by the Lehman failure.
4. Putting Fannie Mae and Freddie Mac into conservatorship likely averted larger shocks.
5. The “deregulatory cause” hypothesis is flawed.
6. The financial crisis was caused principally by unprecedented capital flows into the United States.
7. Dominoes vs. popcorn
8. TARP was a shift to a systemic solution from a case-by-case approach and was possible only when Congress accepted that inaction would lead to a catastrophic failure. Policy makers traded false negative errors for false positive errors.
9. TARP is the most successful financial policy for which no member of Congress will admit having voted “aye.”
10. Capital investment was indeed better policy than buying “toxic assets.”
11. The financial crisis was largely resolved by the time President Obama took office in late January 2009. President Obama’s task was not to address the financial crisis, but instead to handle the ensuing financial cleanup, financial policy reforms, and the severe macroeconomic recession that resulted from the late-2008 financial crisis.
12. The financial rescue continuity should not be surprising, since two of the three key players were unchanged.
13. Some conservatives mistakenly assumed that Chapter 11 restructuring was a viable option for GM and Chrysler.
14. President Bush’s decision to extend auto loans was in part influenced by the timing of the Presidential transition.
15. While both were heavily involved in crisis management, Presidents Bush and Obama took different approaches to firm-level decisions.
16. “The deepest recession since the Great Depression” does not mean the two are comparable in size.
17. At best, the fiscal stimulus offset about a quarter of lost output in the past five years.
18. The exceptionally slow recovery has magnified the economic losses of the 2008-09 recession.
19. While the U.S. economy is growing, it is not returning quickly to its prior level.

If you find this paper interesting I have two other reading suggestions to offer.

1. As a member of the Financial Crisis Inquiry Commission I wrote a dissent to the main report with Bill Thomas and Doug Holtz-Eakin.  Where the Hennessey/Lazear paper makes a collection of arguments on frequently discussed topics about the crisis, the Hennessey/Holtz-Eakin/Thomas dissent attempts to describe the causes of the 2008 crisis.
2. I think this paper by Brookings’ Martin Baily and Doug Elliott, Telling the Narrative of the Financial Crisis, does the best job of framing the overall debate about what caused the 2008 crisis.  At a minimum it’s good to read their short blog post about the paper.  The Financial Crisis Inquiry Commission debate fit perfectly into these three narratives: the majority report tracked Narrative 2, Peter Wallison’s dissent tracked Narrative 1, and our dissent tracked Narrative 3 (where Baily and Elliott are).

Two sharp-eyed readers (who are better than I am at proofreading) found our typo.  On page 2 it should read “… steadily worsening to 830,000 jobs lost in March of 2009.”  The printed text says March of 2008.

The post Observations on the Financial Crisis appeared first on Keith Hennessey.

I’m not sure it adds a lot of value for me to go point-by-point rebutting each of Mr. Morgan’s responses to my original technical points. He is right that we agree in some areas, even though he doesn’t highlight all areas of our agreement. I am sorry to say that where we still disagree his responses have not convinced me to change my original critiques.

While I therefore stand by each point of my original critique, I think it’s most helpful if I highlight a few points on which we agree, and then explain again only the most important reasons why I continue to recommend policymakers ignore this study and its headline number.

Where Heritage and I agree

Heritage highlighted a few important points of agreement, as well as a few other smaller ones.  We agree on the following.

• Making legal those now here illegally would increase government spending and deficits. This is because much of this population is low income, and the benefits they would receive from government exceed the taxes they would pay.
• Therefore, as Heritage frames it, “amnesty will cost taxpayers.”
• It is highly unlikely that the additional economic growth resulting from making these folks legal would offset these costs, especially since governments would capture only a small fraction of that additional growth.

If you read Mr. Morgan’s response carefully you can see that Heritage agrees with several other points I have made.

As best I can tell, Heritage and I agree on the following.

• Heritage’s $6.3 trillion headline number does not represent their estimate of what they label as “amnesty,” but instead something different.
• This number includes the costs of government services now being used by 8-9 million people here illegally.
• This number includes current and ongoing costs of 4.5 million U.S. citizen children. These costs would remain if you could somehow find and deport everyone now here illegally.
• While this number includes a one-time +5% bump in income (I missed this), it ignores future skill and income growth of newly legal U.S. citizens, and the effects of that growth on the budget.
• This number excludes the supply-side effect of increased labor from newly-legal Americans who would have more ability to work and for some take higher-skilled jobs that better match their abilities and training.
• This number ignores the time value of money and treats an inflation-adjusted dollar of costs 50 years from now as equivalent to a dollar of costs today.

The baseline & citizen kids disagreements

Heritage and I disagree on what numbers are relevant for policymakers. I argue that the relevant number for policymakers is the incremental cost of what is now being debated in Congress, eventually making legal those now here illegally. (Heritage calls this “amnesty,” I shy away from that term.) This increment, I argue, should be measured relative to current policy: the reality that 8-9 million people are in the U.S. today, using government services and imposing fiscal costs on governments.

Heritage argues policymakers should also know the cost of the proposed policy relative to a state of the world in which illegal immigration had never occurred. How can that possibly be relevant to any policy decision now being debated? That illegal immigration did occur, and those people are here now. Even if you somehow had a way to find every illegal immigrant, deport him or her, and perfectly prevent all new illegal immigration, what are you going to do with 4.5 million U.S. citizen children? Deport them too? That’s what the Heritage study tries to estimate.

While Heritage or some policymakers might prefer that state of the world, it’s impossible to get there from here, both because we don’t know how to find and deport everyone, and because you can’t undo the existence of 4.5 million U.S. citizens. It is therefore an irrelevant basis for comparison.

Some may argue, “How can it hurt to know this additional number, even if it’s kind of silly and not relevant to the current choice being considered by Congress?” It hurts because reporters, policymakers, and Heritage shorthand things, and policymakers mistakenly substitute the useless number for the useful one. That is definitely the case here. Unless you are scrupulously reading the report’s footnotes (or my blog), you’d never know that Heritage most of the time does not actually claim that $6.3 trillion is the cost of the “amnesty” provisions in the Gang of Eight bill.

This confusion, which always exists in real-world legislative processes, makes a misleading number harmful. If this confusion is intentional, then it’s deception and highly irresponsible.

The costs of more poor Americans

I think Heritage and I are pulling in roughly the same direction on concerns about our enormous and unsustainable entitlement state. The Heritage work on illegal immigration focuses on the additional fiscal costs of having more poor Americans. I am willing to bear some (I said some) additional fiscal costs of making legal those here legally if it’s part of a long-term solution that dramatically reduces the flow of future illegal immigration, and if that solution significantly expands our high-skill immigration.

At the same time, I think parts of our low-income support structure are seriously fouled up. I’d highlight three big concerns: the explosion of food stamp eligibility in recent years; the explosion of those claiming disability insurance; and the insanely high effective marginal tax rates on some low-income workers as their income climbs and they lose eligibility for government benefits. I think all three problems should be high priorities for policymakers to fix.

I place an even higher priority on dialing back quite dramatically the taxpayer subsidies for the broadly defined “middle class” in the form of old-age entitlements and now new health insurance subsidies. Because they are bigger and apply to so many more people, these unsustainable middle class benefit promises are even more fiscally damaging than the low-income subsidies so often highlighted by Heritage.

And I think I differ from Heritage in that I see both of these solely as problems of our entitlement state, not as costs of illegal immigration. Let’s fix the whole immigration system and offer new, better structured, fiscally sustainable entitlement promises to the middle class and the poor. Let’s not use fouled-up entitlement spending structures as an excuse not to improve immigration policy.

The fatal flaw:  No discounting

For me the fatal flaw in the Rector-Richwine paper is not accounting for the time value of money. I applaud Heritage for trying to estimate the long-term costs of immigration policy, and I am a proponent of long-term cost estimates (especially for old-age entitlement programs where they are most relevant). Heritage repeatedly refers to its “exhaustive” study, a “100 page paper” that contains “a complex analysis of 34 categories of taxes and 73 expenditure categories.” But if your study tries to examine costs over a 50-year timeframe and you’re not doing a net present value calculation, everything else is moot. You are overestimating lifetime costs by nearly a factor of two simply by not discounting future costs and benefits. You undercut the rest of your hard work by ignoring this elementary principle.

Sorry, Heritage, it’s still not a useful number

Estimating the costs of making legal those here illegally is difficult. Well-intentioned estimators will take different approaches to the same problem. But when you estimate the costs of the wrong population, compare it to a fanciful/impossible baseline, and ignore the time value of money, your headline number adds no useful information to the immigration policy debate. Each of these problems leads to an overstatement of the cost, as does each other smaller concern I highlighted with the paper and op-ed. When those flawed conclusions are then further misrepresented as the “Cost of Amnesty,” real harm is done to the policy debate on an important national issue.

I continue to recommend immigration policymakers ignore the Heritage study and especially its $6.3 trillion headline number. Ask CBO for an estimate instead.

The post Sorry, Heritage, your number is still wrong appeared first on Keith Hennessey.

In a little over three years, our businesses have created more than 6.5 million new jobs.

… Corporate profits have skyrocketed to all-time highs.

… Our housing market is healing.

… And our deficits are shrinking at the fastest rate in decades.

If you studied my post last Wednesday on the CBO baseline update, this should strike you as an odd boast.

CBO projects that under current law we would have a deficit of 4% of GDP for 2013, meaning that our debt/GDP will continue to rise. CBO further projects that under the President’s budget we would have a deficit of 4.2% of GDP for 2013, slightly higher than their projected deficit under current law.

President Obama’s words:  Our deficits are shrinking at the fastest rate in decades.

Translation 1:  The rate at which we’re rolling backwards is slowing dramatically.

or Translation 2:  Our debt problem is getting worse much more slowly than in recent years.

That is not something you should boast about.  You’re supposed to boast when things are getting better, not when they’re getting worse more slowly.

The post Boasting about a 4.2% deficit? appeared first on Keith Hennessey.

CBO projects that revenues will increase significantly from last year (2012) to this year (2013) for three reasons:

• The tax increases legislated in the January 2nd “fiscal cliff” law;
• Some taxpayers realized their income in late 2012 rather than 2013 in anticipation of 2013 rate increases;
• For other reasons, personal income increased from 2012 to 2013.

These are all reasons why the U.S. Government is projected to collect significantly more revenues in 2013 than it did in 2012. In my earlier post I had mistakenly said these were reasons why CBO’s most recent baseline update had increased from January/February until now.

CBO’s Jan/Feb baseline document (and, indeed, their August baseline update last summer) had already incorporated tax increases scheduled to occur under then-current law. CBO did not leave them out of their Jan/Feb projection as I wrote earlier.

CBO’s revenue projection increased from their Jan/Feb baseline document to now simply because they have increased their estimate of the magnitude of the second factor listed above.

I apologize for any confusion I caused. While it’s important that I correct this, the error and correction don’t change the fundamental lessons from that post.

You can see the corrected post here.  Thanks to a friend for pointing out my mistake.

The post A mistake in my deficit post appeared first on Keith Hennessey.

CBO released their updated economic and budget baseline today, in advance of their estimate of the President’s budget due out later this week. At first the headline sounds like good news: the deficit for this year will be “only” $642 B, 4% of GDP. That’s about $200 B smaller than CBO projected for this year in their January baseline document. Should we celebrate?

No, not unless you like the “fiscal cliff” tax rate increases and you like the government owning Fannie Mae and Freddie Mac. Those are the reasons why the deficit projection declined.

Deficits and Debt

You should know three benchmarks when thinking about federal budget deficits, each measured in % of GDP:

1. A roughly 3% deficit will hold debt/GDP constant;
2. The historic average deficit (pre-2008 crisis) is about 2% of GDP; and
3. Of course, a balanced budget is zero deficit.

Any time you hear a deficit number, compare it to zero, two and three, and you’ll have a good feel for where we are. A 4 percent deficit for this year is not good: it’s almost twice as high as the historic average, and it’s high enough that our debt will continue to increase faster than our economy will grow.

You will hear “But that 4 percent projection is much lower than the 5.4% projected in January. Surely that’s good news.  It is certainly an improvement over where we thought we were this year.”

This is where we need to review levels, rates of change, and expectations. This is tricky so I’ll break it down into small steps.

• The level of our debt/GDP is quite high: 73% at the end of last year.  That’s bad, and there’s a debate about just how bad it is.
• The deficit is the change in our debt for this year. A deficit means our debt is increasing, and a deficit greater than 3% of GDP means our debt is increasing relative to our economy. So our level is high (bad), and because our 4% deficit is greater than the 3% benchmark, our level is increasing (getting worse).
• But it’s getting worse much more slowly than it was getting worse a few years ago. In 2009 the deficit was 10% of GDP.  With a 4% deficit this year, our situation (level, debt/GDP) is getting worse much more slowly than it was four years ago.
• That does not, of course, mean we’re in a better position (debt level) than four years ago. Our debt/GDP at the end of 2008 was 41%. At the end of last year it was 73%, and CBO projects it will increase to 75% at the end of this year. That our debt is growing much more slowly this year than it was four years ago is hardly cause for celebration.
• Looking for a silver lining, our projected deficit (4%) is significantly smaller than was projected just four months ago (5.4%, projected in January). It is therefore a better (less bad, really) number than prior expectations.

I know that’s probably more complicated than you want.  Sorry, best I can do.

Why did the projection change so much?

Update:  I struck a lot of text from the original version of this post, in which I misread the reasons why CBO’s revenue projection went up.  The correct version is in green here.

• Based on tax data collected through April of this year, both income and corporate tax collections on income earned in 2012 (and therefore collected in 2013) are coming in higher than CBO anticipated;
• and Fannie Mae and Freddie Mac, now quite profitable, are making big dividend payments to the Treasury. These payments show up on the outlay side of the federal budget ledger, but they are in effect receipts of the U.S. government.

CBO’s best guess at this point is that the first factor is because taxpayers realized more income in late 2012 (rather than in 2013) in anticipation of 2013 rate increases than CBO had originally anticipated.

The other big consequence of the nature of these changes is that they are mostly one-time bumps. So the 2013 numbers improved quite a bit, but the numbers for following years don’t increase nearly as much.

Enough already! How should I feel about this?

If you supported the tax rate increases then this is marginally good news. But don’t celebrate; our fiscal picture is still grim.

If, like me, you hate tax rate increases on anyone and detest having the government own two massive mortgage finance companies, then you should feel no comfort from today’s deficit news, which is almost entirely the result of those policies. I’d happily return to a 5.4% deficit if you let me repeal the tax rate increases and replace Fannie & Freddie with a private mortgage securitization market.

And then I’d cut government spending.  A lot.

The post CBO’s new deficit estimate appeared first on Keith Hennessey.

The key substantive point of the paper and op-ed is a $6.3 trillion number:

An exhaustive study by the Heritage Foundation has found that after amnesty, current unlawful immigrants would receive $9.4 trillion in government benefits and services and pay more than $3 trillion in taxes over their lifetimes. That leaves a net fiscal deficit (benefits minus taxes) of $6.3 trillion.

I expect making 8-9 million people here illegally into U.S. citizens would increase future deficits once these people are eligible for benefits. But there are so many problems with the Heritage study that this $6.3 trillion number is useless for making policy decisions. It might as well be plucked out of thin air.

Others have criticized the Heritage study, including a detailed critique from Cato’s Alex Nowrasteh. I’m adding to that here.

The basics of estimating government expenditures for an entitlement program are simple.

1. Figure out the number of people who will receive subsidies;
2. Figure out how much the government will spend, on average, per person per year;
3. Choose your timeframe, measured in years;
4. Multiply (1) by (2) by (3) and you’re done.

The Heritage study makes errors in each step.

1. The study purports to measure the “cost … of amnesty.” Let’s set aside whether amnesty is the appropriate word to describe what is in the Gang of Eight’s bill. The fiscal cost of “amnesty” is the incremental cost of making those here illegally eligible for government payments and services relative to what we have now. People here illegally are already imposing fiscal costs by driving on the highways, using public parks, relying on local firefighters for emergency services, and in some cases receiving uncompensated care in emergency rooms. Some children here illegally are already receiving free public education. Making those children U.S. citizens doesn’t increase the cost to the state of educating them.

There are significant incremental costs to amnesty, mostly from millions of people eventually becoming eligible for Social Security, Medicare, Medicaid, food stamps, and cash assistance.

But in addition to these incremental costs, Heritage incorporates all of the baseline costs in their $6.3 trillion estimate of “amnesty.” By measuring total rather than marginal costs, they are telling us the cost of making millions of people legal relative to the cost of somehow finding and deporting all of them. Setting aside my view that such an alternative is infeasible, it is inaccurate to describe such an estimate as the cost of amnesty. It is instead the cost of amnesty relative to some other state of the world that Heritage would prefer. That is both misleading and not particularly useful to policymakers.

The study authors acknowledge this. On page 29 of they write:

The $6.3 trillion figure represents the lifetime fiscal costs of unlawful immigrant households after amnesty. It does not represent the increased fiscal costs caused by amnesty alone. The increased lifetime costs caused by amnesty would equal $6.3 trillion minus the estimated lifetime fiscal costs of unlawful immigrant households under current law.

The killer problem comes with the way Heritage is marketing the study. $6.3 trillion is Heritage’s estimate of the total costs of illegal immigrants if “amnesty” is granted. But the op-ed is titled “What amnesty for illegal immigrants will cost America,” and the op-ed says “amnesty has a substantial price tag,” thus mistakenly presenting $6.3 trillion as the marginal cost of a proposed policy change. The study says one not very useful thing, while the op-ed markets the study’s results as something else entirely.

1. In addition to not being an estimate of the cost of “amnesty,” the $6.3 trillion number does not measure the cost of illegal immigrants, either. The study includes a number calculated from looking at 12.7 million people, then labels that the cost of “illegal immigrants.” Contained within those 12.7 million people are 4.5 million children born in the U.S. to at least one parent here illegally. These children are U.S. citizens. Heritage is inflating the population of “illegal immigrants” measured by 55% = (4.5 / (12.7 – 4.5)).

The Heritage logic is that those 4.5 million children are in the U.S. only as a result of illegal immigration, so the costs of providing them with taxpayer services are costs of illegal immigration. Heritage is correct that, had those 8.2 million adults here illegally never arrived, those 4.5 million children would not have been born in the U.S.

But you can’t unring the bell. Whatever your view on whether policy failed by granting citizenship to the U.S.-born children of an illegal immigrant, these children are now U.S. citizens and entitled to benefits (and with the requirement to eventually pay taxes). The fiscal costs of these citizen children can’t be counted as the cost of “amnesty for illegal immigrants,” since (a) they are being paid now and (b) they will continue to be paid even if their parents do not get benefits.

At best Heritage’s estimate is not the cost of “amnesty” for illegal immigrants. It is an estimate of the cost of “amnesty” for 8.7 million illegal immigrants plus the costs of benefits for 4.5 million U.S. citizen children.

While the study acknowledges that their estimate depends heavily on this unusual redefinition, the op-ed and Heritage’s subsequent promotional efforts do not. In the study the authors carefully acknowledge:

For example, any study that excludes the welfare benefits and educational services received by the minor U.S.-born children of unlawful immigrant parents from the costs assigned to unlawful immigrant households will reach very different conclusions about the fiscal consequences of illegal immigration.

The DeMint/Rector op-ed makes no such distinction and is factually incorrect because it includes the benefit spending for 4.5 million U.S. citizens (emphasis added by me):

… current unlawful immigrants would receive $9.4 trillion in government benefits…

As we’ll see next, the study is also not really a complaint about the fiscal effects of illegal immigrants, or even of immigrants generally. It is instead a complaint about low income people receiving net government subsidies.

1. The logic behind the study can be summed up like this:

• Poor U.S. citizens cost the government money because they receive more in benefits than they pay in taxes;
• Immigrants tend, on average, to be fairly low on the income scale;
• Illegal immigrants even more so; therefore
• Making illegal immigrants legal (at some point) will therefore increase future deficits.

But other than the “even more so” point, this isn’t really an argument about illegal immigrants. It’s an argument about the existence of low-income Americans, a redistributive safety net and old-age subsidies, and an income tax system that exempts about 45% of Americans from paying income taxes.

Senator DeMint and Dr. Rector write:

Yet immigrants should come to our nation lawfully and should not impose additional fiscal costs on our overburdened taxpayers.

I agree with the first part, but they run into trouble on the second.  If you believe their numbers, legal immigrants also impose additional fiscal costs on our overburdened taxpayers.

The Heritage logic would apply equally to legal immigrants and to babies born to low income U.S. citizens. I know Heritage is not opposed to either of those, but the logic of this study (and the language in the op-ed) would seem to lead to such a conclusion.

1. Even more generally, the study is actually a critique of our unbalanced federal budget for everyone, and not just for the poor, much less for a subset of the poor. The federal budget is terribly out of whack, the result of promising way too many entitlement spending benefits without raising the taxes needed to pay them. (I would of course solve this by changing the spending promises, not by raising taxes.) Entitlement spending promises to seniors are the largest cause of this problem and are the drivers of unsustainable federal and state government spending trends.

Illegal immigrants are being promised far more in benefits than they will pay in taxes not just because they are on average low income, but because almost everyone is being promised old age benefits that will exceed the taxes they will pay.

In addition, Heritage’s calculations mistakenly assume that Social Security and Medicare benefits will be paid in full to newly legal immigrants for the next 50 years, even though (a) it’s obvious that neither program’s spending is sustainable in its current form for even half that time; and (b) current law includes a mandated 27% cut in Social Security benefits once the Social Security “trust fund” has a zero balance, and a 13% cut in Medicare part A benefits when the Hospital Insurance “trust fund” hits the wall. As a result, Heritage’s estimates of the direct old-age benefit costs for newly legal immigrants are too high.

1. The authors do a lot of work to group illegal immigrants by educational level (as a proxy for income) and to estimate the fiscal costs for various eligibility phase-in timeframes. But, as best I can tell, they assume that a poor, low-skilled, poorly educated illegal immigrant will remain poor, low-skill, and poorly educated, and that he will draw government subsidies his entire life. Incomes typically climb as a worker ages (including for low-skilled, low-wage workers). Some people who arrive in the U.S. illegally may initially take jobs well below their skill level because of language barriers that they later overcome. Others will get further education or build skills over time. Since government subsidies relate inversely to income, if you assume illegal immigrants will never see their education, skills, or income increase, then you’ll overestimate the government subsidies spent on their behalf and underestimate the taxes they pay. Ignoring the potential for self-improvement and economic advancement inflates the cost estimate.

Let’s not forget that those here illegally are the subset of those back home who had some combination of skills, determination, and savvy to make it to the U.S. despite significant barriers.

1. More broadly, the fear of discovery and deportation has to constrain the labor supplied by those here illegally. A talented electrical engineer here illegally might now be working in an unskilled job because green card verification is weaker for driving a cab than for working at Cisco or Intel. A spouse here illegally might choose to stay at home with the kids rather than seek paid work because the former has significantly lower risk of being discovered by immigration authorities. Eliminating these deportation risks will increase the available labor supply. Increased labor supply means a larger GDP, a larger tax base, and higher government revenues. Heritage appears to ignore all these supply-side labor effects, which is unusual from an organization that in other contexts has championed consideration of supply-side effects in fiscal estimates.

2. To get their huge numbers Heritage sums up spending over a 50-year period. They adjust their estimates of future spending and taxes for inflation but not for the time value of money.  Most official legislative cost estimates are done for a 5 or 10-year period, in which these effects are small and customarily ignored. But nobody adds up a 50-year fiscal stream without either discounting it or measuring it as a % of GDP rather than in real $. Using a 3% real long-term interest rate (CBO’s assumption), a dollar of cost 50 years from now is equivalent to a 23¢ cost today. Heritage counts this cost as a dollar rather than 23 cents. They should be showing us net present values if they want to do long-term estimates. It’s tough to say exactly, but a back-of-the-envelope calculation suggests this almost doubles their final number.

3. Finally, the DeMint/Rector op-ed purports to describe what illegal immigrants “will cost America,” when in fact they are looking only at what they will cost American governments. This is an important oversimplification and a surprising one from an institution as reliably conservative as Heritage, which I would never expect to make the mistake of equating the Government with the Nation. I happen to think the cultural and non-governmental economic benefits of a robust immigration system and a resolution of the problem of a stock of 8-9 million people here illegally far outweigh the likely impact on the federal budget, but you might make a different judgment call. Either way, it’s obvious that the federal budget is only part of the calculus, and the op-ed erred in suggesting otherwise.

To summarize, the $6.3 trillion number offered by Heritage as “the cost of unlawful immigrants and amnesty”:

• Does not estimate the marginal cost of an amnesty program or whatever is in the Gang of Eight bill relative to anything other than a fantasy state of the world;
• Includes costs for 4.5 million U.S. citizen children in its estimate of the costs of illegal immigrants;
• Employs logic extensible to both legal immigrants and poor U.S. citizens, and thus is actually a critique of government tax-and-spending redistribution more than of illegal immigration;
• Mistakenly assumes that unsustainable Social Security and Medicare benefits will be paid to newly-legal immigrants for 50 years when both programs will go bankrupt long before;
• Ignores supply-side labor effects by mistakenly assuming that an illegal immigrant who is poor and receiving government benefits will remain poor for 50 years, that he will not learn new skills or increase his income, and that he will not find a better-paying job or take additional work after eliminating the risk of deportation;
• Ignores the time value of money; and
• Mistakenly labels the cost to the Government as the cost to the Nation, ignoring the cultural and non-fiscal economic benefits and costs of changing immigration policy.

There is a significant fiscal effect from making 8-9 million people into U.S. citizens and making them legal taxpayers and eventually beneficiaries eligible for the full panoply of government subsidies. But Heritage’s $6.3 trillion figure is not a good estimate of that effect and is useless for making policy decisions.

I am a fan of Heritage and respect many of their scholars and their policy work. Unfortunately this study and op-ed are not up to their usual standard. They subtract value from an informed policy debate about an important topic.

The post Eight problems with the Heritage immigration cost estimate appeared first on Keith Hennessey.

In the mid 2000s Fannie, Freddie, and their hordes of lobbyists were able to delay GSE reform legislation until it was too late to do any preventive good. Despite the efforts of President Bush to push aggressive reforms for several years prior, legislation was enacted only in July 2008 as the firms were in the process of imploding. Congress allowed the barn doors to be closed only after the horses had escaped.

For GSE reformers the most important vote was on a bipartisan May 2007 House floor amendment by Rep. Randy Neugebauer (R-TX) and Rep. Melissa Bean (D-IL).

At the time Fannie and Freddie held portfolios of mortgage-backed financial assets of about $700 billion (each!) GSE reformers were afraid that these large hedge funds within the firms were carrying too much risk and had little to do with the core mission for which Fannie and Freddie were created. Because Fannie and Freddie (a) were so big, (b) held such huge portfolios with poorly-understood risk; and (c) were interconnected with so many other financial firms large and small, reformers feared they posed too much risk to the financial system.

The House Financial Services Committee reported a bill to strengthen the GSE regulatory agency (and to rename it as FHFA). The bill reported by committee would have given the new strengthened FHFA head the authority to limit the GSEs’ portfolios. He would be required to consider “any potential risks posed by the nature of the portfolio holdings.” This language is critical because it includes any risks posed by the portfolios to the rest of the financial system.

The Neugebauer-Bean amendment simply inserted three words.  The regulator would be required to consider:

any potential risks to the enterprises posed by the nature of the holdings.

Before Neugebauer-Bean passed, the regulator would have been required to consider the risks these two firms’ multi-hundred billion dollar portfolios posed to the financial system. After it passed, he had to consider only whether these portfolios caused risks to the firms. A weak or captured regulator could, if he wanted, ignore the risks posed to the global financial system by $1.4 trillion of housing finance assets held by these two firms.

I continue to hold the view prevalent at the time, that the Neugebauer-Bean amendment was offered at the behest of those two firms, which were engaged in a decades-long campaign to weaken the authority of their regulator.

This amendment passed the House on a huge vote: 383-36. Blame here is solidly bipartisan: House Democrats voted 221-3 in favor, and House Republicans voted 162-33 in favor. Such was the pre-collapse political power of Fannie Mae and Freddie Mac. Kudos to the 36 brave members who stood up to Fannie and Freddie and voted for strong regulatory oversight. These members cast an unpopular vote that was later borne out by the facts.

There are few floor votes that can be linked directly to the financial crisis. Members who voted aye on Neugebauer-Bean contributed to the crisis, members who voted no deserve credit for trying to limit this one contributing factor to systemic risk. Along with most of his colleagues, Mr. Watt voted aye, to weaken the authority of the regulatory position for which he will now be nominated.

We know how this movie ends. Fannie and Freddie collapsed and were placed into conservatorship by then-FHFA Director James Lockhart in September 2008. These two firms were the first dominos to fall that month.

No member of Congress who voted in May 2007 with Fannie and Freddie and against a stronger FHFA regulator should head that agency now. That includes Mr. Watt.

I am not one of those who argue that Fannie and Freddie were the sole cause of the 2008 crisis, or even the most important cause. They were, however, contributors to that crisis in many ways. The man the President wants to lead FHFA voted in May 2007 to weaken that regulatory agency’s responsibility.

By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk.  That is a huge mistake.  Mr. Watt should not be confirmed to head the FHFA.

The post Opposing the President’s FHFA nomination appeared first on Keith Hennessey.

I teach a class at Stanford Business School titled “Financial Crises in the U.S. and Europe.” During one class session while explaining the events of September 2008, I kept referring to the efforts of the threesome of Hank Paulson, Ben Bernanke, and Tim Geithner, who were joined at the hip in dealing with firm-specific problems as they arose.

One of my students asked “How involved was President Bush with what was going on?” I smiled and responded, “What you really mean is, ‘Was President Bush smart enough to understand what was going on,’ right?”

The class went dead silent. Everyone knew that this was the true meaning of the question. Kudos to that student for asking the hard question and for framing it so politely. I had stripped away that decorum and exposed the raw nerve.

I looked hard at the 60 MBA students and said “President Bush is smarter than almost every one of you.”

More silence.

I could tell they were waiting for me to break the tension, laugh, and admit I was joking.

I did not. A few shifted in their seats, then I launched into a longer answer. While it was a while ago, here is an amalgam of that answer and others I have given in similar contexts.

I am not kidding. You are quite an intelligent group. Don’t take it personally, but President Bush is smarter than almost every one of you. Were he a student here today, he would consistently get “HP” (High Pass) grades without having to work hard, and he’d get an “H” (High, the top grade) in any class where he wanted to put in the effort.

For more than six years it was my job to help educate President Bush about complex economic policy issues and to get decisions from him on impossibly hard policy choices. In meetings and in the briefing materials we gave him in advance we covered issues in far more depth than I have been discussing with you this quarter because we needed to do so for him to make decisions.

President Bush is extremely smart by any traditional standard. He’s highly analytical and was incredibly quick to be able to discern the core question he needed to answer. It was occasionally a little embarrassing when he would jump ahead of one of his Cabinet secretaries in a policy discussion and the advisor would struggle to catch up. He would sometimes force us to accelerate through policy presentations because he so quickly grasped what we were presenting.

I use words like briefing and presentation to describe our policy meetings with him, but those are inaccurate. Every meeting was a dialogue, and you had to be ready at all times to be grilled by him and to defend both your analysis and your recommendation. That was scary.

We treat Presidential speeches as if they are written by speechwriters, then handed to the President for delivery. If I could show you one experience from my time working for President Bush, it would be an editing session in the Oval with him and his speechwriters. You think that me cold-calling you is nerve-wracking? Try defending a sentence you inserted into a draft speech, with President Bush pouncing on the slightest weakness in your argument or your word choice.

In addition to his analytical speed, what most impressed me were his memory and his substantive breadth. We would sometimes have to brief him on an issue that we had last discussed with him weeks or even months before. He would remember small facts and arguments from the prior briefing and get impatient with us when we were rehashing things we had told him long ago.

And while my job involved juggling a lot of balls, I only had to worry about economic issues. In addition to all of those, at any given point in time he was making enormous decisions on Iraq and Afghanistan, on hunting al Qaeda and keeping America safe. He was making choices not just on taxes and spending and trade and energy and climate and health care and agriculture and Social Security and Medicare, but also on education and immigration, on crime and justice issues, on environmental policy and social policy and politics. Being able to handle such substantive breadth and depth, on such huge decisions, in parallel, requires not just enormous strength of character but tremendous intellectual power. President Bush has both.

On one particularly thorny policy issue on which his advisors had strong and deep disagreements, over the course of two weeks we (his senior advisors) held a series of three 90-minute meetings with the President. Shortly after the third meeting we asked for his OK to do a fourth. He said, “How about rather than doing another meeting on this, I instead tell you now what each person will say.” He then ran through half a dozen of his advisors by name and precisely detailed each one’s arguments and pointed out their flaws. (Needless to say there was no fourth meeting.)

Every prominent politician has a public caricature, one drawn initially by late-night comedy joke writers and shaped heavily by the press and one’s political opponents. The caricature of President Bush is that of a good ol’ boy from Texas who is principled and tough, but just not that bright.

That caricature was reinforced by several factors:

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I assume that some who read this will react automatically with disbelief and sarcasm. They think they know that President Bush is unintelligent because, after all, everyone knows that. They will assume that I am wrong, or blinded by loyalty, or lying. They are certain that they are smarter than George Bush.

I ask you simply to consider the possibility that I’m right, that he is smarter than you.

If you can, find someone who has interacted directly with him outside the public spotlight. Ask that person about President Bush’s intellect. I am confident you will hear what I heard dozens of times from CEOs after they met with him: “Gosh, I had no idea he was that smart.”

At a minimum I hope you will test your own assumptions and thinking about our former President. I offer a few questions to help that process.

• Upon what do you base your view of President Bush’s intellect? How much is it shaped by the conventional wisdom about him? How much by verbal miscues highlighted by the press?
• Do you discount your estimate of his intellect because he’s from Texas or because of his accent? Because he’s an athlete and a ranch owner? Because he never advertises that he went to Yale and Harvard?
• This is a hard one, for liberals only. Do you assume that he is unintelligent because he made policy choices with which you disagree? If so, your logic may be backwards. “I disagree with choice X that President Bush made. No intelligent person could conclude X, therefore President Bush is unintelligent.” Might it be possible that an intelligent, thoughtful conservative with different values and priorities than your own might have reached a different conclusion than you?  Do you really think your policy views derive only from your intellect?

And finally, if you base your view of President Bush’s intellect on a public image and caricature shaped by late night comedians, op-ed writers, TV pundits, and Twitter, is that a smart thing for you to do?

(photo: The Bush Center)

The post George W. Bush is smarter than you appeared first on Keith Hennessey.

Background

At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:

• Should amendment A by Senator B to bill C be adopted?
• Should the Senate pass bill C?
• Should the Senate consent to the nomination of person D to job E?
• [Now that it has finished F,] Should the Senate next proceed to working on G?

Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.

A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.

There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.

How a filibuster works

A filibuster is probably better labeled extended debate. To filibuster a question, there isn’t some formal procedural move you make. You simply get recognized by the presiding officer to speak on a debatable question, start speaking, and don’t stop. You talk, and talk, and talk, and talk. At some point people say, “Hey, he’s filibustering,” but there’s no bright line between a filibuster and a really long floor speech. As a procedural matter they are identical.

There are a few interesting technical limitations once you have been recognized to speak. These apply at any time you are recognized to speak on the Senate floor but are particularly important during extended debate.

• You can’t sit down. If you do, you have yielded the floor and the Chair will recognize someone else to speak.
• You can’t eat on the Senate floor. You can drink water or milk, nothing else.
• You can’t leave the Senate floor, even for a bathroom break. If you do you have yielded the floor and the Chair will recognize someone else to speak.
• You don’t have to discuss the pending question. You can talk about anything you want. You can read a book aloud if you like.
• You can only speak once on any particular question.

These limits create some practical limitations on how long a single Senator can filibuster a particular question. At some point you’ll get tired of talking continuously and need a momentary break. If you’re talking a lot you’ll drink something, and that will at some later point provoke a need for a bathroom break.

You can solve the first problem by yielding for a question. Here’s an example which I saw Senators Paul and Cruz implement last night. Note that the “question” itself is substantively irrelevant. The procedural point is to allow someone else to speak for a while while technically maintaining control of the floor.

Sen. A: <discusses the question of the Brennan nomination for a couple of hours>

Sen. B: <interrupting> Will the Senator yield for a question?

Sen. A:  I yield for a question from my good friend Senator B.

Sen. B:  Is the Senator aware that … <talks for an hour or three while Senator A stretches, walks around a bit, and enjoys not speaking, all the while remaining standing and on the Senate floor>

Sen. A:  No, Senator B, I wasn’t aware of that, but thank you for asking. <continues discussing the question for a few more hours>

Through this “friendly yielding for a question” a single Senator can continue his filibuster for quite a long time while his or her allies are doing the speaking for much of that time. Other Senators C, D, and E could additionally play the role that Sen. B plays above.

In addition, at some point Senator A may tire and yield the floor, probably for a bathroom break if nothing else. At that point any other Senator could seek recognition and begin his own period of extended debate. Therefore, if you have a group of Senators teaming up, you can keep a filibuster going for a quite a long while.

Cloture: stopping a filibuster

There are two ways to limit debate: in advance by unanimous consent and while it’s occurring by invoking cloture. If neither of these occurs a question can be debated for as long as Senators are willing to speak.

A unanimous consent (UC) agreement to limit debate looks like this:

Majority Leader: Mr. President [of the Senate], I ask for unanimous consent that debate on this amendment be limited to two hours, with one hour under control of the committee chairman Senator X and one hour under the control of the committee’s ranking member Senator Y.

Presiding Officer of the Senate: Is there objection?  <pauses to allow any Senator to object> Hearing no objection, it is so ordered.

Any single Senator can block a UC request to limit debate simply by standing when the UC request is made and saying the two most powerful words in Senate procedure: “I object.” In doing so she ensures that she and her colleagues can engage in extended debate until and unless the Senate invokes cloture.

Let’s say a group of Senators have been debating a question for a couple of days straight and show no signs of letting up. The Senate majority leader says to himself, “That’s it, we need to shut down this filibuster and bring this debate to a close.” He then finds 15 other Senators to join him in filing with the Senate clerk a cloture motion to limit further debate on this question.

If they do this today, the cloture vote will “pop up” automatically the day after tomorrow, one hour after the Senate begins business for the day. The extended debate will be automatically interrupted for the cloture vote. If at least three-fifths (60) Senators vote to “invoke cloture,” then further debate on that question is automatically limited to 30 additional hours, then followed by a vote on the question. If cloture is invoked, those involved in the filibuster usually fold after a few additional hours, not burning all of their allowed 30 hours of post-cloture time since they know that they can no longer infinitely delay a vote on the question.

The power to invoke cloture and shut down extended debate is a big deal, but the cloture process is cumbersome for two reasons. First, it’s still quite slow. Even if the cloture vote is successful, the Senate will burn 2-3 additional days of floor time on the filibustered question. Second, the majority leader must find an affirmative 60 aye votes (rather than requiring the minority to produce 41 or more votes against cloture), so the majority leader has to make sure everyone he needs to vote aye will actually show up and vote. This last factor helps explain why filibusters are so rare.

Why filibuster when you can just threaten to filibuster?

Let’s say you’re a Senator who really, really, really hates a particular amendment to a bill the Senate is now considering. You approach the bill manager, a committee chairman, and threaten to filibuster the amendment.

You: Mr. Chairman, I hate this amendment and intend to debate it indefinitely. I have several colleagues who have promised they will assist me in this task. I know you support the amendment, but I’m guessing it’s not as important to you as the underlying bill that you wrote. I support your bill, but if this amendment is adopted I’ll have to filibuster the underlying bill as well.

Chairman: I appreciate that, but the amendment sponsor is a close ally of mine. I’m sorry, I can’t help you. And I’m fairly confident that I can get 60 votes to invoke cloture and shut down your filibuster.

You: Yes, but that will cost you two, maybe three days. And I’ll slow you down at every stage of the process. You’re under pressure from the majority leader to finish this bill soon, and you have plenty of other Senators who want to offer other amendments. If you force me to, my colleagues and I will slow the process down enough so that the leader will tell you he’s pulling your bill to move onto other legislation, because it will be clear you’re not going to get the bill passed in the next few days given my filibuster.

Chairman: OK, I believe that you’re serious in your threat. I’ll tell the amendment sponsor I want him to drop his amendment or else I’ll be forced to oppose it to protect my bill from your threatened filibuster.

Note that you never had to filibuster the amendment. You just had to threaten to filibuster it. Maybe the Chairman asked for UC to limit debate, knowing that you would object, so he could demonstrate to his ally the amendment sponsor that you were serious in your threat. By simply threatening to filibuster the amendment and slow down the bill, you achieved the same objective as if you had actually filibustered it.

The simplest reason why there are so few filibusters is that it’s almost never necessary to filibuster a question to block something you hate. You simply have to threaten to filibuster and maybe object to a UC or two. Then the majority leader and/or chairman managing the bill or nomination usually fold to your demand or at least negotiate a compromise with you.

Why doesn’t the majority force a Senator to carry out his filibuster threat?

Your exchange might instead have ended like this.

Chairman: Sure, you can slow me down, but filibustering is hard work. You can slow things down, but to do so you and your friends will need to stand on the Senate floor for the next two days, day and night, talking the whole time. You have other things to do and some of your colleagues are quite old and need their sleep. And frankly I’m sick of you threatening every bill I bring to the floor, so this time I’m calling your bluff. Maybe you can slow down my bill and maybe the majority leader will pull it from consideration because it’s taking too long. But I’ll bet you and your colleagues tire and end your extended debate tonight sometime around 1 AM. I will then be able to continue moving forward with amendments, and we’ll pass this amendment that you hate and I support. I’m filing my cloture motion now. If you want to filibuster, go right ahead. I’ll wait.

In this scenario you and your colleagues could still probably kill the bill by slowing it down for at least a few days, hoping the majority leader will move on to other items. But doing so would cost you a lot. The temporary hassle of staying overnight isn’t the significant cost, it’s the burden you’d be imposing on your allies who join to help you. All of you will be severely limited in the work you can do on other topics during that time. If every once in a while the majority leader and/or bill managers forced those threatening filibusters to actually stay all day and all night, then threats to filibuster would involve some cost that the bluff would be called. Filibusters would be more frequent and filibuster threats less so. The most fiercely debated questions would be subject to all-night filibusters, and the threats to slow down legislation on smaller questions would be relatively infrequent.

So why doesn’t this ever happen? It turns out there is a procedural reason that imposes much greater costs on the majority when the bluff is called.

Why doesn’t the majority leader ever force those threatening a bill to engage in a real filibuster?

Technically a majority of Senators (51) must be present on the Senate floor to do any business. This is called a quorum.

Since it would be super inconvenient for 51 Senators to have to sit on the floor all day when the Senate is in session, the Senate almost always operates with a presumptive quorum. The Senate simply pretends that a quorum exists and they don’t count noses on the floor. Everyone knows that there are typically only a handful of Senators on the floor at any given moment, but they “presume a quorum is present” so they can keep doing business without inconveniencing all of their colleagues and forcing them to be present on the Senate floor.

The trick is that at any point in time, any Senator can challenge this presumption by “suggesting the absence of a quorum” to the Chair. After a while the Chair will have to initiate a mandatory quorum call, in which the Senate Sergeant of Arms has to find Senators and bring them to the Senate floor. If this fails and at least 51 Senators don’t show up, then the Senate automatically adjourns for the day and convenes the next morning.

This is the key procedural weakness that makes the majority leader hesitant to force Senators to carry out their filibuster threats. Suppose last night Senator Paul and a few of his colleagues had kept their filibuster going until 2 AM. At that point Senate Majority Leader Reid would still be around, as would be Senator Paul. Senator Paul could then suggest the absence of a quorum. There clearly aren’t 51 Senators present, so a mandatory quorum call would soon begin. Most other Republican Senators, who are sympathetic to Sen. Paul’s filibuster but aren’t participating, would be sleeping soundly in their beds and would ignore the mandatory quorum call when the phone rings.

But Leader Reid wants to force Sen. Paul to continue filibustering, so Leader Reid needs to keep the Senate operating in the face of the mandatory quorum call. Leader Reid must therefore get 51 Senators to the Senate floor at 2 AM, and he’s probably limited to working with a universe of 55 Democrats sympathetic to his situation.

If Leader Reid can’t produce 51 Democratic Senators on the floor at 2:15 AM, the Senate adjourns for the night. Senator Paul can get several hours of sleep, freshen up, and begin again.

If Leader Reid succeeds, Senator Paul can wait until the very grumpy Democrats leave, then again suggest the absence of a quorum, maybe at 3 AM. And then again at 3:30 AM, and at 4 AM. He can do the same the next night, since cloture doesn’t “ripen” until after two nights.

Senator Paul only has to inconvenience himself by staying all night, maybe joined by a colleague or two who is equally fervent and committed to the filibuster.

Leader Reid must get 51 Democratic Senators to the floor at any time of night (or day) that Senator Paul feels like initiating a quorum call, and as many times as Senator Paul would like. Calling Senator Paul’s bluff of a threatened filibuster means Leader Reid must inconvenience his entire caucus, probably forcing them to sleep on cots in the Capitol building for two nights in a row.

Senators are powerful, independent types. Their average age is around 60. If you’re the majority leader and you’re trying to break a filibuster on a major piece of legislation that is a top national or your party’s top priority, then you can probably persuade 50 of them to foul up their schedules and to join you in sleeping in the Capitol for a couple of nights. But you can’t do this too often, and if you’re asking them to do so on a relatively minor amendment or bill, some of them are going to say no.

The majority leader and his bill managers usually yield to credible filibuster threats because they assess that they cannot rally enough of their colleagues to bear the personal and schedule costs of breaking the filibuster, or because the long-run cost of asking them to do so on this particular issue is significantly higher than the cost of yielding to the demand or negotiating a compromise.

Congratulations to Senator Paul and his colleagues for reviving the old-school filibuster.

The post How filibusters work and why they are so rare appeared first on Keith Hennessey.

Let’s review:

• The sequester is modeled after a similar provision in law from more than 20 years ago.  That earlier sequester exempted certain programs from spending cuts, most notably Social Security, and it limited any Medicare cut to at most 2% 4%. These are the two largest entitlement programs in the federal budget.
• When the terms of this sequester were negotiated in the summer of 2011, the President’s advisors expanded the list of programs exempt from spending cuts to include most low-income/safety net entitlement programs. Most notable here is the exemption of Medicaid, the third largest entitlement. They also limited the Medicare cut to no more than 2%.
• In the summer of 2011 President Obama wanted the sequester to raise taxes as well but Congressional Republicans refused. For the past few months the President has been trying to rewrite the terms of that deal so that tax increases will be substituted for spending cuts, at least for the first year. His insistence has contributed to a stalemate.
• The sequester is now cutting spending in FY13 by the following percentages:
  • defense discretionary:  7.8% cut;
  • domestic discretionary:  5.0% cut;
  • Medicare:  2.0% cut;
  • small pots of defense and domestic mandatory spending are cut by almost the same percentages as their discretionary counterparts above.

tsaLet’s do a thought experiment: suppose the sequester now taking effect was instead structured as a true across-the-board spending cut?  Suppose we wanted to cut government spending this year by the same $85 B as is being cut now, but we didn’t exempt huge swaths of entitlement spending?  And suppose we cut all spending by the same percentage?

The discretionary programs now being cut by the sequester would take smaller hits. Let’s see how the numbers change.

In my hypothetical across-the-board spending cut I will exempt only interest payments and defense spending in a combat theater. Everything else, including all non-combat theater defense and the three largest entitlements of Social Security, Medicare, and Medicaid is on the cutting block along with all other non-interest, non-combat spending. And I’m going to cut everything by the same percentage rather than having a higher percentage cut for defense and a lower percentage cut for Medicare.

My arithmetic shows that such a true across-the-board spending cut would save the same $85 B this year through a 2.6% cut to all spending except interest and defense spending in a combat theater.

A true across-the-board spending cut would therefore be about one-third as deep of a cut in defense spending as the current sequester, and about half as deep of a cut in nondefense discretionary spending as the current sequester.

Seniors wouldn’t like a 2.6% cut in their Social Security checks, and the poor wouldn’t like the same percentage cut in Medicaid, cash welfare, food stamps, and other low-income support programs. Medical providers and health insurers wouldn’t like the larger cuts in Medicare and the inclusion of Medicaid and CHIP in the cuts.

But there would be upsides for other things the federal government does relative to where we are now. Let’s look at the effect of this alternative on spending this year for some popular programs relative to the effect of the sequester now in place. If we substituted a true 2.6% across-the-board spending cut for our current sequester, this year the federal government would spend:

• $300M more for Special Education;
• $732M more for medical research at the National Institutes of Health, $138M more for National Science Foundation grants, and $424M more for NASA;
• $124M more for the Food & Drug Administration and food safety;
• $131M more for airport security, $110M more for the FAA, and $23M more for air marshals;
• $333M more for the FBI;
• $139M more for immigration and customs enforcement and $242M more for customs and border protection;
• $53M more to operate the National Parks and $141M more for the Forest Service;
• $24M more for the Smithsonian;
• $54M more for child are and development block grants, and $238M more for children and families services programs;
• $195M more for global health programs;
• $142M more for the Coast Guard;
• and about $27B more for defense.

By insisting that the deficit reduction debate is a choice between cutting spending and raising taxes the President has frozen Washington in a stalemate position that is likely to last for the remainder of his term. If policymakers were instead to set the tax stalemate aside and examine more closely the choices they are implicitly making within the universe of government spending, they would see that by exempting huge swaths of popular entitlement spending from any cuts they are focusing the pain on programs that to many are more important and more popular.

Our federal budget process is fouled up in that it gives procedural advantages to entitlement spending over discretionary spending.  Benefit programs that primarily help particular individuals are advantaged, while programs that principally provide for the common good are disadvantaged.  The current sequester exacerbates those procedural advantages and, as a result, means that many broadly-supported functions of government are being cut even more that they would be if the spending cuts were distributed evenly across all government spending.

(photo credit: Anita Ritenour)

The post What if the sequester was a true across-the-board spending cut? appeared first on Keith Hennessey.

THE PRESIDENT: So economists are estimating that as a consequence of this sequester, that we could see growth cut by over one-half of 1 percent.  It will cost about 750,000 jobs at a time when we should be growing jobs more quickly.  So every time that we get a piece of economic news, over the next month, next two months, next six months, as long as the sequester is in place, we’ll know that that economic news could have been better if Congress had not failed to act.

And let’s be clear.  None of this is necessary.  It’s happening because of a choice that Republicans in Congress have made.  They’ve allowed these cuts to happen because they refuse to budge on closing a single wasteful loophole to help reduce the deficit.  As recently as yesterday, they decided to protect special interest tax breaks for the well-off and well-connected, and they think that that’s apparently more important than protecting our military or middle-class families from the pain of these cuts.

The President’s initial attempt to blame Republicans in Congress for current and future economic weakness is flawed because House Republicans passed a bill that would have the same macroeconomic effect as the President’s proposal, at least for this year.

CBO estimates the sequester will knock about 0.6 percentage points off the growth rate of GDP in calendar year 2013, and therefore that undoing the sequester (in 2013) would increase GDP growth by the same amount. For the moment I’ll set aside the concerns often expressed on the right about estimating the GDP effects of fiscal expansion or contraction and take CBO’s estimates as given.

The key flaw in the President’s argument is that the first year effects of the House-passed sequester replacement bill and the Senate Democrats’ failed bill are nearly identical.  Each would unwind almost all of the 2013 effects of the sequester, and each would therefore increase GDP growth by the same amount.

The proposals differ in the amount and composition of their deficit-reducing offsets, but in both proposals those would be spread out over a long timeframe beginning next year.  Senate Democrats proposed to offset in future years all of the $85 B they would spend this year, while House Republicans passed a bill that would reduce the deficit even more in future years. But $8 B (Senate Democrats) to $20 B (House Republicans) of deficit reduction for each of the nine years after this one is too small to show up in any estimate of macroeconomic effects. The competing proposals would have the same growth benefit this year, and similar and trivially small growth costs in future years, beginning in 2014.

The President says there wasn’t a deal because Republicans refused to accept his proposed offsets. House Republicans can make exactly the same argument. This 0.6 percentage point growth drag is because the two sides couldn’t agree, not because one party wanted to fix the problem and the other party didn’t.

I expect the President will fail to mention that CBO also says that the tax increases he championed and got will slow this year’s economic growth by an additional 0.6 percentage points this year on top of the effects of the sequester.

The post A flawed attempt to assign blame appeared first on Keith Hennessey.

Sequester replacement was mostly for show

As best I can tell there were no negotiations across the partisan aisle on how to replace the sequester. The President did some campaigning outside of Washington. Even if he had expected Congressional Republicans to fold to this pressure, his team was not doing the staff-level work needed to actually make legislation happen. And while leaders of both parties claim to hate the sequester, neither side hated it enough to be willing to even begin negotiations over how to pay for its replacement. The competing sequester replacement plans and the rhetoric on both sides look like they were mostly for public positioning and Member management within the Congressional caucuses rather than serious attempts to change the law.

Why the sequester will hold

There are two distinct legislative coalitions that in theory could unwind the sequester. In both hypothetical coalitions cuts in both defense and non-defense discretionary spending would be unwound.

One would be a center-left alliance formed by pro-defense spending Republicans agreeing to raise taxes and cut farm subsidies. These Republicans would be deciding that avoiding defense spending cuts is more important than preventing additional tax increases.

The other would be a center-right alliance formed by Democratic appropriators agreeing to drop their party’s tax increase demands and pay for higher discretionary spending offset entirely by entitlement spending cuts. These Democrats would be deciding that they care more about spending money than about extracting more from the rich.

These coalitions will never form as long as the sequester issue is being controlled by the President and the four Congressional leaders. Each of these five is working principally to hold his or her party intact, and each has so far succeeded. A coalition to replace the sequester would have a chance only if the issue were being handled below the leadership level, most likely in the House and Senate Appropriations Committees. In these committees everyone’s priority is to increase discretionary spending and both sides would be more likely to show flexibility on offsets. Since the issue remains squarely in the hands of the President and the party leaders I expect the sequester will hold indefinitely.

In addition, the optical damage of the cuts affects only the next seven months. If the continuing resolution extends post-sequester spending levels, then the implementation of next year’s sequester won’t show up as a “spending cut,” but instead as a slight increase (say, +2% for inflation) from this year’s spending levels. To the extent the political and press blowback from cutting spending arises from the optics of a decline in spending, that decline takes effect only this year. After that it’s built into the baseline, at least in a political sense.

Watch the CR for spending flexibility and maybe a little money

I instead expect the appropriators to instead pursue more modest versions of the same goals through quietly shaping the upcoming Continuing Resolution. The appropriators appear poised to give targeted flexibility to the Administration in a few limited areas where they agree that the sequester will impose too much pain, and they might even try to shift a few billion dollars around here and there. The Administration claims they are still opposed to funding flexibility. I think they’re irrelevant on this point and the Appropriators will now quietly exert process and legislative language control to minimize the policy harm from the sequester. And the more flexibility the appropriators provide, and the more they shift funds (within what I hope is a fixed post-sequester topline) to address sequester-driven policy harm, the more likely the sequester will be sustained over time.

The White House’s management challenge

While Team Obama now says the sky will now drop gradually rather than fall suddenly, they are sticking to their line that the pain from these spending cuts will be intolerable and will/should force Congress to increase taxes and discretionary spending.

With this argument they create a management challenge for themselves. They need the harm from these cuts to be severe and visible. The more harm is done and felt, the more likely that Republicans will relent to the president’s position (or so goes this logic). More policy harm creates more legislative pressure.

But the TSA manager at O’Hare or Logan or LaGuardia wants to minimize policy harm in his area, not maximize it. Sure he’d like more funding, but from his perspective there’s little he can do to influence Congress on something as big as the sequester. And since he will personally take the public heat for long security lines in his airport, his goal is to make do as best he can and minimize the harm done by the cuts.

The same is true for every program manager throughout the government. Each is judged on how well her program meets its goals given the funding available. If we simply assume that these managers will try to do their jobs as effectively as possible, both for noble policy reasons and for personal reputational reasons, then they will be working at odds with the President’s strategic goal of maximizing visible harm to undo the sequester. They will be trying to minimize the damage done while the President wants the opposite.

Playing a longer game?

It is possible the President’s primary goal is not to replace the sequester with offsets that he prefers. Sure he’d prefer that policy outcome, but it’s hard to believe that he and his team were so clueless that they actually thought his recent barnstorming would cause Republicans to fold and agree to raise taxes. Again.

Charles Krauthammer has suggested the President is instead playing a longer game, that his strategic goal is instead to win Democratic majorities in 2014 rather than to win a tactical victory by extracting a few tens of billions of dollars now from the House Republican majority. If Mr. Krauthammer is right, then the goal of barnstorming is to further damage the Republican brand rather than to enact legislation in the short run.

The other obvious benefit to the barnstorming is that without a deal to replace the sequester, the President now has a new target for blame-shifting in his macroeconomic message.

• Old message: All economic bad news is George W. Bush’s fault, all good news is because my policies are working.
• New message: All economic bad news is Congressional Republicans’ fault, while all good news is because my policies are working.

Both these “long game” explanations are dispiriting. That doesn’t mean they’re wrong.

The post Skynotfall appeared first on Keith Hennessey.

Let me repeat – nothing I’m proposing tonight should increase our deficit by a single dime. It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

Let’s set aside for the moment the question that others have raised, the credibility of his claim that his proposals will not increase the deficit. Even if the President’s new proposals don’t increase the deficit they will still make government bigger because they increase government spending.

The deficit does not measure the size of government. It instead measures how economic resources are allocated over time to finance government spending. When we increase the deficit we reallocate some future income to today for government to spend. When we reduce the deficit we are taking less future income to pay for today’s government spending.

When the President says he won’t increase the deficit, he is saying he will not increase the amount of future income taken to pay for increased government spending today. In effect he is promising not to create an additional burden to raise future taxes beyond what’s in current law. He is not saying he won’t increase government spending today and raise current taxes by an equal amount, which is what we mean by government getting bigger.

As a fiscal matter we should measure the size of government by the amount government spends, not by the difference between what it collects and what it spends (the deficit). Suppose in our $16 trillion economy you were to increase government spending by $320 billion per year and increase taxes by the same amount. The deficit would be unchanged but government would be $320 billion per year bigger.

For the 50 year period before the 2008 financial crisis total federal government spending averaged 20.1% of GDP. CBO tells us it’s 22.2% this year and projects that under current law it will average 22.1% over the next decade. That means the federal government is and will continue be 10% bigger than it his has historically been, relative to the economy. If we were to use real dollars rather than percent of GDP we’d measure an even bigger increase. As a fiscal matter the federal government is and will be significantly bigger than it has historically been.

If you increase government spending you make government bigger, even if you pay for that spending with higher taxes. To make government smaller, cut government spending.

In addition to fiscal expansion the federal government has also massively increased its regulatory scope in the past four years, especially in health care and financial services. The President proposes that in the next four years he’ll do the same to the energy sector.

President Obama is correct that we don’t need a bigger government. Unfortunately, that is what has resulted from his first term and what he proposes for his second.

The post The deficit does not measure the size of government appeared first on Keith Hennessey.

Each year the federal budget cycle begins with release of the baseline from the Congressional Budget Office in a document titled The Economic and Budget Outlook. If you want to learn more about economic and fiscal policy I recommend you read carefully at least CBO’s short summary.

My former White House colleague Charles Blahous wrote a great piece that highlighted ten fiscal policy lessons you should draw from CBO’s latest baseline report. With this post I’d like to look at one important macroeconomic graph from that same report.

This graph compares actual GDP with what GDP would be “if everyone were working,” a rough description of what the economists call potential GDP. They estimate the lowest unemployment rate that they think would be consistent with inflation not accelerating. CBO thinks this number is 5.5%. They then estimate what economic output would be if we were at 5.5% unemployment rather than where we are, which is now 7.9%.

The gap between the light blue (actual GDP) and dark blue (potential GDP) lines above therefore represents an estimate of the output lost due to high unemployment. To the left of the dotted line that output gap is in the past and cannot be recovered. To the right of the dotted line we see CBO’s projections for actual and potential GDP in the future. We want actual GDP to converge with potential GDP, to “close the gap” quickly.

Now let’s zoom out and look at a similar historical graph measured in decades rather than years.

From this graph we can see that in the long run, actual GDP tracks closely with potential GDP, and that the recent output gap is quite large in comparison.

Let’s zoom back in and examine the recent past, the left half of CBO’s graph.

The downward sloping part of the light blue line is the recent recession, also marked by the vertical white stripe. If you look closely you can see actual GDP flattening out in early 2008 as potential GDP continues to rise. Actual GDP then plummets as the financial shock hits in the second half of that year. The recession ended and the recovery began where the line started sloping upward in mid 2009.

In trying to frame this story positively President Obama draws your attention to the fairly steady growth of actual (real) GDP since the recession ended, the upward slope of the light blue line from mid 2009. This graph also shows that in recent years actual GDP had been growing at roughly the same rate as potential GDP. Because the light blue and dark blue lines have almost the the same slope, the distance between them is almost as large now as it was when the recession ended. So while the President is right that the economy has been growing for 3+ years, the output gap is almost the same size as it was in mid 2009. We’re not catching up.

Here is how CBO describes it.

By CBO’s estimates, in the fourth quarter of 2012, real GDP was about 5½ percent below its potential level. That gap was only modestly smaller than the gap between actual and potential GDP that existed at the end of the recession because the growth of output since then has been only slightly greater than the growth of potential output.

To close the output gap we need much faster short-term economic growth than we have had over the past three and a half years. We need the light blue line to slope sharply upwards until it meets up with the dark blue line.

Now let’s turn to CBO’s projection for the future. I’ll hide the left half of the graph this time.

Now we can see more closely that CBO’s GDP projection has three significant features:

1. CBO projects that real GDP will continue to grow only as fast as potential GDP this year;
2. They then project that growth will accelerate; but
3. They project that the output gap won’t close until the end of 2017, almost five years from now.

Attaching numbers to this, CBO projects real GDP will grow 1.4 percent in 2013, 3.4 percent in 2014, and 3.6 percent per year from 2015-2017, reaching potential GDP at the end of 2017.

This translates into their (un)employment projections as well. CBO projects an 8.0% unemployment rate in the fourth quarter of this year and a 7.6% rate at the end of 2014, only three-tenths of a percentage point below where we are now. They then project that the unemployment rate will decline to reach full employment by the end of 2017.

On our current path CBO projects we won’t reach full employment for almost five more years.

CBO also estimated the total size of the output gap and it’s depressing:

With such a large gap between actual and potential GDP persisting for so long, CBO projects that the total loss of output, relative to the economy’s potential, between 2007 and 2017 will be equivalent to nearly half of the output that the United States produced last year.

You may have noticed that I have avoided discussion (here) of why the economy has grown so slowly, how much of that is because of or in spite of policy decisions, and why it’s projected to continue to do so for the next year. That’s where the food fight begins, including the debate about whether and how much the 2009 fiscal stimulus increased growth, and the debate about how much of slow future growth is because of business uncertainty about the economy, about drags from policy and regulation, and about allowing more time for balance sheet repair after the financial shock of 2008.

Those are incredibly important debates but today I just want to highlight the basic historic facts and a mainstream projection from an unbiased source. On our current policy path CBO projects continued slow growth for 2013 and a gradual acceleration after that, returning the U.S. economy to full capacity output by the end of 2017. That projection excludes:

• the downside risk to growth from policy shocks like further tax increases proposed by the President, repeated unresolved fiscal conflicts that exacerbate business uncertainty, and additional regulatory burdens rumored to be coming from HHS, IRS, EPA and financial regulators; and
• the downside risk to growth from possible external shocks from a possible Middle East crisis or a sudden unraveling of Europe’s financial system.

I told you this wasn’t a happy post.

Summary

• While the U.S. economy has been growing fairly steadily since the recession ended in mid 2009, it has been doing so far more slowly than we need. Actual growth has been just sufficient to keep up with growth in our national economic capacity.
• CBO projects that 2013 will be yet another year of slow growth with acceleration beginning in 2014. They project we won’t reach full employment until the end of 2017, almost five years from now.
• CBO estimates that the total lost economic output over the decade will be equal to the entire U.S. economic output for half of last year.

The post Not catching up appeared first on Keith Hennessey.

We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  This single step would raise the incomes of millions of working families.  It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead.  For businesses across the country, it would mean customers with more money in their pockets.  In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.  So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.

If raising the minimum wage is good economic policy, why stop at $9 per hour? Why not increase it to $90 per hour? By the President’s logic, doing so would dramatically increase the income of not just millions of working families, but tens of millions of working families, and indeed of almost all working Americans.

By the President’s logic, a $90 minimum wage would be good for American businesses because their customers would have more money in their pockets. A full-time worker making the minimum wage wouldn’t make $18,000 per year as the President proposes, but $180,000 per year.

I am, of course, joking, and in doing so I’m trying to demonstrate the flawed logic of a minimum wage increase of any size. In my example a typical worker whose labor is worth $20 per hour to his employer would not suddenly find himself being paid $90 per hour. He would find himself laid off because his employer would choose not to employ him rather than to pay a wage more than the value the worker produces for the firm. Since almost all Americans produce less than $180,000 of value per year for their employer, layoffs would skyrocket. Customers of American businesses would not have more money to spend, they’d have much less because they’d be unemployed.

The same logic holds, just to a much lesser degree, for a minimum wage increase of any size, including the increase to $9 proposed tonight by the President.  A minimum wage increase precludes employers from hiring, or from continuing to employ, those workers whose productive value to the firm is worth less than the new minimum wage. Like any price ceiling or price floor a minimum wage restricts supply, and an increase in the minimum wage restricts supply more. Raise the minimum wage and you will eliminate jobs for the lowest-skilled workers in America.

Who are the lowest-skilled workers? Many of them are teenagers, new immigrants, and high school dropouts. They would be the most harmed by a minimum wage increase.

Minimum wage increases are politically attractive because they sound like they’re going to help poor people and because the economic argument against it takes a little time and effort to explain. When pressed, proponents of raising the minimum wage argue that it wouldn’t reduce the number of available jobs that much because even the lowest-skilled workers are worth more than the proposed higher minimum wage. Or they argue that when the minimum wage has been increased in the past, they couldn’t find evidence that employment declined. It’s absurd to argue that a policy is good because “we don’t think it will do much harm,” or “we couldn’t find evidence of harm when we did this policy before.”

Another version of this argument is that because the minimum wage is not indexed to inflation, the real (inflation-adjusted) minimum wage declines over time without new legislation to raise it. But if the real minimum wage does decline, then a few more of the even lowest-skilled workers will now have job opportunities available to them.

No matter how hard they try, Congress can’t outlaw economics any more than they can outlaw gravity. Congress should reject the President’s proposal and in doing so maximize job opportunities for teenagers, high school dropouts, new immigrants and other low-skilled workers.

(photo credit: Ed Yourdon)

The post Why stop at $9? A $90 minimum wage appeared first on Keith Hennessey.

THE PRESIDENT:  Good afternoon, everybody.

I wanted to say a few words about the looming deadlines and decisions that we face on our budget and on our deficit — and these are decisions that will have real and lasting impacts on the strength and pace of our recovery.

Yesterday was the legal deadline for the President to submit his budget to Congress. Not only did he miss the deadline again this year, but his team has given no indication of when they will meet this legal requirement.

In these remarks the President proposes to delay immediate spending cuts and substitute a combination of (future, I think) spending cuts and tax increases. Even if you believe this will have a “real” effect on our recovery, it won’t have a “lasting impact” on it. A temporary loosening of fiscal policy would, at most, temporarily goose economic growth. That’s not “lasting.”

THE PRESIDENT: Economists and business leaders from across the spectrum have said that our economy is poised for progress in 2013.  And we’ve seen signs of this progress over the last several weeks. Home prices continue to climb.  Car sales are at a five-year high.  Manufacturing has been strong.  And we’ve created more than six million jobs in the last 35 months.

And GDP was flat last quarter … and the unemployment rate ticked up last month. 6M / 35 = +171K jobs/month, which when unemployment is high is nothing to brag about. “Our economy is poised for progress” is what you say when you can’t say “our economy is growing now.”

THE PRESIDENT: But we’ve also seen the effects that political dysfunction can have on our economic progress.  The drawn-out process for resolving the fiscal cliff hurt consumer confidence.  The threat of massive automatic cuts have already started to affect business decisions.  So we’ve been reminded that while it’s critical for us to cut wasteful spending, we can’t just cut our way to prosperity.  Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery.  It’s not the right thing to do for the economy; it’s not the right thing for folks who are out there still looking for work.

He argues that the past drawn-out process caused uncertainty which hurt consumer confidence. He recently made a similar argument against a short-term debt limit extension. But eight paragraphs from now he proposes to delay the sequester, further “drawing out” that process, to allow time to substitute different spending cuts and tax increases for the sequester. By his own logic, his proposal should further hurt consumer confidence.

I’m not sure how to respond to his point that immediate government spending cuts cause economic harm, because he has no proposal to tell us what he wants instead. If he proposes to change the mix of deficit reduction (more tax increases and defense spending cuts, fewer nondefense spending cuts) but not the timing, then all he’s doing is shifting resources from the private to the public sector, and from one part of government to another. That’s going to have no short-term growth effect and will hurt long-term growth because the private sector is smaller.

If instead he wants to substitute future deficit reduction for that which is about to begin March 1, then he is, in effect, arguing that given a weak economy, our budget deficit this year ($845 B or 5.3% of GDP) isn’t big enough. This is a traditional Keynesian fiscal stimulus argument. But his problem is that the numbers are too small: the sequester will cut spending this calendar year by about $65 B. Even if you push all that deficit effect into future years, you’re not going to move the needle much on a $16 T economy.

The deep indiscriminate cuts to which he refers are the result of the sequester that his advisors proposed to Congress in July of 2011 and which he signed into law that August.

And he argues that cutting government spending now would harm the economy and “folks who are out there still looking for work,” but his solution means that government employees would be protected from job loss while those previously employed in the private sector had to suffer the pain of a weak labor market. That doesn’t seem fair.

THE PRESIDENT: And the good news is this doesn’t have to happen.  For all the drama and disagreements that we’ve had over the past few years, Democrats and Republicans have still been able to come together and cut the deficit by more than $2.5 trillion through a mix of spending cuts and higher rates on taxes for the wealthy.  A balanced approach has achieved more than $2.5 trillion in deficit reduction.  That’s more than halfway towards the $4 trillion in deficit reduction that economists and elected officials from both parties believe is required to stabilize our debt.  So we’ve made progress.  And I still believe that we can finish the job with a balanced mix of spending cuts and more tax reform.

He’s got a small verb tense problem and a large logic problem here. Policymakers have cut the deficit by less than $100 billion so far, and they have enacted policies which, if not unraveled by future laws, would result in another $2.4ish trillion in deficit reduction over the next nine years. But all these future savings are from cutting discretionary spending, which is what the President is (ambiguously) proposing to undo here. It seems a bit hypocritical to simultaneously claim credit for enacted future cuts in discretionary spending at the same time you propose to undo them. The President would have more credibility here if he were proposing specific spending cuts and tax increases to substitute for the spending cuts he wants to undo. But the only thing he is specific about is that he wants to undo or delay the impending spending cuts.

THE PRESIDENT: The proposals that I put forward during the fiscal cliff negotiations in discussions with Speaker Boehner and others are still very much on the table.  I just want to repeat:  The deals that I put forward, the balanced approach of spending cuts and entitlement reform and tax reform that I put forward are still on the table.

But what exactly are those proposals, and will the President propose them in his budget? If he is willing to use a chain-weighted CPI for COLAs and tax bracket indexation, will he propose it? If he is willing to raise the eligibility age for Medicare, will he propose it? If not, how do we know what he is actually proposing? By reading Bob Woodward’s book and background quotes from unnamed senior advisors in POLITICO? He has never told us what this deal is that he put forward, nor has he proposed it to anyone other than Speaker Boehner. If you think it’s good policy, Mr. President, then put it in your budget.

Also, the deal in December has to be modified, right, since a new law enacted $600+ B of current and future tax increases? So technically the deal the President put forward then at a minimum has to be updated to reflect the new law, right?

THE PRESIDENT: I’ve offered sensible reforms to Medicare and other entitlements, and my health care proposals achieve the same amount of savings by the beginning of the next decade as the reforms that have been proposed by the bipartisan Bowles-Simpson fiscal commission.  These reforms would reduce our government’s bill — (laughter.)  What’s up, cameraman?  (Laughter.)  Come on, guys.  (Laughter.)  They’re breaking my flow all the time.  (Laughter.)

He mentions only one of the Big 4 entitlements. He and his party slowed Medicare spending growth in 2010, but then they turned around and spent those savings on a new health entitlement. Now he proposes again slowing Medicare spending growth, but ignores the other three sources of medium-term spending growth: Social Security, Medicaid, and the new health subsidies from the Affordable Care Act.

THE PRESIDENT: These reforms would reduce our government’s bills by reducing the cost of health care, not shifting all those costs on to middle-class seniors, or the working poor, or children with disabilities, but nevertheless, achieving the kinds of savings that we’re looking for.

Translation: He’ll cut medical provider payments rather than raise copayments, deductibles, or premiums.

THE PRESIDENT: But in order to achieve the full $4 trillion in deficit reductions that is the stated goal of economists and our elected leaders, these modest reforms in our social insurance programs have to go hand-in-hand with a process of tax reform, so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans.

Translation: I’m not touching the big entitlements unless Republicans raise taxes (again, more) at the same time.

I disagree that his proposals “achieve the kinds of savings we’re looking for,” and that “the full $4 trillion in deficit reduction” is the right target, given that his stated goal is only to get the deficit down to 3% of GDP for the next decade. We need more savings now to start reducing debt/GDP, and we need long-term spending cuts for when entitlement spending growth is otherwise projected to explode. We need much more than $4 trillion of deficit reduction over the next decade, and it’s incorrect to suggest that there is a consensus among elected leaders on that point.

The “loopholes and deductions that aren’t available to most Americans” language is new to me. I wonder what he means? Tax deductions have greater dollar value to a high-income taxpayer than to “most Americans,” but both taxpayers have these preferences “available to them.”

THE PRESIDENT: Leaders in both parties have already identified the need to get rid of these loopholes and deductions. There’s no reason why we should keep them at a time when we’re trying to cut down on our deficit.  And if we are going to close these loopholes, then there’s no reason we should use the savings that we obtain and turn around and spend that on new tax breaks for the wealthiest or for corporations.  If we’re serious about paying down the deficit, the savings we achieve from tax reform should be used to pay down the deficit, and potentially to make our businesses more competitive.

Here’s the President’s position, as best I can infer:

1. Raising taxes to offset tax cuts: Bad;
2. Raising taxes to reduce the deficit: Good but he’s not proposing it;
3. Raising taxes to increase spending: He’s proposing it while pretending he’s doing #2.

He argues that raising taxes to reduce future deficits is a good thing, but as I understand it he wants to raise taxes to pay for more government spending (by undoing the spending sequester). That’s quite different.

THE PRESIDENT: Now, I think this balanced mix of spending cuts and tax reform is the best way to finish the job of deficit reduction.  The overwhelming majority of the American people — Democrats and Republicans, as well as independents — have the same view.  And both the House and the Senate are working towards budget proposals that I hope reflect this balanced approach.  Having said that, I know that a full budget may not be finished before March 1st, and, unfortunately, that’s the date when a series of harmful automatic cuts to job-creating investments and defense spending — also known as the sequester — are scheduled to take effect.

I don’t blame the American people for agreeing with the President; he is personally popular and it is impossible for them to understand what he is proposing. He has never publicly described or proposed the deals he privately offered to Speaker Boehner. He hasn’t proposed a budget this year and doesn’t appear likely to do so soon. He calls government spending “investment,” tax increases “tax reforms,” and welfare payments “tax cuts.” He keeps shifting baselines against which he measures “balance” and he repeatedly conflates taxes and spending. I have been studying and working on fiscal policy for more than 15 years and I can barely understand what he’s saying. No wonder the American people are confused and frustrated.

He says, “I know that a full budget may not be finished before March 1st”:

• He missed the statutory deadline for proposing a budget and is creating further delays and uncertainty by not even announcing when he will propose a budget, complicating the jobs of both the House and Senate budget chairmen.
• The (often missed) deadline for a budget resolution conference report is April 15th.
• So it’s unfair to suggest that Congress is somehow failing by not finishing a full budget by the March 1 sequester deadline.

THE PRESIDENT: So if Congress can’t act immediately on a bigger package, if they can’t get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution.

Who in Congress is seriously discussing now “acting immediately on a bigger package?” Anyone? The Grand Bargain died on New Year’s Day with the enactment of a $600+ B tax increase. This is another straw man so that the President can repeatedly say “I’m for a big deal” while making no new concessions to get one done nor taking any steps to create an environment in which such a deal might happen. The “if” clause above is therefore trivially true. The President is saying Congress should replace or delay the sequester for a  few months but he offers no specific proposal to do so.

THE PRESIDENT: There is no reason that the jobs of thousands of Americans who work in national security or education or clean energy, not to mention the growth of the entire economy should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special interest tax loopholes or government programs that we agree need some reform.

Yes, there is:  Because if you enact a law now that raises taxes now and promises to cut future spending, what is to say that those future spending cuts won’t again be delayed, just as the President is proposing to do now? Also, shifting resources from the private sector to the public sector (aka “tax-and-spend”) doesn’t increase economic growth, it stifles it.

And he’s exaggerates when he suggests that “the growth of the entire economy” is contingent on whether government spending is cut by four-tenths of a percent of GDP this year.

THE PRESIDENT: Congress is already working towards a budget that would permanently replace the sequester.  At the very least, we should give them the chance to come up with this budget instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery.

Are they? Maybe the Senate is. I’m not sure the House is looking to replace the sequester in their budget. Time will tell.

THE PRESIDENT: So let me just repeat:  Our economy right now is headed in the right direction and it will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington.  So let’s keep on chipping away at this problem together, as Democrats and Republicans, to give our workers and our businesses the support that they need to thrive in the weeks and months ahead.

Wouldn’t it be nice if he had said “let’s keep chipping away at this problem together, as Americans, …” rather than “as Democrats and Republicans”?

THE PRESIDENT: Thanks very much.  And I know that you’re going to have a whole bunch of other questions.  And that’s why I hired this guy, Jay Carney — (laughter) — to take those questions.

Thank you, everybody.

I have a question: Where is the President’s specific proposal? At 7:43 AM EST today POLITICO reported:

POLITICO: President Barack Obama will propose a package of short-term spending cuts and tax reforms in an effort to head off the looming sequester cuts Tuesday at 1:15 p.m., a White House official tells POLITICO.

What happened to the “package of short-term spending cuts and tax reforms?” It seems to have died between 7:43 AM and 1:15 PM when the President spoke.

(photo credit: White House photo by Pete Souza)

The post The President’s sequester remarks, annotated appeared first on Keith Hennessey.

MR. CARNEY: [E]very proposal the President has put forward … has included significant investments in our economy — in infrastructure, in education, in putting teachers and police officers back on the street.

… they represent the President’s view that deficit reduction is not a goal unto itself; it should be in service of the broader goal, which is positive economic growth and job creation, and that we need to continue to invest wisely to ensure that our economy grows.

Investing in infrastructure, for example, doesn’t just create jobs in the near term; it helps build a foundation for sustained economic growth in the decades to come.

Mr. Carney and his boss use this argument often to justify many of the President’s proposed spending increases. The broader goal, they argue, “is positive economic growth and job creation … [to] build a foundation for sustained economic growth in decades to come.”

I expect Team Obama will be using this argument more frequently as the sequester and budget resolution debates heat up. They’ll probably use it again as a straw man to suggest that because Congressional Republicans oppose the Obama Administration’s proposed spending levels and particular spending plans, those same Republicans oppose all economic growth benefits that come from public infrastructure investment.

So let’s look at government capital investment in this context of long-term economic growth.

The Administration starts from a strong theoretical foundation. Capital investment, whether in the private or public sector, should lead to more productive workers, who will enjoy higher wages and improved living standards over time. When aimed at increasing productivity, capital investment (or capital formation) leads to “sustained economic growth in decades to come.” So far, so good.

But…

1. Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance). The pursuit of multiple policy goals lowers the expected economic growth benefit of public capital spending.
2. Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.
3. Non-geographic politics can distort government capital spending. This is principally an Executive Branch concern, as we saw with the Obama Administration’s decision to throw good money after bad to postpone Solyndra’s failure. And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
4. Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort. We should allow them some rhetorical leeway, and we should recognize that government has other reasons to spend money than just to maximize future economic growth. At the same time, it’s misleading when they claim that increased government spending that serves other policy goals (some quite legitimate) also increases future economic growth.
5. There’s a difference between government investments in the commons and government spending that primarily benefits individuals.  A new airport benefits all who use it. A scientific research grant benefits the researcher and society as a whole if his research advances our understanding. A subsidized student loan is an investment in human capital, but the return on that investment accrues mostly to the student and his or her family. That’s not wrong, it’s just having a more limited effect on increasing long-term growth for society as a whole.
6. Government investment in physical infrastructure is slow. The Administration learned this as they tried to force money out the door in 2009 for “shovel-ready jobs” that turned out not to be there. This doesn’t mean you don’t build roads and improve ports and airports, it just means the short-term fiscal stimulus argument for this type of spending is weak.
7. Government investment in physical infrastructure is intentionally expensive because of “prevailing wage” requirements, championed by construction labor unions, that mandate the government must pay more for workers than an aggressive private firm might be able to find in the labor market.
8. We should evaluate the marginal productivity benefits of additional investment. The President sometimes argues that building the national highway system was good for growth, therefore his specific proposal to increase highway spending is good for growth, too. But those are different investments, and we need to examine the marginal benefits (and rate of return) on the specific incremental investments he is now proposing. The transcontinental railroad definitely increased national economic growth, but that doesn’t mean the feds should subsidize a costly California bullet train with questionable growth benefits.
9. International comparisons of government infrastructure are silly. U.S. government capital spending should be determined based on what will most increase U.S. productivity without comparison to what other countries are doing. If American ports are clogged and that is harming our trade and slowing American economic growth, then we should upgrade our ports. We shouldn’t instead improve our airports because other countries have shinier ones. We have a different geography, a different economy, and different infrastructure needs than does China, or Japan, or Dubai or France. It is crazy to suggest that the U.S. should build bullet trains because China is doing so.
10. Government investment faces no market discipline. Capital investment in a private firm can face some of the above challenges—a CEO, for instance, might want a new facility built in his hometown rather than where it will produce the highest rate of return. Or a firm might reject an investment that would maximize its’ workers’ productivity because that investment is inconsistent with the firm’s broader strategic goals. But these firms ultimately face the discipline of the market to curb their excesses. Government does not, and in some cases policymakers are rewarded by their election markets to distort infrastructure investment even farther from its growth-maximizing ideal.
11. Government capital investment financed by raising taxes on private capital investment will slow long-term economic growth. While in theory there probably are government infrastructure investments with very high rates of return, all of the above reasons suggest that in practice the actual rate of return on government-directed investment is going to be lower than in the private sector. If you advocate raising capital taxes (on capital gains and dividends, for instance, as Senate Democrats appear poised to do) at the same time you argue for increased government capital spending, you’re shifting capital investment from the private sector to the public sector. That will slow long-run economic growth rather than increase it.

After all of these cautions you might conclude that I’m opposed to more highway spending or to all additional government capital investment. I’m not. America needs a robust, efficient, and plentiful supply of national physical and human capital. And there are definitely areas where smart government capital investment can increase productivity and contribute to faster long-run economic growth.

I am instead suggesting that the President’s infrastructure investment strategy is missing some key cautions, and that we shouldn’t use simplistic arguments and flawed logic, cloaked in attractive investment rhetoric, to justify enormous and often unrelated increases in government spending. We should recognize that in practice government infrastructure investment falls far short of its theoretic ideal, and we should therefore spend taxpayer money on it cautiously and wisely rather than with reckless abandon.

(photo credit: Robin Ellis)

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MR. CARNEY: Well, there’s a lot in your question, so let me go first to the broader fact, which is that we have seen consistent job growth over almost three years.

Nope. Job growth began in March 2010 and was strong for March, April, and May. We then lost net jobs for four months. We have had continuous job growth since October 2010. That is two and a quarter years, which is not “almost three.” (Source: BLS)

If you start measuring in March 2010, job growth has averaged +141K/month. If you start measuring in October 2010, job growth has averaged +153K/month. If we were at full employment those numbers would be fine because you need around +125-150K/month to keep up with population growth. Given continued high unemployment those numbers fall far short of the job growth rate we need to return rapidly to full employment. We’re generally doing a bit better than treading water, but not much.

MR. CARNEY: But there’s more work to do and our economy is facing a major headwind, which goes to your point, and that’s Republicans in Congress.

This is an aggressive and, I think, novel presentation—labeling Congressional Republicans as an economic headwind. Those same Republicans should respond aggressively to this particular language.

MR. CARNEY: Talk about letting the sequester kick in as though that were an acceptable thing belies where Republicans were on this issue not that long ago, and it makes clear again that this is sort of political brinksmanship of the kind that results in one primary victim, and that’s American taxpayers, the American middle class.

You’re correct that the GDP number we saw today was driven in part by — in large part by a sharp decrease in defense spending, the sharpest drop since I think 1972.  And at least some of that has to do with the uncertainty created by the prospect of sequester.

To the end of your question, I would say that the President has had and continues to have very detailed proposals, including spending cuts, that would completely do away with the sequester if enacted, that approaches deficit reduction — not just the $1.2 trillion called for by the sequester, but even beyond that  — in a balanced way.

His logic is:

• The sharp decline in Q4 defense spending was in large part responsible for today’s bad (-0.1%) Q4 GDP growth number;
• The President wants to replace the sequester cuts with a “balanced” package of tax increases and other spending cuts;
• Republicans oppose the President’s reasonable “balanced” alternative;
• A recent shift suggests that Congressional Republicans appear to favor leaving the upcoming sequester in place;
• Therefore the bad Q4 GDP number is because Congressional Republicans refused the President’s reasonable alternative and may be willing now to leave the upcoming sequester in effect.

Problem #1 with this logic is that the President’s proposal would be deficit neutral, so any increase in discretionary spending that helped short-term economic growth would be mostly offset by cuts in other government spending and increases in taxes. If you buy the logic of yanking hard on the Keynesian short-term fiscal lever (big if) then your proposal needs to increase the deficit to get any first order GDP kick. So the tax-increasing solution Republicans are rejecting wouldn’t help GDP growth, it would just shift the components around so that government spending grew faster and private consumption and investment grew more slowly.

Problem #2 is that his sequence doesn’t work. Mr. Carney implies that last quarter’s GDP was harmed by Congressional Republicans’ movement in the past two weeks toward allowing the sequester to take effect. That puts the effect before the cause, which is hard to do.

MR. CARNEY: So it can’t be we’ll let sequester kick in because we insist that tax loopholes remain where they are for corporate jet owners, or subsidies provided to the oil and gas companies that have done so exceedingly well in recent years have to remain in place.  That’s just — that’s not I think a position that will earn a lot of support with the American people.

The words “DEMAGOGUE ALERT” should flash any time you hear the ol’ corporate jet tax break. Eliminating it would raise a few billion dollars of revenue compared to spending problems measured in trillions.

Still, Republicans should find a way to propose repealing this tax break and using the revenue to lower some other tax in a way that both parties like. Neutralize the stupid talking point by getting rid of this tax preference, but don’t use the revenue raised to increase government spending. Don’t wait for tax reform, get rid of this one quickly in the right way.

MR. CARNEY: Speaker of the House Boehner put forward, in theory, at least, a proposal late last year that said he could find $800 billion in revenues through tax reform alone — closing of loopholes and capping of deductions.  So surely what was a good idea then can’t suddenly be a bad idea now.

Did he forget about the $617 B of tax increases that were just enacted? No. This is another important rhetorical trick – suggesting that the previously offered +$800B and the recently enacted +$617B are additive rather than duplicative. I’m certain that’s not how Congressional Republicans think of it. Watch for this rhetorical trick to be repeated often.

MR. CARNEY: The President put forward a proposal to the super committee that reflected the balance that was inherent in every serious bipartisan proposal, including the Simpson-Bowles proposal.  A refusal at the time to allow revenue to be a part of that meant that the super committee did not produce.

Congressional Republicans told me at the time that the Administration was nowhere to be found during the Super Committee’s failed attempts in the fall of 2011.  “Completely disengaged – absent,” was how one insider described the Administration.

Republicans on the Super Committee offered to their Democratic colleagues to accept higher revenue in exchange for either significant entitlement reforms or pro-growth tax reform. Mr. Carney’s claim that Republicans “refus

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Update: During debate on H.R. 8, the New Year’s tax increase law, House Chairman Camp made clear that he will move through the House a bill that is revenue-neutral (after H.R. 8 took effect). This makes a “preconferenced” Baucus-Camp-Hatch bill highly unlikely, and means that any agreement would come only in a conference after the House had passed a revenue-neutral bill. Such a conference report might or might not be revenue-neutral, but at least the first stage of the process would not increase revenues.

Sen. Schumer’s Senate reconciliation for “tax reform” won’t happen.

A couple of friends pointed out that a Senate reconciliation bill can only be produced by the House and Senate passing identical versions of a budget resolution in the form of a conference report. This means that Senator Schumer’s push last week for a 51-vote procedural path to enacting a tax bill can happen only if the Senate Democratic majority reaches an agreement on deficits, debt, and aggregate spending and tax levels with a Republican majority House. This leads me to four obvious conclusions that I missed in last week’s post:

1. Senate Democrats can’t force the Senate to pass a partisan tax bill through reconciliation without House Republican acquiescence on creating the process to do so.
2. Even in the unlikely scenario where House Republicans and Senate Democrats agreed to create such a reconciliation “vehicle” for tax reform, they couldn’t do so unless they also agreed on the other components of a budget resolution: deficit and debt levels, spending and tax aggregates, and the aggregate size of changes to major entitlement programs and discretionary spending.
3. Therefore, Senator Schumer’s prediction early last week of a 51-vote reconciliation path for Senate passage of “tax reform” has almost no chance of happening.
4. And if tax reform is even to pass the Senate it will need bipartisan support. For Chairman Baucus this means he needs Finance Committee Ranking Member Hatch early in the process, and House Ways & Means Committee Chairman Camp after/if the Senate passes a bill.

In support of this, I’d note that in a press conference last Wednesday Senator Schumer did not push the reconciliation idea, instead describing it as something that Chairmen Murray and Baucus would work out. I’ll bet that idea is now dead.

Baucus v. Schumer

I think Sen. Schumer

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I don’t begrudge the majority for creating that hardball procedural option – we Republicans did it in 2001 and 2003 to enact two rounds of tax cuts. In 2001 we used a reconciliation bill to pass a center-right bipartisan bill 58-33 (Democratic now-Chairman Baucus supported it). in 2003 we used it to pass a Republican-only bill 51-50.

Having a reconciliation vehicle creates the opportunity to pass a bill with a simple majority, but it does not require the bill to be partisan. If Senate Democrats follow this procedural path, they will have to choose between a bipartisan bill (likely Baucus-Hatch) or a partisan Democrat-only bill. The former would be easier to conference with a tax reform bill passed by a Republican House, while the latter would more closely hew to the policy goals of most Senate Democrats and our newly-avowed liberal/progressive President.

The way to tell which they’re going to do is to look at what the upcoming Democratic budget resolution requires tax reform do on total tax levels. If, as Senator Schumer suggests, the budget resolution requires that tax reform increase total taxes by hundreds of billions of dollars (or even a trillion+!) over the next decade, then reconciliation isn’t just an option, it’s their chosen path. Senate tax reform that massively raises taxes will be a partisan positioning exercise that will not lead to a law, and Senate Democrats will need to use reconciliation to block a Republican filibuster. If the President and Senate Democrats want to try to enact bipartisan tax reform, they’ll have to make it revenue-neutral or nearly so.

This didn’t have to be the case.

To my tremendous dismay, in 2011 and 2012 Congressional Republicans repeatedly signaled that they would agree to higher total revenues if they could get tax reform that they liked on microeconomic grounds (i.e., that lowers marginal effective rates on labor and capital). This created the risk that Republicans would agree to higher taxes once in exchange for tax reform, and a second time to get structural entitlement reforms. That’s a lot of potential tax increases, and it scared me tremendously.

While key Congressional Republicans insisted they would only agree to higher revenues resulting from dynamic economic growth effects, I was skeptical about the numbers. In the failed Grand Bargain negotiations of Summer 2011, Speaker Boehner was willing to agree to +$800B in taxes over ten years, as long as those increased revenues were the result of higher economic growth resulting from tax reform that lowered marginal rates. He, and later Republicans on the Super Committee, said they would not agree to “static” revenue increases but they floated the $800B number.

I think you can get maybe $100-150B in higher revenues over ten years from the pro-growth effects of a great tax reform bill. +$800B means you’re agreeing to static tax increases through reform as well. I think that’s terrible policy. You get the benefits of lower marginal rates and a somewhat more efficient economy, but you give them up by having government take more resources from the private sector. In my view that’s almost certainly not worth it, especially when you move from an imagined ideal tax reform to that likely to result from a real-world legislative process in which the efficiency benefits would be tremendously diluted.

The Grand Bargain fell apart in the summer of 2011 because President Obama wanted even higher taxes: +$1.2T over ten years. This discussion repeated itself last month, with the President even more aggressive in his demands for higher taxes. He got about half that amount with his New Year’s tax hike law.

Now the President is signaling that he wants the rest of his tax increases through tax reform, and there’s no way he’s going to get it. Senator Schumer’s comments suggest that Senate Democrats’ priority for tax reform is not making the code more efficient or increasing economic growth, it is raising total tax revenues to finance bigger government.

Agreement on the total level of taxation is a prerequisite for enacting tax reform. In 2011 or most of 2012 Democrats could have gotten some key Republicans to agree to +$800B, if it had been raised the right (pro-growth) way. Now they can’t get that. If Senate Democrats insist that tax reform raises total revenues by hundreds of billions of dollars, tax reform will go nowhere, for five reasons.

First, taxes were just increased by more than $600B. Those Republicans who were willing to support Speaker Boehner’s +$800B will count that +$600ish B against that amount. A few Republicans might in theory still be willing to agree to net revenue increases equal to the dynamic benefits of increased growth, but that’s at most +$100-150B. There is clearly no Republican appetite for net increases measured in hundreds of billions of dollars (this pleases me). Senate Republicans would block such a bill if they could, necessitating the reconciliation bill which could not be filibustered. But even if Senate Democrats pass it on a party-line vote, House Republicans will not agree to further tax increases beyond maybe +$100-150B, and then only if they really like the pro-growth incentives in a reform bill. They probably won’t even go above revenue-neutral because of reason #2.

Second, the President’s end zone dance and partisan taunting during and after the New Year’s tax increase law should convince even the most bipartisan and cooperative of Congressional Republicans that the political risk/reward tradeoff of working with the President on tax reform is poor. Bipartisan tax reform only has a chance if members of both parties can see both a potential policy win and a shared political win at the end of a long and winding road. President Obama has demonstrated repeatedly that he views fiscal politics as partisan and zero sum. For a Camp-Baucus-Hatch tax reform bill to come together, which is the only feasible path to enacting a new law, you need a legislative environment conducive to bipartisan cooperation. Thanks to the President’s framing of the last tax law we have exactly the opposite.

Third, a partisan path for Senate Democrats makes Finance Chairman Baucus’ job much harder. He will not have the bipartisan cover essential to repealing or reforming the popular broad-based tax preferences like the mortgage interest subsidy, the health tax exclusion, the deductibility of charitable contributions, and deductions for state and local taxes. If you want to move the policy needle you need to tackle these big items, and you can’t do that and succeed without bipartisanship to protect you from the political blowback of taking on such popular preferences.

Fourth, a partisan path means Mr. Baucus has a smaller universe of potential votes to work from. Sure he’d only need 50 (+ the VP), but corralling 50 of 55 votes on tax reform is hard and may be impossible. It’s much easier to try to find 50 votes out of 100, even if 20 conservatives of those 100 are practically ungettable. In committee any one of his 11 Democrats could hold a bill hostage if Republicans are unified in opposition.

Finally, tax reform that raises taxes creates far more losers than winners. That increases citizen and interest group opposition and makes it even harder to get the votes needed to pass a bill. Democrats may like the prospect of spending an extra trillion dollars but I’ll bet they can’t find the votes for the specific tax increases to raise that much, especially if they’re simultaneously trying to sell tax reform as helping taxpayers.

Senator Baucus knows all of this. Whatever his personal policy preferences, he has to know that a budget resolution that instructs him to enact tax reform that raises hundreds of billions in higher taxes will not lead to a law, but instead at best to a partisan stalemate in which he is the face of a liberal bill that represents the views of a quite liberal Senate Democratic caucus. It’s almost impossible for him to pass such a bill out of the Senate. If he does it’s almost impossible to conference with the House.  And either way it won’t help his reelection prospects in low-tax Montana this election cycle.

If you are interested in the prospects for tax reform, watch the public postures of the key Senate Democratic players on total tax levels in the budget resolution. The people to watch are Finance Chairman Baucus, Budget Chairman Murray, and Leader Reid. Also watch Senators Durbin and Schumer and incoming Treasury Secretary Jack Lew if he is confirmed.

If in their budget resolution Senate Democrats require that tax reform raise total taxes by hundreds of billions of dollars or more, then tax reform will at best be an interesting contrast in partisan approaches between Senate Democrats and House Republicans, and at worst a partisan flame-out in which the Senate fails to pass a bill or doesn’t even try.

If instead the moderates (and Chairman Baucus?) force the budget resolution to create a reconciliation instruction for revenue-neutral tax reform, or tax reform that only raises revenues by $100-$150B over ten years from dynamic growth effects, then the prospects for significant and bipartisan tax reform in the next two years increase from “hopeless” to “extremely unlikely.”

Sorry to be so pessimistic.

(photo credit: Office of Senator Baucus)

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The House bill fits well with the strategy I advocated last week on this blog and in a Wall Street Journal op-ed. I hope the House passes it tomorrow.

My preferred policy is to “pay past bills and cut future spending.” This bill does the first part of that, for a short timeframe. In doing so, House Republicans demonstrate that they can govern as a responsible majority, and that they don’t want a default or even a cash crunch. No Member wants to have to vote to raise the debt limit, but it has to be done if the U.S. government is to avoid a further credit downgrade.

Simply by demonstrating that they are a governing majority that can pass a bill supporting a coherent strategy, House Republicans, with a strong assist from a few key Senate counterparts, have already won two small but important tactical victories.

1. According to Senator Schumer, the Senate Democratic majority now plans to pass a budget resolution this year, their first in several years.
2. The President has backed down from his demand for a long-term debt limit increase, as demonstrated by today’s Statement of Administration Policy.

These are not earth-shattering victories. They will not fundamentally change the course of our unsustainable fiscal policy. If we compare them to what needs to be done, they are trivial. But if we compare them to the Senate Democrats’ inaction for the past few years, and to the New Year’s tax increase rout of three weeks ago, these are important tactical victories, and the bill hasn’t even come to a vote yet.

Senate Budget Committee Ranking Member Jeff Sessions has for several weeks been urging that a debt limit extension be linked to a requirement that the Senate pass a budget, and he has been relentless in drawing attention to the Senate majority’s repeated failure to do the basic legislative work of fiscal policy.

While the short-term policy benefit of the Senate Democrats passing a budget is minimal, it should have an important clarifying effect on the broader fiscal policy debate. Senate Budget Committee Chair Patty Murray and Leader Reid will have their hands full because Democrats are far from united on these big questions that they must now answer.

• Do you support the President’s proposed level of taxes on top of the recently enacted tax increases?
• What is your policy on the appropriations sequester?
• Do you support any slowing of the growth of the major old-age entitlement programs?
• What deficits and debt do you propose for the next 5-10 years?

By forcing/encouraging/persuading Senate Democrats to do a budget resolution, this debt limit bill levels the playing field for future fiscal policy debates. House Republicans who have had to defend their proposed spending cuts will now be able to contrast those at-times painful policy choices with whatever alternatives Senate Democrats propose. This will clarify the fiscal policy choices and make the debate one that is simultaneously both more honest and less unfair to spending cutters.

President Obama endorsed this bill today because he had no other option. He knows that he cannot veto a short-term debt limit increase because he wants a longer one. Senate Democrats already agreed to do a budget resolution, and I’d bet Leader Reid told the President he didn’t want to stand in the way of the House bill if they passed it, as it now appears likely they will.

Even more important is the beginning of the return to regular order. For two years the President and Leader Reid allied to bypass the standard legislative process and instead force fiscal policy to be negotiated in ad hoc private talks between the President and Speaker Boehner. This bill looks likely to produce a regular order two-fer: the President is largely on the sidelines on the details of this bill, and the Senate Democratic majority appears headed toward reestablishing the normal budget process.

By setting the next debt limit deadline in mid-May, well after the sequester is triggered, the continuing resolution expires, and the budget resolution deadlines, this bill reorders the 2013 fiscal debates in a way that is advantageous to spending cutters. You want to have your strongest legislative levers up front, and if this bill becomes law they will be in the right order: sequester, then CR, with the weakest lever of debt limit last. That doesn’t mean that spending cutters will be able to force the President to fix everything, but at least they’re maximizing their leverage.

And if it works this time, as it appears likely it will, House Republicans can then repeat this tactic a few months from now. The challenge at that point will be coming up with and uniting around a similarly beneficial but modest fiscal policy change to attach to the next short-term increase. If conservatives want to pick a knockdown spending fight with the President, they’re better off doing that on the sequester and/or CR.

With four more years of a now-avowed liberal in the White House, I have extremely low expectations that America will soon shift to a responsible fiscal path. Spending restraint will be at best a piecemeal effort built over the course of countless small legislative struggles like this one. This bill is only the first step in a strategy to pay the bills and cut spending, but it’s a good first step.

(photo credit: Sean Dreilinger)

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(photo credit: Mr. Soop)

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Here are a few reactions to the President’s debt limit comments in yesterday’s press conference.

• The President did not threaten to veto a debt limit bill. He substituted insults of Congressional Republicans for formal legislative threats. It’s easy to get distracted by the insults, but the absence of a formal threat is more important.
• This reinforces my view that the President views the debt limit as a must-pass bill, and that anyone in Congress who can attach other legislation to it has a good chance of it becoming law. The debt limit can only carry so much additional legislative weight, so the smart strategy is for House Republican leaders to attach something that is modest, closely related to deficits and debt, and difficult for Democrats to reject. Speaker Boehner and Senator Sessions both have good ideas that meet these criteria.
• Without a veto threat the President must rely on Leader Reid and Senate Democrats to water down or even remove spending cuts or other fiscal reforms that House Republicans may attach. In a strange way this is good for spending cutters, who should prefer to negotiate with Senate Democrats to negotiating with the President.
• The President is trying to frame the issue as “Me responsible, them reckless.” But setting aside the fringes of each party, this is not a debate about whether to increase the debt limit, but about for how long and how much spending should be cut at the same time. It is also a struggle for control of the legislative agenda for at least the next two years.
• The President is on weak ground when he tries to argue that a debt limit bill should be clean. He has signed four debt limit increases into law, only one of which was clean. The first was attached to the $800+ B stimulus bill, the second to a set of PAYGO reforms that Democrats supported and Republicans opposed, and the fourth was attached to the summer 2011 Budget Control Act that cut spending, set up the deficit reduction Super Committee, and created the sequester. Debt limit increases are often attached to fiscal policy legislation, and usually to bills that reduce the deficit. Kudos go to Major Garrett of CBS News for a tough question yesterday that highlighted this point.
• The President is also on weak ground when he argues that short-term debt limit increases are unusual or radical. Modern history includes both short-term and long-term extensions. President Obama signed a four-month extension, and the U.S. has spent more than seven of the last 30 years operating under extensions that lasted less than a year. The median increase in that timeframe lasted about four and a half months.
• He argues there is no good policy reason to do a small, short-term increase, but makes it clear that he does not expect to reach agreement with Congress on future spending cuts. In doing so he makes the clearest possible case for the benefit of small, short-term debt limit increases. That’s the only way spending-cutters in Congress will be able to keep unsustainable government spending front-and-center on the agenda. They should not expect to make tremendous progress in solving that issue with this President, but it’s better to revisit the issue a couple times a year, even unsuccessfully, than to return quietly to the unsustainable spending status quo.
• He is pretending to frame this as “be responsible and increase the debt limit now, and we’ll reduce the deficit later,” but by saying repeatedly only that he is willing to engage in a “vigorous debate” rather than to “negotiate” or “work toward a bipartisan solution,” he is signaling that he has no intention of compromising and no expectations for legislative success in enacting future deficit reduction. His strategy is to raise the debt limit now for as long as possible, then reject Republican demands to cut spending and move on to other issues. Usually a President says “vigorous debate” at the beginning of an election year. It is dispiriting but not surprising that he is saying it right after being reelected.
• He is afraid of getting jammed by small short-term debt limit increases (as I have recommended). Really afraid. This path would keep fiscal issues front-and-center when he wants to punt them, and it would force him to pay a price every few months. Just as in 2011 his top priority was to get a debt limit increase that lasted past the election so he would not have to negotiate again, his top priority is to make certain he isn’t forced to do this often. The primary leverage Congressional Republicans have on this bill is the size and duration of an increase, not the ability to deny any increase. The President will pay to do this infrequently.

(photo credit: White House video)

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Payment prioritization proposals

As background, in my last post I explained the difference between default and technical default:

Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.

I know of two different ideas for “payment prioritization” proposals. One is active, the other passive.

In the active proposal, Congress and the President would enact a law that explicitly prioritizes payments if Congress does not raise the debt limit. These legislative proposals always put debt payments first, an attempt to ensure that if Treasury must prioritize the use of its cash on hand, then there is no risk of the U.S. government defaulting on Treasuries. Instead, the Administration would have to delay paying other obligations of the U.S. government. These bills attempt to leave technical default as a threat while neutralizing the risk of default.

There are at least four problems with this idea.

1. Credit rating agencies and investors may not be reassured because they may insufficiently distinguish between default and technical default. It’s easy to imagine a credit rating agency downgrading the U.S. for not paying contractors or States on time, even if principal and interest payments on U.S. Treasuries are all being made when they should be. The credit risk might be mitigated but it certainly wouldn’t be eliminated. If you make your credit card payments on time but miss your rent payment three months in a row you’re probably a bad credit risk.
2. To the extent that the enactment of such a law increased the expectation of future legislative brinksmanship surrounding these non-debt obligations, such a law might actually increase credit risk.
3. Even if Congress and the President agreed on such a concept in principle, good luck coming up with a short prioritization list to write into the bill. It would start small (debt repayment goes first). Then members would argue whether Social Security recipients, veterans, or active duty troops should be paid next. Maybe cancer research funding comes after those three, or is it money to protect against terrorist attacks? Congress is terrible at setting priorities; that’s a major source of the underlying fiscal problem.
4. There is zero chance this proposal could be enacted while President Obama is in office. If the goal is to increase leverage of the spending cutters, what makes anyone think it will become law now?

Some conservatives argue for the passive variant of payment prioritization. Let’s vote against raising the debt limit, they argue. Let’s block any bill that increases the debt limit, they say. Treasury will soon run short of cash and have to make choices about where to spend. The pain caused throughout government will hurt liberals more than conservatives because they rely more on government than we do. This will therefore incent Democrats to agree to legislative spending cuts.

I agree that in such a scenario the Administration would place the top priority on repaying Treasury debt so that default is not a real threat. This is the kernel of truth on which the passive variant relies. It’s also why some on the right and the Obama Administration were both horribly wrong and misleading in the 2011 struggle when they argued about the increased risk of default (rather than of technical default) from that summer’s brinksmanship. Treasuries never have been and never will be at risk, because any Administration would use all available legal flexibility to avoid that increased credit risk.

But it’s irresponsible for the government not to fulfill in a timely fashion legal commitments it has already made. This is about the sanctity of contracts and the U.S. government’s credibility as a party to an agreement. If the U.S. government legally commits to paying someone a benefit, or agrees to pay a firm for a good or a service, the U.S. government should fulfill that agreement in a timely fashion. To do otherwise is taking the first step to becoming a banana republic. The fiscally responsible policy is to pay your bills on time and cut future spending commitments.

Also note that payment prioritization doesn’t stop payments, it just delays them. Then the aggrieved party sues the government, and probably wins, and it turns into a bloody mess.

Even if you disagree with me, and you think we need to take extreme measures to force President Obama to agree to spending cuts, and you’re willing to damage the U.S. government’s contracting credibility by starving it of cash by denying it the ability to borrow more, …

… what makes you think the President and his team are going to do so in a way that you like or that creates leverage for Congressional Republicans? Remember, he has the flexibility to decide which payments get delayed.

Today President Obama signaled what he would do in this situation. He will start warning politically powerful constituencies: seniors, veterans, and troops, that they are at risk of not being paid on time, and their Republican Congressman is responsible for it, and his or her phone number is 225-XXXX. I have no idea why some conservatives think it’s smart strategy to hand the President this kind of political club. In the extreme, he could in theory tell his budget director, “Delay payments for highway funds to any State that voted against me in the last election.” That’s absurd and egregious, but my point is that conservatives and Congressional Republicans are foolish in the extreme if they think that a passive payment prioritization strategy would create leverage on the President. It would do just the opposite.

Some then pivot back to the active variant as a solution, “Well, we’ll enact a law saying they can’t stiff troops or veterans or seniors, but the Administration is required to stick it to National Public Radio and welfare.” Okay, but how again do you plan to enact such a law? And we’re back where we started.

Neither active nor passive payment prioritization ideas would work to generate the leverage that spending cutters want. They also happen to be bad fiscal policy (violating contracts and really ugly cash flow management). These are the conservative parallels to the recently deceased trillion-dollar coin idea that was enchanting the left.

There are smarter ways to cut spending, and even to use a debt limit increase to cut spending. Here is one.

To cut spending, raise the debt limit

A better strategy for House Republicans to force some spending cuts on a President who doesn’t want them looks like this.

1. Rely first on the sequester, second on the CR, and last on the debt limit as leverage.
2. On the debt limit, state loudly and repeatedly a simple principle: We will pay our bills on time and we will cut future spending.  Rather than being against a debt limit increase unless it also cuts spending, say that you’re for a debt limit increase that also cuts spending. You’re the legislative branch, you control what’s in the law. Act as leaders doing the right thing, rather than as rebels trying to block President Obama and Congressional Democratic spenders from doing the wrong thing. Agree with the President that we must pay our bills, and politely smile and say “And we’re going to cut spending, too.” Make him argue against cutting spending, rather than giving him the opportunity to attack you for risking financial disaster.
3. Pass a bill out of the House that raises the debt limit and cuts spending.  Make it a short-term extension, maybe 3-6 months, and cut spending by a similarly modest amount.
4. Take whatever big spending cuts you want and make them conditions of extending the Continuing Resolution. Threaten to shut down the government rather than to make the government risk not paying its bills on time. It’s a less damaging and therefore more credible threat.
5. Propose specific entitlement spending cuts to substitute for the sequester cuts you don’t like (presumably in defense). On this one sit and wait for Democratic nondefense appropriators to panic. You won’t have to wait long.
6. Publicly state your willingness to agree to (and vote for) a longer-term debt limit increase as soon as the President is willing to cut spending a lot or at least to commit to a credible long-term fiscal path. If he won’t, state that you will repeat step 3 as often as needed.
7. If the President threatens to veto your short-term debt limit increase + spending cuts, then tell him you’ll allow House Democrats to pass a clean short-term debt limit extension, but they’ll all have to vote for it, every three months or so. Watch the ensuing panic in the House Democratic caucus with amusement.

There are three key strategic premises upon which this strategy relies:

• Leverage to cut spending is best implemented through the sequester and CR more than through the debt limit.
• Leverage on the debt limit can be created only by being for the right kind of debt limit increase (short-term and with spending cuts), and not by threatening to block any increase. The more responsible policy path is also the one that generates more negotiating leverage, albeit in an incremental way.
• A smart debt limit strategy allows the President an opportunity to get his clean debt limit increase, but only for a short timeframe and only at great political cost to his own party in Congress. This is what creates leverage, not threatening to let the house burn down.

We will soon see whether Congressional Republicans can channel their oft-stated passion and commitment to cutting spending into a strategy that works.

(photo credit: Rod)

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Three fiscal deadlines loom.

1. The fiscal cliff law delayed the spending sequester so that it is now scheduled to cut spending beginning on March 1.
2. The Continuing Resolution (CR) that substituted for all 12 regular appropriations bills expires on March 27th.
3. Without an increase in the statutory debt limit, some time in late February or early March Treasury will face a cash crunch as it tries to meet all its obligations on time.

In addition,

• CBO will come out with their new baseline in late January.
• The President’s budget is due February 4 but it appears he’ll miss that deadline, maybe by a lot.
• The House and Senate should be marking up budget resolutions in March and considering them on the floor in late March.

If the first deadline (the sequester on March 1) passes without legislative action, across-the-board spending cuts will begin. Republicans generally like that as an aggregate fiscal policy matter, but they don’t like that defense is on the chopping block. No law means the sequester begins.

If the second deadline (CR expires on March 27) passes without legislative action on appropriations, major parts of the federal government will shut down. In those parts of government, only those employees who are essential to preventing loss of life or property (e.g., Coast Guard rescue personnel, air traffic controllers) can work. Other parts of the U.S. government close until and unless appropriations bills are enacted. This is typically called a government shutdown. Entitlement checks continue to be cut.

If the third deadlines (cash crunch after no debt limit increase) passes without legislative action, at some point Treasury will not have enough cash on hand to pay all of its obligations on time. The President must then choose whether to miss or delay debt payments to those holding Treasury debt, or instead to delay payments to others owed government funding, including Social Security beneficiaries, veterans, States owed payments for Medicaid and welfare and highways, and defense and other contractors for goods and services they provide to the federal government.

Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.

When talking about the consequences of these deadlines I classify default as an order of magnitude more potentially damaging than either a government shutdown or a technical default. And while the sequester is painful to the policy goals of the areas being cut (national security, cancer research, border protection), from a fiscal policy perspective it’s cutting government spending and that’s a good thing.

It gets confusing because each of these could result in less money being spent by government, or at least less being spent right now. The sequester will cut spending by a fixed percentage across-the-board for a large portion of government (but far from all of it). If the CR expires without a new law, funding for a large part of the government will suddenly drop to zero. If there were a default

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My substantive view is that the debt limit must be legislatively increased. It is highly irresponsible to pursue a legislative strategy that places the full faith and credit of the U.S. government at risk. Failing to pay debt obligations is at least an order of magnitude more damaging than a “government shutdown” induced by failing to extend a continuing resolution. Having lived through the 1995 government shutdown, I wouldn’t want to wish that on anyone, but I’d happily risk another shutdown rather than roll the dice on the debt limit.

At the same time, despite President Obama’s jaw-dropping argument to the contrary, we have a government spending problem that must be addressed. If your teenager breaks the borrowing limit on a credit card you gave him, you don’t fix the problem by refusing to pay the bill. But you also don’t let him keep spending at such an irresponsible rate. You pay the prior obligations and you simultaneously force him to change his spending habits.

President Obama and his team are working overtime to frame a “clean” debt limit extension, without any accompanying spending cuts, as the responsible policy path. That is an outrageous argument. Look to Europe: Germany and its northern European neighbors repeatedly loan Greece enough cash to make it through the next few quarters and they require policy reforms as a condition of that loan. They then repeat the process frequently. Sure, Greece would like a large long-term loan with no conditions, but their creditors know that path would lead to no reform and ever-increasing debt.

The responsible policy path is to increase the debt limit and to cut government spending. It is not to increase the debt limit, with vague promises about maybe cutting spending in the future, if it is done the right way and only if it is accompanied by even more tax increases.

But if a debt limit must be enacted, if we cannot risk a default, then how can Republican spending cutters exert leverage on a President who doesn’t want to cut spending?

Most observers mistakenly assume that the only way to force the President to change his spending habits is to threaten to block a debt limit increase. But in addition to other, better levers like the impending spending sequester and the expiring continuing resolution, there are smaller levers that can change how a debt limit law is enacted without killing the necessary increase. These levers are not strong enough to force the President to accept a fundamental shift in spending trends, but they can be leveraged to enact significant incremental spending cuts.

There are three key tactical levers.

1. All Members of Congress hate voting to increase the debt limit. It is one of the most politically painful votes a member can cast.
2. Traditionally the majority party in each House delivers the bulk of the aye votes for a debt limit increase. The minority party free rides and most vote nay.
3. When there’s a legislative disagreement over the size and duration of a debt limit increase, the smaller/shorter increase always wins.

It’s hard to overstate how much Members hate voting for a debt limit increase and how entitled House Democrats feel about not having any obligation to do so because they’re in the minority. That is the soft spot we’re going to exploit—catching the President between his policy goals and the political self-interest of his partisan allies, especially in the House.

I’ll propose this alternate strategy in the form of a hypothetical joint public statement by Speaker Boehner and Senate Minority Leader McConnell.  The 50 vote number below can, of course, be dialed up or down.

Hypothetical press statement by Speaker Boehner and Leader McConnell

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blockquote>SIM-SPEAKER BOEHNER: I want to begin by assuring you that we will not allow the government to default on its obligations. The debt limit will be increased. The questions we must resolve are first, whether we will simultaneously cut government spending and second, who will cast the votes for the debt increase.

The President says he wants a clean debt limit increase without any accompanying spending cuts. I am prepared to bring such a bill to the floor and deliver 50 Republican votes for a three-month clean extension. If they wish to avoid spending cuts, the President and Leader Pelosi simply have to deliver the other 168 votes from House Democrats for a short-term clean extension. I will not block such a bill, and will even deliver up to 50 Republican votes needed to put it over the top. But if the President chooses this path, his party will have to deliver the overwhelming majority of the House votes, and he’ll get only a short-term extension. Then we’ll repeat this exercise three months from now and three months after that.

SIM-LEADER MCCONNELL: If the House were to pass such a bill, Senate Republicans would not filibuster it, but they also would not vote for it. It would have to pass the Senate entirely with Democratic votes.

SIM-SPEAKER BOEHNER:  If the President and Democratic leaders want a longer extension than three months, or if they want more than 50 House Republicans and no Senate Republicans to vote aye (so they don’t have to twist as many Democratic arms to cast a very unpopular vote) then we need to cut government spending as well. If we match one dollar of spending cuts for each dollar of debt limit increase, then I’m prepared to deliver the bulk of the needed votes on the Republican side and do an increase that lasts up to a full year. Under this principle bigger spending cuts lead to a longer debt limit extension. Tomorrow the House majority will pass just such a bill, a responsible bill that both increases the debt limit and cuts government spending. We will pay our bills and we will take a significant step toward solving our underlying government spending problem.

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The venue shifts

This venue shift has three important effects.

1. The venue shift narrows the negotiating scope. Spending cuts, a debt limit extension, and a CPI correction will be deferred until 2013 (notwithstanding Team Obama’s recent petulant claim that they won’t deal with it next year). The scope is now limited to tax changes, with unemployment insurance, a sequester delay, and a Medicare doc fix possible, more likely in separate legislation, but still done this year. Extension of the President’s payroll tax provision is less likely. His infrastructure spending never had a chance in the first place.
2. The venue shift moves Senate Majority Leader Reid to the forefront of negotiations and moves the President back into a secondary if not a supporting role.
3. The venue shift makes a legislative solution in 2012 more likely.

For weeks I have been struggling to see a substantive policy sweet spot in the Obama-Boehner negotiations that I thought could be supported by the President and the Speaker and could pass both the House and Senate. I am still skeptical that such a sweet spot exists, largely because I think the President won’t agree to big enough cuts in entitlement spending growth.

In contrast, it is easy to see a sweet spot between the plan B bill the House may soon pass, and S. 3412, which Senate Democrats passed last summer. I don’t know that this new regular order will lead to a solution, but at least there is a clearly visible path to success. The legislative process that begins with a plan B bill is, in effect, plan A. I don’t think there’s another path that has a better chance of successful resolution before year end.

We can see evidence of the venue shifting as Senate Democrats today debate amongst themselves about what their position should be on the House bill. No matter what definition of “rich” they choose, the news is that they are making their own decision, independent of that defined by the President.

Leader Reid enters the spotlight

Assuming the House passes a bill soon, all eyes should turn to Leader Reid. Be wary of his confident statements about what the Senate will and won’t pass. Nobody can possibly know this right now. Leader Reid can only know what he alone will or will not do. He can guess at his colleagues’ behavior, but when he asserts “The Senate will not pass X,” he is bluffing.

He can, however, unilaterally decide what bill the Senate will or will not consider. He can choose not to bring up a House-passed plan B bill, and he can choose not to try to send the Senate-passed bill from July to the House. He can unilaterally choose to have the Senate not act, but if he initiates the legislative process of considering a bill, then all bets are off.

Leader Reid’s challenge is that his standard tactic, not legislating and deferring to the President to negotiate with Republican leaders, is probably unsustainable if the House passes a plan B bill. Leader Reid’s key decision will be if and after the House has passed a bill. Will he sit and do nothing, in an attempt to try to force Speaker Boehner to resume negotiations with the President? Or will he move to proceed to a bill on the Senate floor? If he does the former, then Senator Reid is still acting as the President’s lieutenant, and is trying to keep the Senate in the background. If he begins to legislate, then he is acting as the Senate Majority Leader and he is taking the reins from the President.

The President’s struggle for relevance

As Leader Reid moves to the forefront, the President fades to the background. The driving question changes from “What policies does the President want?” to “What policies can we get enough votes for in the House and Senate?” Until now Congressional Democrats have been drafting behind the President. Speaker Boehner’s move forces Leader Reid to decide whether to continue following President Obama as he takes everyone off the cliff, or instead help Senate Democrats chart their own path to a new law, allowing the President to lead from behind.

I interpret everything I hear from the White House this week as part of a furious struggle to stay relevant. I think the President and his team were surprised by the Speaker’s move, and now they fear being sidelined. Yes, Dan Pfeiffer made a veto threat against the plan B bill yesterday, but the plan B bill will never make it to the President’s desk unchanged, so that veto threat is irrelevant. If it gets to the President’s desk, it will have been modified by negotiations with Senate Democrats, and that particular veto threat won’t apply.

The Obama-Boehner broader substantive talks are dead for 2012. I don’t think the Speaker could restart them even if he wanted to. He and his fellow Republican leaders have invested too much effort into getting House Republicans to support their new path. They can’t change direction again without risking a major revolt. It appears the President and his team either don’t recognize this or they don’t care. As long as Team Obama continues to talk about their failed bigger deal, and about the need to restart talks with the Speaker, they are not contributing to a speedy and successful legislative conclusion. They may, however, be instead investing now in publicly framing a future legislative failure.

Even if Leader Reid were to refuse to take up a House-passed bill, and even if President Obama were today to accept Speaker Boehner’s most recent offer on a bigger deal, there isn’t time to negotiate all the secondary and tertiary details, many of which are as difficult to negotiate as the top-tier stuff. The Obama-Boehner negotiating process has simply run out of time.

A secondary role for the President does not mean that he is irrelevant, or that he won’t become involved again late in the game. It means instead that he is, in effect, acting through Leader Reid. This limits his ability to influence the final product.

This looks to be a colossal negotiating foul-up on the President’s part. Did he never anticipate that the Speaker might go with regular order as the deadline approached and the President continued to play stall-ball?

The sweet spot

I think the following bill could pass the House and Senate before the end of the year.

• All tax rates below $700K of income are extended permanently as they are now.
• Above $700K, tax rates revert permanently to their pre-2001 rates: 39.6% for income and dividends, 20% for capital gains;
• the Personal Exemption Phaseout (PEP) and Pease limit on itemized deductions are not reinstated; and
• the AMT is permanently patched.

In addition, I think a separate bill or bills pass to:

• extend unemployment insurance in some form;
• patch the Medicare “doc fix” for another year; and
• delay or mitigate the spending sequester for 6-12 months.

In the current vernacular this is the Speaker’s plan B bill but with a $700K income threshold rather than $1M, plus separate bills on UI, doc fix, and the sequester.

I think such a bill would lose votes on both ends of the spectrum, and everyone would complain about something that should be in the bill but isn’t. But I think this bill could pass both houses.

And then, despite all of his current bluster, the President would sign it, in large part because a bunch of Democrats voted for it.

Off the cliff?

It is still quite possible that there will be no new law this year. The greatest threats at this point are House conservatives, Leader Reid, and the President. If we go off the cliff, it will likely be because one of three things happened:

1. House Republican leaders couldn’t start the process by passing a bill with only Republican votes;
2. After receiving a House-passed bill or bills, Leader Reid refused to initiate the legislative process; or
3. President Obama failed to recognize the venue shift and said things to make legislative regular order harder, in a failed and futile attempt to restart the Obama-Boehner talks.

If President Obama were to stay quiet, and if Leader Reid were to bring up a soon-to-be House-passed bill, offer his own substitute amendment, and allow 3-5 relevant amendments per side, this thing would get done.

My prediction

• 50% chance the sweet spot or something quite close to it becomes law before the New Year begins;
• 48% chance there’s no new law;
• 1% chance I’m fundamentally wrong, the Obama-Boehner grand bargain talks restart, and a deal comes together before the New Year; and
• 1% chance the Mayans had it right, the world ends tomorrow, and we no longer care about the fiscal cliff.

(photo credit: Center for American Progress Action Fund)

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In model 1 the President is a risk-taker. He is a competent and effective negotiator who is willing to risk a recession and the ensuing political blame game in January because he thinks both will help him achieve his fiscal policy goals. I don’t think the President is willing to take such a risk, but Michael Barone makes a convincing case otherwise. You decide.

In model 1 the President has leverage because he is willing to go where Congressional Republicans are not (over the cliff).

In model 1 the President would, in the last few days of December, compare Speaker Boehner’s last offer with what the President thinks he can get after a few weeks of January blame game, then decide whether or not to accept the offer or take us over the cliff.

In model 2 the President is bluffing quite effectively. He is risk averse, and he is also a savvy, patient, and skilled negotiator. Privately he knows that he cannot allow a no-bill scenario because a recession would seriously damage his second term. But he has bluffed Congressional Republicans into thinking he is willing to take that risk, and this bluff has given him tremendous leverage. His initial offer was outrageous but designed for maximum press benefit over the next few weeks. He will demonstrate to a willingly gullible press corps that he is reasonable by showing the significant negotiating concessions he has made (from an absurd starting point) in an attempt to get a deal with those extreeeeme Republicans.

In model 2 the President continues to leverage Congressional Republicans’ fear of being blamed for no bill to press them for incremental concessions without giving up anything meaningful in exchange. Yet the President would, at the last minute, accept Speaker Boehner’s last offer, because the President is also quite afraid of a no-bill scenario. We would never know that he was bluffing since there would be an agreement and a bill.

In model 3 the President is an unskilled and ineffective negotiator who cannot or will not close a deal with those eeeevil Republicans. In this model the President does not want to go over the cliff, he is genuinely afraid of a recession, and he thinks he is a savvy and skilled negotiator who is bluffing Republicans. But he fails to understand what Speaker Boehner needs to support a final deal, or he doesn’t care and is unwilling to give it to him. Or he fails to realize how hard this kind of legislative deal is to pull together, and he mistakenly thinks he can sit with his arms folded until the last minute and then it will all suddenly, magically come together.

In model 3 President Obama doesn’t know how to compromise or isn’t capable of it. He knows only win and loss.

Model 3 could arise from overconfidence: “You are more afraid of no bill than I am, so you have to do whatever I say” (not recognizing that Republicans have a third option available).

Model 3 could arise from a sense of entitlement, “I won, the people voted for me and I campaigned on this, so I should get my way, and you must give it to me.” But Speaker Boehner is not negotiating for himself. He is an agent, negotiating on behalf of 240 House Members and 47 Senate Republicans, and he is therefore limited in his ability to agree to certain things. There may be no overlap between what President Obama feels he deserves and what Speaker Boehner can or is willing to deliver.

Or model 3 could arise from a zero-sum mentality, an inability to understand that an agreement requires both sides be able to label a deal as a win. We know the President is an effective political combatant and candidate, and we have seen him be ruthlessly attack those with whom he disagrees.

Unlike his predecessors, President Obama has not achieved any positive-sum legislative compromises with the other party. His only major deals with Republicans were the extension of all tax rates two years ago and the summer 2011 budget deal. The President now defines both of those laws as mistakes and losses rather than as honorable compromises. He sees and frames them as the results of zero-sum negotiations in which Republicans forced him to accept bad policy outcomes. And now when he has leverage, he thinks and hopes he can turn the tables, not recognizing that he still needs Speaker Boehner and House Republican votes.

President Reagan did Social Security and tax reform deals with Democrats. President Bush 41 did a budget deal and the Americans with Disabilities Act with Democrats.  President Clinton did NATFA, and welfare reform, and a balanced budget with Republicans. President Bush did the 2001 tax cut, No Child Left Behind, Medicare, two energy bills, and TARP with Democrats. Each President defined these deals as success, as principled compromises, and both parties shared the credit.

President Obama has not negotiated a single win-win middle ground legislative compromise with the other political party. I fear he may not know how to do so or be unwilling to do so because he sees all his dealings with Congressional Republicans as pure zero-sum.

The scary part about model 3 is that the President might unwittingly kill an agreement, further inflame a nasty partisan blame game, and trigger a recession even though in this model that’s not the outcome he wants. In model 3 a different negotiator (say, Mr. Bowles) could find a middle ground that could pass both the House and Senate, but President Obama cannot or will not. Some combination of legislative inexperience, a distaste for interacting with Congress, and a naturally combative rather than cooperative temperament may hobble the President’s ability to close deals with those who have different policy priorities. And if model 3 is correct, in the next few weeks it could all go sideways because we have a President who doesn’t know how to or isn’t willing to negotiate.

It may be impossible for us to know which of these models applies to President Obama. I know this is an important question, and that a clear answer would not only allow us to analyze the current negotiation, but would increase the ability of other elected policymakers to deal effectively with the President over the next four years.

(photo credit: White House photo by Pete Souza)

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I won’t rehash my argument that the President is no more willing to risk a no deal scenario than Republicans, and therefore that he and his advisors are bluffing when they say they are willing to “go over the cliff” if a new bill is not to their liking. But after talking to Republican friends on Capitol Hill, I am confident that I have convinced no one of this point. It appears many key Republicans believe that a no-bill scenario is unacceptable and must be avoided at any cost.

If enough Republican Members of Congress believe this, and if the President knows they believe this, then Speaker Boehner has literally zero leverage in his negotiations. The President can dictate his terms because Republicans think he is willing to walk away from a bad deal and they are not.

At the same time many conservatives on and off Capitol Hill are talking about their policy views on what a possible Obama-Boehner deal should (or even “must”) include. I hear and read that marginal rates must not increase, or that we shouldn’t raise taxes by the $1.6 trillion the President demands, or that there must be a procedural path to enact tax reform, or that the defense sequester must be mitigated, or that a deal must include significant spending cuts and entitlement reforms. While I share these policy views, it seems absurd to be simultaneously making these demands of your negotiator while giving him no leverage.

If, however, there is a third option, one that is terrible but not inconceivable, then there is at least some minimum floor to the negotiations. If a third option exists, then Speaker Boehner and the Congressional Republicans he represents can reject demands from the President that are worse than that third alternative. Even a highly undesirable third legislative option changes the negotiating dynamic, if it is minimally tolerable in the extreme. If most Republicans would prefer that third option to a no-deal “go off the cliff” scenario, then the Speaker has at least a little leverage to reject or ignore outrageous demands from the President. He can say, “No thanks, Mr. President, we’ll just go with option C, whether you want us to or not.” The negotiating term for option C is a new and stronger BATNA: Best Alternative To a Negotiated Agreement. The risk of going over the fiscal cliff is irrelevant because Republicans have a backup plan if there is no deal with the President.

This doesn’t mean Republicans want to go with option C, or that they like option C. It instead means their negotiator now has the ability to walk away from a really terrible deal with the President, and that he can therefore demand a bit more from the President in exchange for cooperation on a deal. Option C is useful to Republicans even if their strong preference, for non-policy reasons, is to negotiate a deal with the President.

I think option C is S. 3412, a bill passed by the Senate in July. The short description is that this bill “extends the middle class tax relief for one year and allows tax cuts for the rich to expire.” More precisely, here is what the bill does (Joint Tax table is here):

• It extends for one year all current income tax rates for incomes <$200K (single) and <$250K (married);
• For one year it keeps the capital gains rate at 15% for the same incomes as above;
• For one year it (explicitly) raises the capital gains and dividends rates to 20% for incomes >$200K/$250K;
• It extends for one year other provisions of current law, important and not-so-important:  marriage penalty relief and the child credit, education tax relief, and a handful of smaller provisions; and
• It patches the AMT for 2012.

There are corollary policy consequences to enacting S. 3412 as-is. Unlike the explicit capital gains and dividend rate increase on “the rich,” these consequences are implicit, meaning they would happen because S. 3412 didn’t prevent them from occurring.

• Income tax rates on incomes >$200K/$250K would increase to 36% and 39.6%, their pre-2000 rates;
• If no new legislation is enacted in 2013, we would again face the same kind of cliff at the end of tax year 2013 as we are facing now; and
• The spending sequesters would still happen beginning in January 2013, since S. 3412 is silent on the sequester.

On July 25th S. 3412 passed the Senate on a 51-48 near party line vote, in which Senators Lieberman and Webb joined all Republicans in voting no. This Senate vote is critical to my argument. Senate Democrats have already passed this bill, so it is rhetorically infeasible for them to now say no to it. If there is no Obama-Boehner deal, the Speaker has the ability to bring this bill to the House floor and present it as a take-it-or-go-off-the-cliff offer to Congressional Democrats. Many (most?) House Republicans would oppose it, but enough of them would join with Democrats to pass the bill and avert the cliff scenario.

S. 3412 is a terrible, horrible, no good, very bad bill. I hate S. 3412 because it allows taxes to increase by $80ish B (that’s a guess) next year. I hate that it raises revenues by increasing marginal rates rather than through tax reform-induced economic growth and by eliminating or scaling back tax deductions. I hate that it raises taxes on successful small business owners. I hate that it raises capital gains and dividend taxes. I hate that it creates more uncertainty and another cliff at the end of 2013. I hate that it doesn’t contain any spending cuts or entitlement reforms.

In addition I hate this bill because I helped enact, design, and defend the tax rates on income, capital gains, and dividends now in effect, first as an aide to Senate Majority Leader Trent Lott, and then as an aide to President Bush.

I detest S. 3412 and do not want it to become law.  But I fear that Congressional Republicans are so afraid of being blamed for a no-bill scenario that they will agree to support a hypothetical Obama-Boehner deal that is even worse. They should not do that. They must not do that.

If you share my policy views but think the President is not bluffing, and if you think that America cannot, under any circumstances, risk a no-bill scenario, then S. 3412 is your Option C. It does exactly what President Obama has been calling on Congress to do, it allows tax rates to increase on the rich. It just doesn’t also do other things that we know he wants to do, but which he has not been making the centerpiece of his kick-Republicans-around PR campaign. S. 3412 does not raise taxes by $1.6 trillion, but instead by $80ish B (not counting the AMT patch). It does not guarantee the President $800B – $1T over the next decade, because it tees the fight up again a year from now when the political and legislative dynamics may be different. And it does not include the debt limit increase the President is demanding in end-of-year legislation, and which if enacted now would deny Republicans a tool to demand future spending cuts.

Even more importantly, S. 3412 has passed the Senate entirely with Democratic votes and is therefore a viable legislative alternative in an endgame take-it-or-leave-it scenario. Messrs. Boehner and McConnell could, later this month, announce, “Negotiations with the President have broken down because he refused to cut spending enough. We are therefore not going to stand in the way of S. 3412 becoming law. We oppose this bill and we will both vote no. We imagine most other Republicans will do the same. But it will be brought up for a House vote, and we expect enough House Republicans will join the Democrats in voting for this policy that we will avoid an end-of-year disaster. We will oppose President Obama’s tax increases, but we will not prevent them from becoming law because we do not want to risk a recession next year. The President will get his tax increases when Democrats

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Thanks.

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This is a post for intermediate to advanced readers. Except where noted, all large numbers are for the next ten years.

President Obama’s opening bid

Items in bold are being labeled by the Administration as non-negotiable. Brackets show where I am unsure what they are proposing.

Arithmetic

This is how the Administration describes it.  I think this arithmetic is absurd and explain why below.

• $4 trillion of deficit reduction relative to a current policy baseline;
  • $1 trillion comes from the discretionary spending caps enacted in the Budget Control Act of 2011;
  • $1 trillion comes from lowering the spending caps on Overseas Contingency Operations (aka Afghanistan and the remaining forces in Iraq);
  • $400 B comes from unspecified savings in mandatory spending; and
  • $1.6 T comes from tax increases.

Taxes

• Raise top two income tax rates permanently;
• Extend all other tax rates, credits, and related income tax provisions permanently;
• Tax dividend income as ordinary income;
• Estate tax: $3.6M exemption, 45% rate – These are the parameters that were in place in 2009.
• Capital gains rate increases to 20%;
• Extend the Payroll tax credit;
• Extend bonus depreciation for business investment;
• Permanently extend the Alternative Minimum Tax;
• Permanently extend a package of routinely expiring tax provisions, mostly for businesses, known colloquially as tax extenders.

Debt limit

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Spending

• $50 B additional highway spending in 2013 above baseline, with five years after that of $25 B more per year (total of +$175 B over six years);
• Permanently extend Medicare payments to doctors (aka the Sustainable Growth Rate, aka a permanent doc fix);
• Extend Unemployment Insurance [for how long? a year?];
• the Menendez/Boxer housing refinance bill;
• Delay the entire 2013 sequester and find $109 B of unspecified savings to cover the deficit effect of the delay;
• [Propose? Support?  Enact?] Tax reform in 2013 that increases taxes on the upper brackets by $600 B by capping deductions;
• [Propose? Support? Enact?] Entitlement reforms in 2013 that cut spending by $290 B;
• The 2014 sequester would [somehow] be used as an enforcement mechanism to drive tax reform and entitlement reform in 2013.

Analysis

Arithmetic

The President’s arithmetic is absurd.  The BCA cap reductions were enacted 16 months ago, but Team Obama wants to count that $1 trillion again as if it is future deficit reduction. The Afghanistan OCO caps are mythical savings—the President never proposed to spend those funds, but they want to count savings by not spending them.

The $1.6 trillion in tax increases would be real if enacted.  There are no budgetary or arithmetic games here, just policies I strongly oppose.

They specify no details on their $400 B in mandatory spending cuts. All entitlement programs, including the big four (Social Security, Medicare, Medicaid, and ObamaCare) are mandatory spending, as are farm subsidies, student loans, welfare payments, and a bunch of other things. But certain “offsetting receipts” also technically count as mandatory savings, even though to you and me they look much more like increased fees or asset sales (like auctioning off telecommunications spectrum). The $400 B figure is therefore, at best, a ceiling for gross spending cuts. And of course the President and Congressional Democrats keep reminding us that they won’t touch Social Security and really don’t want to cut Medicare, Medicaid, or ObamaCare.

Also, note that the President’s proposal would enact only $109 B of mandatory savings now. The other $290 B might come in 2013 as a result of entitlement reform.

I’m sure someone will ask what the total effects of the President’s proposal are on spending, taxes, and deficits. That’s a simple question with a really complex answer, and I’m not going to try to answer it today. If you’re a reporter and need to know, I’d go to Chairman Ryan’s and Chairman Sessions’ staff. Don’t try to calculate it yourself. I estimate below that the net effect of his spending proposals, however, is to increase rather than cut spending.

“Balance”

Team Obama makes a big deal about balancing spending cuts and tax increases.

They measure spending cuts starting from current all-time historically high spending levels, and they measure tax increases from revenue levels which are artificially low because of the weak economy. This skews even an honest measurement of spending cuts and tax increases in favor of those who prefer higher taxes. It also means that any calculation of a ratio between spending cuts and tax increases is fundamentally misleading.

If that weren’t bad enough, Team Obama continues to try to combine previously enacted spending cuts with proposed future tax increases, and to treat them as if they were part of a package of future policy changes. I don’t use this term lightly: this is a lie.  The President’s version of balance means “In 2011 we enacted a bunch of spending cuts, so now to balance it we’re going to rely almost entirely on tax increases.”

I expect Obama spokesman to claim they have more spending cuts than tax increases.  They’ll add the $2 trillion of past (BCA) and mythical (OCO) spending cuts to the $400 B of spending cuts, three-fourths of which they don’t want enacted in this bill, and say that the total is more than the $1.6 T of tax increases the President demands be enacted now.  That would be funny if it weren’t so dangerous.

I saved the best for last. The President is proposing spending increases, not spending cuts. He claims $400 B of spending cuts for policies he hasn’t specified, and $291 B of which wouldn’t be considered until next year. But he proposes to spend $109 B to delay the sequester for a year (GOP defense hawks will like this), and another $175 B on highways, and another $30ish B on unemployment insurance. Then he’s got the cost of Menendez-Boxer on housing (I don’t know), and the cost of a permanent Medicare doc fix (hundreds of billions, depending on the details). The net result of his proposal is higher spending, not lower.

Taxes

I’ll start with something positive.  Good for them for proposing a permanent AMT patch.

Note that they say “raise the top two income tax rates.”  They don’t say “raise them to pre-Bush rates, with a top rate at 39.6%.” Team Obama has been fairly clear in signaling that they insist that rates go up on “the rich,” but they’re flexible on how much of a rate increase they’ll support.  Their $1.6T total assumes these rates go all the way back up.

I understand that Team Obama says the rate increases, dividend policy, and estate tax are non-negotiable. Obviously we know that’s not true because they have flexibility on how much the rates would increase, but that’s what they’re saying.

The President proposes to tax dividend income as ordinary income. The President is, I believe left of some Senate Democrats on this question. They left this policy change out of their version of a bill earlier this year.

The same is true on the estate tax. The President says his estate tax proposal ($3.5 M exemption, 45% rate) is non-negotiable, yet the Democratic Chairman of the Senate Finance Committee wants a higher exemption and a lower rate, causing Senate Democrats to leave the President’s estate tax proposal out of their alternative bill earlier this year.

Extending the payroll tax credit is a bargaining chip for the President. I have no doubt he’d trade it away.

Someone needs to explain to me why Congressional Republicans would agree to make “the rich” pay $1.6 T higher taxes to avoid a $1 T tax increase on them if there is no law. The practical ceiling for tax increases on “the rich” in these negotiations seems to be just shy of $1 T.  Team Obama threw the other $600 B in just to frame $1 T later as a huge concession on their part. It’s not and it won’t be when they make this move.

Debt limit

I understand the “no more debt limit votes after this one” provision is being labeled by the Administration as non-negotiable. If that holds, it could by itself be a deal-breaker.

Members of Congress hate voting to increase the debt limit, so some may be tempted by the President’s proposal to do away with it. But neither the President nor his party seem willing to address entitlement spending trends unless forced to do so. Senator Reid refuses to pass budget resolutions, and the President appears to have forgotten about his prior statements of wanting to slow entitlement spending growth. Republicans therefore need to insist on short-term debt limit increases to create repeated deadlines to force spending issues to be considered. Yes, this is messy and undesirable, but if the President and Leader Reid would do their job it would not be necessary.

I recommend leaving a debt limit increase out of this bill, to force a separate negotiation on entitlement spending in Q1 of next year. Future debt limit increases should be of no more than one year each until the Senate starts passing budgets.

Bob Woodward’s book describing the summer 2011 negotiations showed a President whose top priority was getting a debt limit increase big enough to avoid any further fiscal deadlines until after the election. If accurate, that suggests that the President’s new goal might be to get a new debt limit increase to last beyond 2016 so he can get all this fiscal stuff behind him and not be bothered by it.

Spending

Nothing like a cool $175 B more highway spending to start the new year, is there? This is trade bait, but Team Obama also knows that Rs are always tempted by more money for roads.  Note that he didn’t ask for more money for rail or mass transit, or green energy to make it more attractive to Republican spenders.

It appears the President doesn’t want to offset the massive cost of a permanent “doc fix.”  That’s really, really expensive, and it further worsens our Medicare spending problem.

I don’t know enough about the Menendez/Boxer housing bill, but I’ll bet the President would give it up to get a deal.

In this proposal the proposed $1.6 trillion in specific tax increases, hundreds of billions of dollars in detailed spending increases, and zero in specific spending cuts.

Future promises

Follow this logic.

In the summer of 2011, President Obama and Speaker Boehner failed to negotiate a Grand Bargain, so they enacted a law which created a Super Committee of Congress to find $1.2 – $1.5 T of spending cuts. In case the Super Committee failed, that law, the Budget Control Act of 2011, created a backup set of sort-of-across-the-board spending cuts to hit the same $1.2 T spending cut target.

The Super Committee failed, so the spending sequester is scheduled to begin one month from now.

The President, most Democrats and many Republicans in Congress want to reduce or delay the sequester.

The President proposes a one-year delay, which would increase the deficit by $109 B in 2013. He wants to enact (in December) mandatory savings of an equal amount, but he proposes no specifics.

In this offer he promises Republicans that the tax reform and entitlement reform that they so desire will be backed up by the threat of, wait for it, the sequester that will begin in early 2014.

See anything wrong with this logic?

Why should anyone believe that a sequester being delayed now will serve as a useful forcing mechanism to drive legislation in 2013 on Republicans’ top two fiscal priorities?

Senate Minority Leader McConnell was right to laugh at the President’s proposal, and Speaker Boehner was right to call it “silliness.”

This is not a serious offer.

(photo credit: Paul Couture)

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1.  I agree that Senate Democrats would likely block any bill that the President would veto. This means the veto threat is important principally to reinforce Leader Reid’s efforts to hold his Democrats together as a unified bloc.

But if I’m right that the President thinks he cannot afford to risk a recession, then the President needs a new law. Whether a bill dies in the Senate or as a result of his veto, in either case no law –> fiscal cliff –> recession –> severe damage to the rest of the President’s agenda. My hypothesis is that the President is unwilling to take that risk, so he needs the House and Senate to pass a bill he can sign. I think my argument holds whether the veto would be actual or merely a tool to reinforce his allies stopping a bill in the Senate.

2.  I agree that, were it not for the recession risk, many Democrats, possibly including the President, would think that no new law was a good fiscal policy outcome. Yes, the President and almost all Congressional Democrats say they want to extend current tax rates for the non-rich.  But if all tax rates go up, future deficits will be $5.4 trillion lower.  If the sequester is allowed to bind, deficits would be reduced by another $1.2 trillion over the next decade. This outcome, of no new law, would give the President a lot more fiscal flexibility.  The deficit and debt problem would be far from solved, but he would have more room to propose new spending that I’m guessing he wants.

There’s an interesting intra-Democratic party tension here. Which is more important to elected Democrats: preventing middle class tax increases or having more room to increase government spending? The President insists he wants to prevent tax increases on the middle class, but it’s easy to believe that he, and especially some Congressional Democrats, would be happy to have such broad-based tax increases to finance their desires to expand government.

If you think the President thinks the potentially quite significant fiscal policy benefits (from his point of view) of no deal are greater than the costs of a 2013 recession and the damage it would do to his entire policy agenda, then you disagree with me and should conclude the President is not bluffing.

1. There are clearly some important Congressional Democrats (e.g., Senator Patty Murray) who appear willing to risk a recession so they can have more money to spend. I disagree with those who suggest those Congressional Democrats would block a bill that the President wanted to sign. If he wants a deal, he’ll be able to deliver the Democratic votes to pass it, and if he wants a bill blocked, they’ll block it for him.

Indeed, the President’s greatest tactical weakness is the varying views within the Democratic party, and especially differences between confident liberals like Senator Murray and nervous in-cycle moderates. Congressional Republicans need to figure out how to expose and exploit these differences and split Congressional Democrats. I will address that in a future post.

5.  One wise friend thinks the President is so confident that he would win an early 2013 blame game that he is willing to risk a recession.

In this view you agree that the President still wants and needs a new law to avoid a recession. You also think that not only does the President think he has negotiating leverage now, he thinks his leverage would increase after the new year if there is no new law. You would argue that he is willing to gamble that, faced with the prospect of being blamed both for tax increases and triggering a recession, Republicans would quickly fold in January 2013 if there is no deal. Therefore, you think he thinks risking a recession still won’t result in a recession, because it will end quickly when Republicans cave.

Thanks to all who provided great feedback and counterarguments.  For now I’m going to stick with my original view. I think the President thinks he needs to get a deal because I think his highest priority is (and should be) avoiding even the risk of triggering a new recession in the first year of his second term.

What scares me more is that I fear the President wants a deal but doesn’t know how to get one with Republicans. My working hypothesis is that the President is an ineffective negotiator when dealing with those who disagree with him. This view is heavily reinforced by Bob Woodward’s book The Price of Politics.  Other than two years ago when he swallowed the Republican view whole and extended all tax rates, the President is oh-for-Administration in major bipartisan legislation.  At the moment I worry less about the President’s goals and priorities, and more about his negotiating skill and his capacity to reach agreement with those with whom he strongly disagrees.

(photo credit: Jim Moran)

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Conventional wisdom: To achieve his desired fiscal policy outcome (big tax rate increases on the rich), the President is willing to risk tax increases on all income tax filers.  He is also willing to risk the political blame for middle class Americans paying higher taxes because he thinks he can shift most of the political blame onto Republicans.  He is therefore willing to veto a bill he doesn’t like and bear the consequences of having no bill, if that’s what is needed to gain negotiating leverage.  His veto threat is credible.

This conventional wisdom makes three key assumptions.

1. The President’s top economic policy priority is his fiscalpolicy goal (raising taxes on the rich).
2. In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
3. He will make his veto decision on these two bases: fiscal policy and relative political blame.

Key flaw in the conventional wisdom:  The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013.

I make different assumptions.

1. If there is no bill, the U.S. economy will probably dip into recession for much/most/all of 2013, and it’s impossible to predict whether such a recession would be short-lived.
2. A 2013 recession would be terrible for the country and terrible for the Obama Presidency. It would limit the President’s options across his entire policy agenda, economic and non-economic.  And it could define and dominate his entire second term.
3. President Obama believes #1 and #2, and therefore avoiding the risk of triggering a recession with his veto is an even higher policy priority than his fiscal policy goal.
4. The President wants to get things done. He cares more about his own chances for policy success (across the entire breadth of his agenda, whenever he figures out what it is) than he cares about relative political blame.  A scenario in which Republicans get most of the blame for a veto-triggered recession is still a loser for him if it means he can’t accomplish his second term goals.

If my assumptions are correct, then the President cannot afford to veto a bill and have no compromise enacted.  Even if doing so increases dramatically the chance of getting his top fiscal policy priority, and even if he would bear only a small portion of the political blame for a legislative failure and the pain of broad-based tax increases, his veto would trigger a recession that would severely damage his agenda at least in 2013.

President Obama’s veto threat decision is not just about fiscal policy, and it’s not just about who gets blamed for a legislative failure.  It’s about whether the President wants to cause a recession in 2013 and hamstring his second term.  No matter what he or his advisors say, he cannot afford to take that risk.

(photo credit: Kaptain Kobold)

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1.  The President upped his demands today.  He had been previously been demanding that income tax rates increase on “the rich.” Treasury says that doing so would raise $442 B of revenues over the next decade. Today the President said that “extending further a tax cut for folks who don’t need it, … would cost close to a trillion dollars.” That means his opening bid is assuming much more than just increasing the top two rates.

Using Treasury numbers, one could get to just shy of a trillion dollars by including the following Presidential proposals to “sunset tax cuts” that would affect “the rich” (in all cases, incomes > $200K for single filers, and > $250K for married filers):

• Increase the top two income tax rates;
• Phase out the personal exemption for upper-income taxpayers (aka “PEP”);
• Limit itemized deductions for the rich (aka “Pease”);
• Tax capital gains at 20% (the pre-2001 rates);
• Tax dividends as ordinary income (the pre-2003 policy); and
• Raise estate and gift taxes to 2009 levels.

We may not, however, be able to stop at $1 trillion.  I am told that in other contexts the President’s team (including Acting OMB Director Jeff Zients in public remarks today), are saying the President’s opening bid is not $1 trillion, but $1.5 trillion of new revenues, raised entirely on the individual side.  I am trying to confirm this, and I wish someone would ask Jay Carney what the President’s revenue number is for lame duck / fiscal cliff negotiations. In his press conference, the President used $1 trillion to describe one possible policy outcome, rather than as a description of his negotiating position. That is at least consistent with a higher $1.5 trillion number.

2.  Over the past five days the President and his team have not insisted that tax “rates” go up, but instead that tax “cuts” for the rich not be extended. Like many others I had at first been interpreting that as a sign of potential flexibility, that he might be open to Speaker Boehner’s idea of raising taxes on the rich by limiting or eliminating their tax preferences. I now have a different view, shaped principally by a new understanding of the size of the tax increase the President is requesting.

I think the Administration wants to raise a lot of revenue ($1T – $1.5T), and they know that it is infeasible to raise that much without raising tax rates.

I now think the ambiguity, the choice not to use the word “rates,” was not to allow for negotiating flexibility but instead to allow flexibility to demand more than just rate increases on the rich. By using “tax cuts” rather than “tax rates,” they can make their total opening bid $1 or even $1.5 trillion.

This is a significantly more pessimistic interpretation of the same language than I had previously, and it’s more pessimistic than most other observers.  If I’m right, not using “rates” is part of a strategy to set an absurdly high opening bid, one so high that makes it harder to close a deal during the lame duck session.

1. It seems like the President is thinking about the threat of tax increases (aka “going over the fiscal cliff”) in relative negotiating terms, and not as much in absolute policy terms. That is, his language suggests that he thinks no legislative deal would be worse policy and worse politically for Republicans than it would be for him. If he’s right, then that should give him leverage in the negotiations, because Republicans should be willing to “pay more” to avoid that stalemate outcome.

The problem is that he has a responsibility to think about a stalemate not just in relative terms (and especially not just in relative political/blame terms), but also as a matter of absolute policy.  No matter who gets blamed for it, a legislative stalemate leads to a terrible short-term macroeconomic consequence:  increased unemployment and a new recession, says the Congressional Budget Office. The President’s public posture treats this as if it’s not a big deal because it’s worse for Republicans.  Far more importantly, it would be a terrible outcome for the country.

(White House photo by Pete Souza)

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I think the most positive thing that can be said about the President’s statement today is that he didn’t say anything that clearly made a deal more difficult.  With one important exception, he didn’t budge on substance …

… The one important exception is that today the president did not insist on raising tax rates on the rich, only that they “pay more in taxes.”  I assume this was intentional.  It allows for at least a portion of the deal like that suggested by the Speaker’s comments:  scale back tax preferences for the rich without raising their marginal rates.  Of course, that’s only part of what the Speaker said was necessary, but it’s a critical part.

My interpretation was far from unique.  Several other observers drew similar conclusions from the President’s apparent constructive ambiguity. It appeared the President was, in reaction to Speaker Boehner, leaving the door open to a deal that raised taxes on the rich but did not raise their tax rates.

But later that same day the President’s press secretary Jay Carney reiterated the President’s prior veto threat:

MR. CARNEY:  The President would veto, as he has said and I and others have said for quite some time, any bill that extends the Bush-era tax cuts for the top 2 percent of wage earners in this country, of earners in this country.

I think that means the President would veto a bill unless the top rates go up.  He is not requiring that they increase to pre-Bush levels (i.e., not requiring that the top rate increase from 35% to 39.6%), but he is requiring that the 35% number increase, since otherwise the bill would be “extend

The post The President sends mixed signals on the fiscal cliff appeared first on Keith Hennessey.

I will describe and interpret both leaders’ statements, then offer a little analysis of the two positions together. I need to emphasize that at this early stage, anyone’s interpretations and predictions are highly speculative. I am doing little more than making educated guesses; then again, so is everyone else.

Both leaders deserve credit for making serious and fairly detailed policy speeches. Both are contributing significantly to the public debate by laying out their views and arguments for all to see. Public policy would be sufficiently improved if we had more serious public discussion like this.

Speaker Boehner’s statement

Speaker Boehner opened that public discussion on Wednesday.

• He frames the election result, in which President Obama and a House Republican majority were both reelected, as “a mandate for us to find a way to work together,” not “to compromise on our principles,” but instead “to creating an atmosphere where we can see common ground when it exists, and seize it.”  His general tone is cooperative.
• He leans heavily against trying for Grand Bargain II during the lame duck session. He probably thinks (correctly) that it’s infeasible. Based on earlier press reports, he may also think it’s inappropriate to make such large policy changes with a bunch of retiring members. Better to wait for the new Congress and take the time to do it right.
• Here is his key language for the next two months:

What we can do is avert the cliff in a manner that serves as a down payment on – and a catalyst for – major solutions, enacted in 2013, that begin to solve the problem.

• As a policy matter he criticizes temporary policy changes. As a practical legislative matter, he suggests a short-term trade (which I’ll describe in a moment) to buy up to a year to legislate a big fiscal solution.
• For that bigger solution he is explicit about being willing to agree to more total government revenues, but only under a few conditions:
  • Those revenues should come as part of base-broadening tax reform that produces faster economic growth;
  • That tax reform should lower marginal tax rates;
  • This should “mak
    [e] real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions.”
• He explicitly links higher revenues to entitlement reform that cuts spending:  “[T]o garner R support for new revenues, the president must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt”
• I can’t find an explicit indication that the Speaker is willing to have higher taxes on “the rich” (however one defines that), but I think it’s implied.  It was certainly true in the Portman/Toomey offer in the SuperCommittee last fall.  More on this in a bit.
• Finally, he says “the President must lead.”

Here’s my summary of the Boehner formula:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

If I am interpreting him correctly, the key trade implied by Speaker Boehner is that Republicans would agree to higher average tax rates paid by the rich, but not higher marginal tax rates.  The rich would therefore pay higher taxes, but the tax on their last dollar of income would not go up.  Thus more revenue would be raised from them, and they would be paying more in taxes, but their incentive to work and invest more at the margin would not be dulled.  The Speaker conveys this by distinguishing between “revenues” and “tax rates.”

Some in the press have reported this as a new policy position for the Speaker. While it’s more directly stated and blunt, I’m not seeing any significant change from his position in the summer 2011 Grand Bargain negotiations with the President. My simple version is that the Speaker is taking his then-private (but well-known) position public, and suggesting an open legislative process instead of private one-on-one negotiations. Any reporter who frames this as a big policy change hasn’t been paying close attention.  Despite everything you’ve read, the bright line that Republicans purportedly drew on taxes was always somewhat blurry.

It is, however, unclear to me what the Speaker means by a down payment to be enacted in the lame duck session.  My best guess is that it might involve some modest entitlement reforms, plus scaling back some tax preferences for high-income tax filers, plus an extension of all current (2012) rates.  If I’m guessing right, the short-term deal would include higher average taxes for the rich but no increases in their tax rates.  I think the Speaker’s long-term framework would require their marginal tax rates to decline as a part of tax reform, rather than just not increase.  I emphasize that here I’m really just guessing.

The President’s statement

OK, let’s do the same with the President’s statement today.

• “Confrontational” is too strong to describe the President’s language and tone. “Insistent” is probably better.  It’s not surprising that the President insists the election gave him a mandate to implement his fiscal policies.  Key quote:

On Tuesday night we find that the majority of Americans agree with my approach. That’s how you reduce the deficit … with a balanced approach. … So our job now is to get a majority in Congress to reflect the will of the American people.

• Like Speaker Boehner, the President is reiterating his earlier substantive position.  He wants to extend all income tax rates except for those with incomes greater than $200K/$250K.  He wants those rates “for the rich” to be allowed to increase on January 1 as they will if there is no new law.
• The President praises the Senate for passing a bill that matches his policy of raising tax rates for incomes > $250K, and he says the House should pass that bill and he would sign it.  But aside from this statement, he does not insist that tax rates on the rich pay more.
• He also reiterates major elements of his budget: spending increases on education, infrastructure, clean energy, and veterans, along with (a claimed) “$4 trillion of deficit reduction over the next decade.”
• Interestingly, he does not frame the choice as “raise taxes on the rich to reduce the deficit.”  He instead frames it as “raise taxes on the rich and cut spending to reduce the deficit and make needed investments (i.e., government spending increases).”
• Once again his key word is that any deficit reduction package must be “balanced.” By this he means that it must raise taxes on the rich.
• He hits hard, a couple of times, that the short-term solution should be the common denominator – Congress should extend the tax rates except those for the rich.  The top tax rates, he suggests, can then be negotiated as part of a broader fiscal deal next year.
• He also says

I was encouraged to hear Speaker Boehner agree that tax revenue has to be part of the equation, so I look forward to hearing his ideas when I see him next week.

Here’s my summary of the Obama formula:

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

It appears that President Obama also has low expectations for a Grand Bargain II during the lame duck session. I think the most positive thing that can be said about the President’s statement today is that he didn’t say anything that clearly made a deal more difficult.  With one important exception, he didn’t budge on substance or even frame his prior positions in a more conciliatory or cooperative manner.  That shouldn’t be too surprising in an opening framing statement for negotiations, but it’s a pretty sharp contrast with the Speaker’s statement yesterday.

The one important exception is that today the president did not insist on raising tax rates on the rich, only that they “pay more in taxes.”  I assume this was intentional.  It allows for at least a portion of the deal like that suggested by the Speaker’s comments:  scale back tax preferences for the rich without raising their marginal rates.  Of course, that’s only part of what the Speaker said was necessary, but it’s a critical part.

Analysis

Let’s compare the two formulas:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

Both formulas are incomplete so far, in that neither covers the sequester or the debt limit.  The sequester kicks in January 1 if the law isn’t changed.  The debt limit is on a slightly slower timeline.

Initial press coverage focuses on the possibility of a deal on taxes on the rich.  As you can see, there are a lot of moving parts left to resolve even if they do work out that biggest difference.

The key conclusions I draw about this week are:

• A Grand Bargain II in the lame duck session is highly unlikely.
• Both sides appear willing to continue that negotiation next year, maybe through the traditional legislative process rather than in private.
• A middle ground on one issue could involve higher average tax rates for the rich with no increase, or even a cut in their marginal rates. This could be accomplished by scaling back tax preferences for high income tax filers.
• The Speaker needs to do this, substantively and politically within his conference, through tax reform.
• Both sides appear willing to discuss entitlement spending changes.  The Speaker is once again more aggressive on these than the President, and the Speaker insists that any revenue increases must be accompanied by entitlement spending changes (often mislabeled as “cuts”).

Q:  OK, but that’s next year.  What about now?  What’s going to happen between now and the new year?

A:  I have no idea. Neither does anyone else, including the participants.  A smaller version of that deal is, in theory, possible during the lame duck session:  incremental changes to the major entitlements plus scaling back tax preferences for the rich, and keeping all the rates in place for, say, a year.  This could fit the Speaker’s idea of a “down payment on reform,” and could meet the President’s test of having the rich pay more, without crossing the Speaker’s bright line of not raising anyone’s rates.  There are a lot of moving parts in that deal.  It’s possible to do such a deal if both sides are skilled and constructive negotiators.  Those are big IFs.

I apologize for the complexity of this post—there are a lot of moving parts, and I’m doing the best I can to clarify things.  Even if I’m a bit lucky and right on all of this, my answer is still incomplete because it leaves the short-term sequester questions unanswered. I am afraid at this point it’s the best I can do.  I will try to improve my analysis as we move forward.

(photo credit: Sam Effron)

The post Fiscal cliff diving appeared first on Keith Hennessey.

President Obama, you and Speaker Boehner were unable to reach a big picture budget agreement last year.  If you are re-elected and Mr. Boehner continues as Speaker, why should voters expect a different result over the next four years? Why shouldn’t Americans expect the budget stalemate just continue?

Separate but related, at some point I assume President Obama will say he inherited our current deficit problems. This is a little long, but it would be great to see Governor Romney respond like this:

Mr. President, for almost four years you have been telling us that you inherited huge fiscal problems, and you have told us that the past four years of trillion dollar deficits aren’t your fault. Why have you spent so much time complaining about who is to blame for our Nation’s deficit and spending problems and so little time solving them?

The budget you propose would accumulate another $6 trillion of debt over the next decade. The long-term budget problems are even more severe, and you still haven’t proposed a solution to them. Presidents are supposed to lead, and you have not.

Yes, we know that you want to raise taxes on the rich. You think the problem is that government doesn’t have enough money, so you propose tax increases. But if we did what you propose we’d eliminate only one-twelfth of next year’s deficit, and only one-sixth of our deficit ten years from now. I think the problem is that government is spending too much, and the obvious solution is to reduce the size of government.

If I am elected President, I will make reducing deficits and cutting government spending top priorities. I will propose a budget that solves our short-term and long-term deficit and government spending problems, and I will take all the energy that you have devoted to blaming someone else, and instead dedicate it to working with anyone, of either party, who will work me to solve the problem. I have already proposed several specific ideas, including changes to the major entitlement programs that drive our fiscal problems.

It is time to stop worrying about who gets blamed when things go wrong and start working on getting economic policy right.

(photo credit: Randy Slavey)

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Ms. Montgomery’s story offers two premises:

1. Mr. Ryan “sat on the sidelines” rather than act, and in doing so he failed to behave as a responsible legislator;
2. He would rather espouse conservative principles than engage in the messy business of bipartisan compromise.

Here is Ms. Montgomery’s core assertion:

But knowledge is not action. Over the past two years, as others labored to bring Democrats and Republicans together to tackle the nation’s $16 trillion debt, Ryan sat on the sidelines, glumly predicting their efforts were doomed to fail because they strayed too far from his own low-tax, small-government vision.

Here is her evidence:

• Ryan voted against the Bowles-Simpson recommendations;
• Through much of 2011, he insisted publicly that a “grand bargain” on the budget was impossible; and
• He “asked Boehner not to name him to the congressional ‘supercommittee’ that took a final stab at bipartisan compromise last fall.”
• He voted against a measure to dial back unemployment benefits and extend a temporary payroll tax holiday.

Not mentioned

She writes that Mr. Ryan “did draft a blueprint for wiping out deficits by 2040,” but she fails to mention that he passed that plan through the House. She does not report that Mr. Ryan’s staff were providing behind-the-scenes technical assistance to Speaker Boehner during the Grand Bargain negotiation. She doesn’t report that Mr. Ryan loaned his budget committee staff director to Mr. Hensarling on the super committee. She doesn’t mention that Mr. Ryan’s prediction that the super committee would fail came true, or that the Obama White House was AWOL during the super committee negotiations. She doesn’t mention that he voted for the Budget Control At of 2011, for the tax rate extensions at the end of 2010, and for the FY 2012 Omnibus Appropriations Act, three major bipartisan fiscal laws that deeply split House Republicans.

Action

Did Chairman Ryan sit on the sidelines over the past two years? On April 15, 2011, the House passed the FY 2012 budget resolution. On March 29, 2012, the House passed the FY 2013 budget resolution. Both were written by Mr. Ryan, passed by him out of his Budget Committee, and he managed the floor debate for each.

It is true that Mr. Ryan never reached a bipartisan conference agreement on either of his two budget resolutions, but that’s because the Senate never did its work. Mr. Ryan’s Senate counterpart, Senate Budget Committee Chairman Kent Conrad (D), did not pass a Senate budget resolution for any of the last three years. It is unfair to criticize Mr. Ryan for failing to reach a bipartisan compromise when his Democratic counterpart didn’t even show up or do his job.

More importantly, Mr. Ryan acted. His job as Budget Committee Chairman is to pass a budget resolution, and he did his job both years. Ms. Montgomery criticizes Mr. Ryan for failing to cut bipartisan deals in ad hoc negotiating forums. Yet he was not a member of two of the three, and she fails to give him credit for doing his job by passing legislation. As Budget Committee Chairman Mr. Ryan produced more concrete legislative progress than the Bowles-Simpson Commission and the super committee combined.

Bipartisanship

Ms. Montgomery suggests that being conservative and being bipartisan are mutually exclusive. That is a false premise.

And he has earned wide praise for tackling Medicare, the nation’s biggest budget problem, despite the political risk.

But as Washington braces for another push after the election to solve the nation’s budget problems, independent budget analysts, Democrats and some Republicans say Ryan has done more to burnish his conservative credentials than to help bridge the yawning political divide that stands as the most profound barrier to action.

Ms. Montgomery fails to mention Mr. Ryan’s two bipartisan Medicare plans. He developed the first with former Clinton Budget Director Alice Rivlin during the Bowles-Simpson Commission and negotiated the second with Democratic Senator Ron Wyden. Rivlin-Ryan (which can point to the bipartisan Breaux-Frist-Thomas as its intellectual forefather) and Ryan-Wyden are major bipartisan structural Medicare reforms.  Ryan-Wyden is the Medicare policy assumed in the budget resolution passed by the House this year, even though it moved a big step left from the all-Republican plan assumed last year.  Medicare is one of the biggest fiscal challenges America faces. Mr. Ryan is the only one who has made concrete legislative progress on a bipartisan Medicare plan since 2003.

Maybe Ms. Montgomery didn’t know about Rivlin-Ryan and Ryan-Wyden? Here is what she wrote on December 14, 2011 in a story titled “Paul Ryan to announce new approach to preserving Medicare”:

Working with Democratic Sen. Ron Wyden (Ore.), the Wisconsin Republican is developing a framework that would offer traditional, government-run Medicare as an option for future retirees along with a variety of private plans.

… The center formed its own debt-reduction committee, chaired by former senator Pete Domenici (R-N.M.) and former Clinton budget director Alice Rivlin, who has also worked with Ryan on his premium support approach to Medicare.

It is easy to write that someone is not bipartisan when you ignore his bipartisan work. In this case the premise is incorrect and Ms. Montgomery knows it’s incorrect.

The Biden comparison and the Commission

Ms. Montgomery contrasts Mr. Ryan with VP Biden:

Democrats say he would make a very different sort of vice president than Joseph Biden, a natural glad-hander who has taken the lead for Obama in negotiations with Republicans over taxes and deficit reduction.

We don’t know who are the Democrats who make this comparison, but we do know that VP Biden’s Communications Director, Shailagh Murray, co-authored at least six stories with Ms. Montgomery when she worked at the Post.

Like many others, Ms. Montgomery’s thesis relies heavily on Mr. Ryan’s no vote in the Bowles-Simpson Commission. Never mind that Senate Finance Committee Chairman Max Baucus (D) also voted no, or that President Obama quietly shelved the recommendations of this commission that he created to report to himself. Never mind that, unlike President Obama, Mr. Ryan proposed his own long-term solution after voting no, then passed it in the House.

The Ryan vote is a perfectly obvious tactical move once you understand the structure of the commission and how it interacts with fiscal negotiations.  Mr. Ryan (and Mr. Camp and Mr. Hensarling) were members of a commission that reported to President Obama.  Yet they, as the representatives of House Republicans, represent the opposite pole from President Obama in fiscal negotiations.

Had the House Republicans on the commission voted aye, President Obama could then have received the negotiated solution and proposed policies one big step to the left, while trying to claim that he was supporting the recommendations (as he now claims). Ryan/Camp/Hensarling (or their leaders) would then be forced to negotiate a compromise between Bowles-Simpson that they had already endorsed and a more liberal position later chosen unilaterally by President Obama. Agreeing to Bowles-Simpson would have been only the first of two rounds of concessions made by House Republicans, given that the President structured the commission so that he alone would get a second bite at the apple.

The Senate Republican appointees (Coburn, Crapo, and Gregg) voted aye in the commission, but they were able to do so in part because they knew the House Republicans were voting no. The Senate Republicans could vote to move the process along, while House Republicans saved their aye vote for a round two in which the President was at the table.

Since President Obama ignored the Bowles-Simpson recommendations, that second round instead started from scratch in the Grand Bargain negotiations between the President and Speaker Boehner, who represent and lead the two poles of the negotiation.  Ms. Montgomery contrasts Mr. Ryan’s position in the commission with Speaker Boehner’s in the Grand Bargain negotiation, but Speaker Boehner was dealing directly with the President rather than as the first step in a potential two-step process.  Mr. Boehner could go farther than could Ryan/Camp/Hensarling because he knew that he wouldn’t get double-dipped.  Even so, President Obama tried to double-dip the Speaker when he used the Gang of Six proposal to demand $400 B more in tax increases and that the agreed-upon ceiling for revenues instead be a floor.

Senator Conrad and the Gang of Six

Ms. Montgomery includes this quote from Senator Conrad:

“His approach — my way or the highway — is precisely what’s wrong with this town. It’s the triumph of ideology,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.), who served with Ryan on the independent fiscal commission chaired by Democrat Erskine B. Bowles and former Republican senator Alan K. Simpson of Wyoming. “The hard reality is, given the fact that we have divided government, both sides have to compromise in order to achieve a result. And Paul has refused to do that.”

Let’s compare and contrast:

• During the Commission, Mr. Ryan worked with Dr. Rivlin to develop a bipartisan compromise Medicare plan. He voted no on the non-binding Bowles-Simpson recommendations, then introduced his own plan (a step to the right of B-S) in the House and passed it. The following year he renegotiated Rivlin-Ryan, compromised with Senator Wyden and produced Ryan-Wyden, included it in the House budget plan, and passed it.
• Senator Conrad voted aye on the non-binding Bowles-Simpson recommendations. He then introduced a different plan (a step to the left of B-S) as leader of the Senate’s Gang of Six. He could have used his Gang of Six plan as the basis for a bipartisan budget resolution but, at Leader Reid’s direction, chose instead to do nothing. He marked up no budget resolution. Instead, he and the Gang rolled out their plan at exactly the wrong moment. President Obama said nice things about it and upped his tax increase demand of Speaker Boehner, leading to the collapse of the Grand Bargain negotiations.
• President Obama created the commission, waited for its report, and then ignored it. He waited until Mr. Ryan proposed a budget, then attacked both the budget and Mr. Ryan in a speech at George Washington University.

Senator Conrad says the problem with Washington is the triumph of ideology. I think the problem is that certainly elected officials, including Chairman Conrad and President Obama, did not do their job.

The GW Speech

Ms. Montgomery takes a speech in which President Obama attacked Mr. Ryan and portrays the event as reflecting poorly on Mr. Ryan (emphasis is mine):

Ryan, too, blames the president. “Obama didn’t want success,” he said in November. He said that became apparent seven months earlier when Obama responded to the recommendations of the Bowles-Simpson fiscal commission by rolling out his own deficit-reduction plan. Unaware that White House aides had invited Ryan to hear Obama’s speech at George Washington University — and that Ryan was sitting in the front row — the president blasted Ryan’s budget and renewed his call for higher taxes on the wealthy.

“It became clear to me when Obama invited us to GW . . . that he wasn’t going to triangulate and embrace Bowles-Simpson. He decided to double down on dema­goguery and ideology, and he has stuck to that ever since,” Ryan said.

According to Ms. Montgomery, the President was simply the victim of poor staff work. Mr. Ryan is portrayed as the aggressor. Yet in Bob Woodward’s book we read:

“We’re not waiting,” the president said in exasperation. He wanted to rip into Ryan’s plan.

… “I want to say this idea that we can’t get our deficit down without brutalizing Medicaid, it’s a dark view of America,” he said. He wanted that idea in the speech.

… Obama was getting fired up as he worked through what to say and how to say it.

I believe there was a staff foul-up in inviting Mr. Ryan to the speech, but the President’s partisan attack was neither unintentional nor staff-driven. It was a planned attack devised by President Obama that ripped into Mr. Ryan’s plan and poisoned the well. Yet somehow Ms. Montgomery portrays the President as the victim of Mr. Ryan’s “blame.”

Timing

For decades the Washington Post was the paper of record for DC.  Over the past few years POLITICO has supplanted the Post in that role. When the Post’s staff publishes an obviously partisan hit piece with such weak intellectual support less than six weeks before Election Day, they destroy any credibility they have for objectivity or nonpartisan reporting.  That’s a shame.

(photo credit: Chealion)

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Independent analysis shows my plan for reducing the deficit would cut it by $4 trillion. I’ve already worked with Republicans in Congress to cut a trillion dollars’ worth of spending, and I’m willing to do more.

Here is an excerpt from Bob Woodward’s new book, The Price of Politics:

Obama was getting fired up as he worked through what to say and how to say it. He wanted a $ 4 trillion deficit plan too, but the cuts were too severe. The progressive and liberal base would be deeply distressed.

Sperling suggested an old trick from the Clinton years: Stick with the $ 4 trillion— that was easy to understand— but instead of projecting it over the traditional 10 years, do it over 12. No one would really notice. Few would do the math. By stretching the plan out and loading most of the cuts into its final years, the early cuts were substantially smaller.

I did the math. When President Obama rolled out his $4 trillion number in an April 2011 speech I wrote:

$4 trillion in deficit reduction over 12 years does not “match” $4 trillion in deficit reduction over 10 years. It’s not even close.

The twelve year timeframe is a red flag.  Federal budgets are measured over 1, 5, and 10 year timeframes.  Any other length “budget window” is nonstandard and suggests someone is playing games.

… In this scenario, $4 trillion of deficit reduction over 12 years translates into about $2.8 trillion over 10 years.

Three days later, Lori Montgomery of the Washington Post quoted White House spokeswoman Amy Brundage:

Under the administration’s estimates, the president’s framework saves $2.9 trillion over 10 years and $4 trillion over 12 years…

Mr. Woodward’s book confirms my analysis and attaches intent to President Obama’s $4 trillion claim.  If Mr. Woodward has it right, President Obama is intentionally misleading you by using this $4 trillion number (while remaining technically correct since he is not now specifying a timeframe).

What about the “independent analysis” cited by the President? He is referring to this February 2012 statement from Robert Greenstein, head of the Center on Budget and Policy Priorities, a liberal think tank. Here is the key quote:

In total, deficit reduction over the coming ten years (fiscal years 2013-2022) — through a combination of the proposals in the budget and measures enacted in 2011 — would equal about $3.8 trillion, not counting savings from reductions in costs for the wars in Iraq and Afghanistan, according to Table S-3 in the President’s budget.

At first glance it appears this supports the President’s “$4 trillion” number, and may even support a claim of $4 trillion of deficit reduction over 10 years rather than 12. But when we look more carefully:

• We see that Table S-3 in the President’s budget is titled “Deficit reduction since January 2011.” The President is, as Dr. Greenstein acknowledges, counting deficit reduction already enacted into law as if it were part of a new deficit reduction proposal.
• At the same time as the Greenstein statement I wrote about this table, separating out past from proposed future deficit reduction.  I came up with $2.764 T of new deficit reduction over 10 years, which is again consistent with the White House’s earlier statement of $2.9 T over 10 years and $4 T over 12.
• Even my $2.764 T is too generous. When you drill down into the details the Administration takes credit for savings that really shouldn’t count. Any measure of deficit reduction is vulnerable to baseline gaming. You should always be wary of claims of deficit reduction.

Let’s return to the President’s quote, which I emphasize he is saying at almost every campaign stop this month. President Obama is boasting about “independent analysis” that simply cites a number from a table in the President Obama’s budget. This is, to me, a new definition of “independent.”

President Obama is not technically lying when he says his budget proposes $4 T of deficit reduction. He is instead using one of two “tricks” to mislead the listener:

• He is using a nonstandard 12 year timeframe to make his proposed deficit reduction appear a bit more than $1 trillion larger over the next decade than it is; and/or
• He is misrepresenting a combination of already enacted deficit reduction with that which he proposes for the future.  Re-read the quote up top and tell me if you think “and I’m willing to do more” suggests that he is proposing $4 trillion of future deficit reduction.

If Mr. Woodward is right, President Obama is intentionally using these numbers, these “tricks,” to mislead you. He wants to claim credit for as much deficit reduction as is in the Ryan budget, but he didn’t want to propose the spending cuts and/or tax increases to hit that target:  “

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• Over the past 50 years federal taxes have averaged 18% of GDP.
• Governor Romney proposes taxes “between 18 and 19 percent” of GDP.
• The House-passed (“Ryan”) budget proposes long-term taxes of 19% of GDP.
• President Obama’s budget proposes long-term taxes at 20% of GDP.*
• The Bowles-Simpson plan proposes long-term taxes at 21% of GDP.

See how nicely that works?  18-19-20-21

There is a danger that measuring tax levels as shares of GDP will lead to casually concluding that “only one or two percentage points difference” is not a big deal. This would be a huge mistake.

• GDP this year will be about $15.5 T. That means each 1% of GDP in higher taxes is about $155 B more taken by the government from those who earn it.
• Going from 19% of GDP to 20% of GDP means a total increase of all federal taxes of just more than 5% (20-19 / 19 = 5.26%)
• For comparison, the ongoing partisan fight over whether to extend today’s tax rates for “the rich” is a fight about half a percent of GDP. The difference between the Ryan and Obama long-term tax levels is twice as big, and the difference between the Ryan and Bowles-Simpson plans is four times as big. Also, the legislative difficulty of closing these gaps is not linear, meaning it is more than twice as hard to close a gap that is twice as large, because policymakers make the easiest changes first.

I intend this rule-of-thumb to be useful for medium-term and long-term fiscal policy discussions, not  for short-term debates. Federal taxes are pro-cyclical, meaning that when the economy is weak, taxes as a share of GDP drops. Taxes/GDP is quite low right now, but that’s in part because the economy is still quite weak. The above numbers are what each policymaker has proposed for their long-term tax share of GDP, measured 5-10 years from now.  In each case they would start with taxes lower than their long-term share. Taxes/GDP would then gradually climb through the next ten years, stabilizing at the rates specified above.

I put an asterisk after the Obama line. The Ryan and Bowles-Simpson plans would stabilize debt/GDP in the long run, while President Obama’s would not. Since President Obama has not proposed a long-term fiscal policy solution, we don’t know whether his long-term fiscal solution, if he had one, would raise taxes above 20% of GDP.

Few seem to have noticed that Messrs. Bowles and Simpson have proposed long-term taxes that are significantly higher than those proposed by President Obama. The spending component of the Bowles-Simpson plan is between the House-passed (Ryan) plan and the President’s proposal, but it’s much closer to and shaped like the Ryan plan. I think that’s consistent with the political dialogue surrounding it, which sees Bowles-Simpson as a middle ground between the two parties.

But on taxes the Bowles-Simpson plan represents one end of the spectrum, not a middle ground, at least until (if) President Obama proposes a long-term fiscal solution. The tax component of the Bowles-Simpson plan is the highest (“leftmost”) of the three, at least for now. This provokes an interesting question for any elected official, of either party, who says he or she supports the Bowles-Simpson recommendations: “So, as part of a long-term fiscal solution, you’re OK with total tax levels five percent higher than those proposed by President Obama?”

Our long-term fiscal problems are immense, and some elected officials may knowingly choose these big tax increases as part of a package combining spending cuts and tax increases. I wonder, however, if some elected officials who have been attracted by the bipartisanship and centrist optics surrounding the Bowles-Simpson effort understand what they are supporting on tax levels. It would be a shame to unwittingly embrace such a massive tax increase.

(photo credit: David Stillman)

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Dr. Orszag argues that the Ryan budget is not a serious fiscal proposal.

In part because of his winning personality, Ryan … has convinced many in Washington that his budget blueprint is a serious proposal for solving our long-term fiscal problems. Unfortunately, it’s not. Let’s dig into the asterisks of Ryan’s plan and unearth the fine print.

Dr. Orszag’s principal critique is that the Ryan budget is short on details. He argues that the Ryan Medicaid block grant, tax reform, and nondefense discretionary spending cuts, are “capping and punting—limiting spending to a certain level but providing no specifics on how to achieve that number.” Later he argues that the lack of legislative detail creates business uncertainty.

The irony is that while in office neither Dr. Orszag nor his boss, President Obama, proposed any long-term fiscal reforms. Even after enacting the Affordable Care Act, which was purported to significantly address our long-term fiscal problems, the Obama Administration’s own numbers show that we’re still headed toward fiscal collapse.

Paul Ryan is chairman of the House Budget Committee. His day job is to develop and pass through the House a budget resolution, to reach a compromise with his Senate counterpart, and then to pass the compromise budget resolution through the House. For the two years he has chaired the committee Mr. Ryan has done his job, passing House budget resolutions in both years. He has been unable to finish his task because the Senate Democratic majority has not done its budget work the last two years. You can’t negotiate with something that doesn’t exist.

A budget resolution is like a blueprint for a new house. A blueprint specifies the size of the house, how many floors there will be, the sizes of each room, and where the walls will go. A blueprint does not specify where the couch will go in the living room or what color it will be.

While studying the draft blueprint, you and your spouse may not yet agree on the position, style, or even type of furniture to put in each room. Reaching such agreement may be quite difficult, and it may depend on how the rooms look once they are actually built. But to approve the blueprint you don’t need to reach agreement on the furniture details at such an early stage. All you need is to agree that the sizes and shapes of the rooms on the blueprint can accommodate the various detail options you are considering.

In the same way, the Congressional budget process separates debate on the topline numbers of fiscal policy from the legislative details of how those numbers will be implemented. Budget Committee Chairman Ryan’s job is:

1. to set overall fiscal goals for the federal government: total government spending, total taxes, and the deficits and debt that result;
2. to divide that spending up into about 10 categories (actually it’s divided by committee jurisdiction);
3. to set legislative processes that will ensure that subsequent legislation complies with Ryan’s numbers; and
4. to get a majority of the House to vote for all of the above.

After this budget resolution (“blueprint”) has been approved, then legislative action shifts away from Chairman Ryan and the Budget Committee and to the various committees responsible for writing legislation. The House Agriculture Committee develops a farm bill. That committee decides the details of how farm policy will be changed, subject to the numeric limits established in Ryan’s budget resolution. The two committees responsible for Medicare write legislation changing Medicare, which is again required to conform with the numbers in the budget resolution. The Ways & Means Committee writes tax reform legislation, subject to the revenue requirements in the Ryan plan.

To do his job, Chairman Ryan is not required to release any reform plans. He just has to produce a table of numbers, and if he does offer any details on how he thinks Medicare or Medicaid or farm subsidies or taxes should be reformed, those details are not binding on anyone. They are merely his suggestions to the committees responsible for writing the legislative details.

Why, then, might a Budget Committee Chairman publicly propose a broad outline of Medicare or Medicaid reform, or a pro-growth tax reform plan, if they are not binding? For two reasons:

• To build support among House Members whose votes he needs for his numbers by showing them sample reform plans consistent with his numbers; and
• To influence the legislative debate that comes later.

When Chairman Ryan approaches you, a House Member, and asks for your support for his budget resolution, you might express concern about the amount his budget “cuts” Medicare spending.  Mr. Ryan can then show you a plan he has developed that meets his spending targets and assuages your concerns on the details. If you vote for his budget resolution you are not, formally, voting for the particular Medicare or tax reform plan that Mr. Ryan assumed. You are only voting for the numbers, the spending and tax levels, that would result from such a plan. And if you don’t like the details of how Mr. Ryan might implement any proposed reform, you have plenty of opportunities to withhold your support for the actual legislation when it is later developed by other committees.

Chairman Ryan has, for example, supported two different versions of long-term Medicare reform. In 2011 he proposed eventually moving all new beneficiaries into a premium support system. In 2012 he teamed up with Democratic Senator Ron Wyden to propose a variant in which traditional fee-for-service Medicare would remain as an option for future beneficiaries. The numbers in the Ryan budget plan are consistent with either version of Medicare reform, and support of the Ryan budget plan allows the Congress to negotiate later on which version of reform makes most sense. Or it would, had the Senate Democratic majority done its work and passed a Senate budget resolution instead of punting again this year.

There is therefore nothing “unserious” about specifying only a broad outline for spending or tax reforms as part of a budget resolution. In fact, it’s standard practice for the legislative process.

On some of the specifics attacked by Dr. Orszag:

• Medicare premium support plans like Ryan/Wyden date back to the late 90s. The first of significance was proposed by Senator John Breaux (D) and Rep. Bill Thomas (R) in 1998.
• A Medicaid block grant was passed by a Republican Congress in 1995 and vetoed by President Clinton.
• The Ryan budget proposes revenue neutral tax reform. To find such a plan, visit DC and swing a cat. You’ll hit two or three.

Dr. Orszag is therefore attacking Mr. Ryan for doing his job as House Budget Committee chairman.  Dr. Orszag argues that Mr. Ryan is being disingenuous by providing insufficient detail on his policy proposals, when it is Dr. Orszag who is taking advantage of general ignorance of the budget process by suggesting that a budget resolution should offer the detail of implementing legislation. As a former director of CBO and OMB, he knows this.

This is a common ploy in fiscal politics. If your opponent proposes policy details, attack the most unpopular of those details. If he does not, attack his credibility for not providing sufficient detail. The only way to avoid this political trap is to avoid proposing any long-term fiscal policy solution and hope no one notices, as President Obama has done so far.

Dr. Orszag also conflates different types of criticisms of the Ryan budget:

• policy critique: “I oppose policy X in the Ryan budget;”
• legislative critique: “I don’t think policy X in the Ryan budget can get the votes it needs to become law;” or “If it is enacted, policy X will cause too much policy pain and eventually will be repealed;” and
• budget credibility critique: “If all policy assumptions in the Ryan budget were implemented as proposed, the numbers still don’t add up.”

Dr. Orszag opposes Mr. Ryan’s proposals for Medicare reform, Medicaid reform, tax reform, and discretionary spending. That’s fine, he’s entitled to his policy opinion.

Dr. Orszag also predicts that Members of Congress would, now or later, fail to support the amount of policy change needed to hit Ryan’s long-term spending and revenue targets. That’s a political/legislative prediction, and to judge it we also need to ask “Compared to what?” In isolation he is correct that it is quite difficult to get Members to vote for painful spending cuts and/or tax increases. But when you’re on your fourth year of trillion+ dollar deficits and the future looks even worse, that’s what leadership requires – making painful and unpopular policy choices. And when the path you’re on leads to a downgrade of the U.S. credit rating or, at some point, complete fiscal collapse, policy changes that were previously out-of-bounds will look less unattractive.

Dr. Orszag then morphs his policy critiques and legislative critiques into an attack on the credibility of Mr. Ryan and his budget plan, deeming it an “unserious” proposal. There is, however, a huge difference between “I don’t like the policies you propose” and “Your numbers don’t add up, your proposals are not serious.” Yes, the Ryan budget would require significant policy changes from our current path. But since our current fiscal path is headed toward disaster, that’s a good thing.

The Ryan budget is a serious fiscal policy roadmap. It proposes the detail required for its intended legislative purpose, and it offers a roadmap for future reforms. And until President Obama and a Democratic-majority Senate propose an alternative long-term path or are replaced, the Ryan plan is literally the only long-term game in town.

(photo credit: Roger Barone/Talk Radio News Service)

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The Associated Press’ Ben Feller asked President Obama this question yesterday (highlights by me).

AP:  Let’s say you win—okay, that’s a hypothetical that you would probably buy into. But say you win, but the House Republicans win again also, a likely possibility. How is that any different from what we have now? Why wouldn’t a voter look at that and say that’s a recipe for stalemate. How would you do anything differently?

THE PRESIDENT: Well, there are a couple things that I think change. No. 1, the American people will have voted. They will have cast a decisive view on how we should move the country forward, and I would hope that the Republican Party, after a fulsome debate, would say to itself, we need to listen to the American people.

I think what is also true is that because of the mechanisms that have been set up, agreed to by Republicans, that have already cut a trillion dollars’ worth of spending out of the federal deficit, but now we’ve got to find an additional trillion—$1.2 trillion, I guess—before the end of the year, means that the Republicans will have to make a very concrete decision about whether they’re willing to cooperate on a balanced package.

If they don’t, then I’m going to have to look at how we can work around Congress to make sure that middle-class families are protected, but that we’re still doing our—meeting our responsibilities when it comes to deficit reduction and investing in the future.

Here’s my attempted translation:

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This sounds like half of a recipe for continued stalemate, the premise of Mr. Feller’s insightful questions. All that is needed to complete the recipe is for members of next year’s House, and maybe Senate, Republican majority to believe that their constituents reelected them in part because of their economic policy views.

Logic problem: if you think the fiscal policy stalemate over the past two years is the result of extreme, crazy, intransigent House Republicans who refused to negotiate responsibly, what makes you think they would behave any differently over the next two years if they retain the majority? Why does President Obama, or why should you the voter, assume that they will change their behavior, given how unreasonable you think they have been so far? Won’t they be just as extreme?

A status quo election likely produces a stalemate in lame duck session fiscal negotiations, at least initially. Neither side will be able to legislatively force the other to cave. President Obama could sustain a veto, and Speaker Boehner could control what legislation is considered by the House. Any legislation would therefore have to be agreed to by both men, as well as by Leaders Reid and McConnell, each of whom would have the legislative strength to block legislation they oppose, no matter which party controls the Senate majority. After a status quo election, the two most likely lame duck scenarios are (1) a negotiated middle ground compromise or (2) a stalemate in which the fiscal cliff bites for a while, increasing pain and pressure on both sides until a compromise is reached.

President Obama’s “work around Congress” language confuses me. The Constitution grants the power of the purse to Congress, not the President. President Obama’s ability to take significant fiscal policy actions without a new law is, at best, extremely limited. In the short run he may have some flexibility to control the terms and timing of a sequester if there’s no lame duck deal, and this may give him a little more leverage in that struggle. But he certainly lacks the unilateral authority to raise taxes or to cut or increase spending beyond the amounts now specified in law. He certainly can’t do anything unilateral to address our medium- and long-term fiscal problems.

Mr. Feller asked the President, “How is that any different from what we have now. … How would you do anything differently?” There is one thing that would be different in a status quo election: President Obama would no longer be constrained by the need to be reelected. He, unlike Members of Congress, would have increased policy flexibility if he chose to use it. He could move to the center, as he did briefly after the 2010 election, and negotiate a short-term or even a long-term fiscal policy deal with Congressional Republicans.

If this is his plan, he isn’t giving any hint of it so far. President Obama could have offered Mr. Feller a game-changing answer by announcing a new substantive position. He could have said, “If House Republicans and I are reelected, I will propose a long-term fiscal policy solution based on the Bowles-Simpson recommendations, and I will negotiate in good faith with anyone willing to work constructively toward solving our long-term fiscal problems. I will seek principled compromise, even with those whose views are different from my own.”

Had he given this answer, he would ally himself with a small centrist coalition in the Senate that supported Bowles-Simpson. This would give a centrist/independent voter a concrete answer to Mr. Feller’s question, and would suggest that negotiations between the same parties might turn out differently next time, that a status quo election might not result in a continued fiscal policy stalemate. Such an answer would, however, upset President Obama’s political base, liberals who dislike the Bowles-Simpson recommendations as much as do most Congressional Republicans.

President Obama can still make such a move.  Until and unless he does, President Obama’s answer to Mr. Feller’s question is that, if there’s a status quo election, he would not do anything differently than he has for the past two years of fiscal policy stalemate.

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blockquote>THE PRESIDENT: I saw how important things like Medicare and Social Security were in

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The selection of Paul Ryan is about much more than just fiscal policy. Nevertheless much of the campaign politics over the next three months will be about the budget he proposed and then passed through the House. Here are a few thoughts as campaign attacks on the Ryan budget accelerate.

The fiscal politics are the inverse of the macroeconomic politics.  So far the Romney campaign has framed the election as a referendum on President Obama’s economic record, while President Obama has been framing a contrast between his vision and his straw-man characterizations of the Romney/Republican vision. I expect the Obama campaign will now seek to highlight the pain in the Ryan budget while minimizing discussion of the President’s alternative budget proposal.  The Romney-Ryan campaign needs to highlight the contrast with President Obama’s unsustainable proposed fiscal path.

Micro vs. macro framing – The Obama campaign and its allies will focus on micro-issues, telling horror stories of cuts to specific popular government programs. This dovetails with their constituency-based messaging so far.  The Romney-Ryan campaign should try to zoom out and highlight (1) the macro effects of the unsustainable current/Obama spending path and (2) the irresponsibility of President Obama’s refusal to propose a long-term fiscal solution and his legislative party’s refusal to pass a budget. Team Obama will highlight the pain the Ryan budget would cause to targeted constituencies. Team Romney-Ryan needs to explain that the Obama budget and a failure to govern would lead to economic disaster for everyone.

Bogus spending cut numbers – Every “cut program X by Y%” quote about the Ryan budget will be relative to an unsustainable spending path. The irresponsible part isn’t the proposed spending cut, it’s the promise to keep spending growth going without specifying how you’ll pay for it. If President Obama were proposing tax increases to match his future spending growth, then this would be a fair attack.  But he is not.

Incremental vs. structural change – More generally, the Obama fiscal path and campaign message rely on the false presumption that everything will be OK if we raise tax increases only on the rich and make small, mostly painless spending cuts.  This is incorrect. Whether you support spending cuts, tax increases, or a combination, you need to make big, structural fiscal policy changes to get on a long-term sustainable fiscal path.  Our federal government spending path is seriously out of whack and minor adjustments won’t fix it.

If you don’t want to make big “cuts” and structural changes to government spending, then the President’s current set of proposed tax increases are, at best, only a short-term fiscal band-aid.  You mathematically force yourself into supporting income tax increases on the middle class and big value-added taxes. Tax increases only on the rich won’t suffice no matter how high your rates go. You are also choosing to keep raising taxes, repeatedly and forever, because the spending line slopes up while the tax line stays flat.  This is an arithmetic result that is independent of my policy preferences.

It is unfair to compare a legislative end-product with an unsupported proposal. The Obama campaign will attack the specifics of the House-passed budget and attribute them all to Rep. Ryan.  It is apples-and-oranges to compare the result of a House-passed budget with the President’s proposal. The House-passed budget includes compromises needed to garner the support of a majority of the House, while the Obama budget is a proposal.  The Obama budget was not supported by a single Member of Congress, and the President’s party neither offered it nor an alternative in the Senate where they have a majority. Because they are the products of compromises and votes, legislative results are always messier and less intellectually coherent than any one person’s starting proposal.

Don’t forget the facts.  In March I compared the deficit and debt effects of President Obama’s budget proposal with Chairman Ryan’s in both the short and long run. Here are the conclusions from those posts.

Short run comparison (10 years)

• In the short run the Ryan budget proposes lower deficits and less debt than President Obama’s budget.
• Under the Ryan budget debt would peak at 77.6% of the economy in 2014. Under the President’s budget, debt would peak at 80.4% of the economy in that same year.
• The Ryan budget would cause debt to steadily decline to 62.3% of GDP by the end of the decade.  Under the Obama budget debt would flatten out by 2018 and end the decade at 76.3% of GDP, 14 percentage points higher than under the Ryan budget.
• At the end of 10 years, debt would be declining relative to the economy under the Ryan budget, while it would be flat under the President’s budget.
• For comparison the pre-crisis (1960-2007) average debt/GDP was 36.3%.

Long run comparison

• Chairman Ryan proposes stable deficits of a bit over 1% of GDP, below the historic average deficit, followed by a gradual path to balance and eventually to surplus.
• President Obama’s budget would result in deficits that are always greater than the historic average, and that would cause debt/GDP to increase again beginning about 10 years from now.
• President Obama’s proposed deficit path is unsustainable. Our economy can tolerate high and even very high deficits for a short time. High and steadily rising deficits like those in the President’s budget cannot be sustained. Something in the economy will break.
• Chairman Ryan’s plan would result in debt/GDP steadily declining over time. It would take decades to return to a pre-crisis average.
• President Obama’s plan would result in debt/GDP stabilizing by the end of this decade, then growing steadily and forever thereafter. At some point, and no one knows when, that growing debt becomes unsustainable.  If we’re lucky the resulting economic decline is gradual. If not, we have a financial crisis.

(photo credit: Romney for President site)

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Governor Romney and his allies have been hammering President Obama for two sentences he said in Roanoke, Virginia on July 13th, colored in red below. Team Obama counters with the blue text and accuses the Romney Team of ignoring key context. I’m adding even more context than the Obama team.  I think the bold text reinforces the critique of the President and, while less punchy for campaign purposes, is just as important as the red text. Here is the full text of the President’s Roanoke remarks, and here is video.

THE PRESIDENT: There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. (Applause.)

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together. There are some things, just like fighting fires, we don’t do on our own. I mean, imagine if everybody had their own fire service. That would be a hard way to organize fighting fires.

President Obama and his allies say Governor Romney and his allies are taking the President out of context by quoting only the sentences in red. How, then, do the President and his defenders explain the bold sentences of the first paragraph shown above? Here the President dismisses the importance of intellect and effort as contributors to success. Is there any more charitable way to interpret this text?

While in the Roanoke remarks President Obama stresses the importance of government as a contributor to the economic success of businesses, in other contexts he emphasizes the importance of luck in economic success.  He frequently refers to the rich as “blessed” and “fortunate.”  Here are just a few examples:

… those of us who’ve been most fortunate get to keep all our tax breaks … (source)

… we can’t reduce without asking folks like me who have been incredibly blessed to give up the tax cuts that we’ve been getting for a decade. … (source)

H.R. 9, however, is not focused on cutting taxes for small businesses, but instead would provide tax cuts to the most fortunate. (source)

I’m not going to do more if we’re not asking folks who have been most blessed by this country — like me — to just pay a little bit more in taxes, to go back to the rates that existed under Bill Clinton.  (source)

In these cases and many others President Obama describes the rich as passive recipients of blessings or good fortune.  He rarely credits skill, intelligence, savvy, hard work, or risk-taking as contributors to economic success. According to the President’s language, the rich are that way because they are blessed and fortunate (i.e., lucky), not because they worked harder than others, or were smarter, or savvier, or took bigger risks or sacrificed more. In this framework, success is given to you, not earned by you.

Policy consequences

The obvious conclusion that President Obama makes at Roanoke and elsewhere is that we need more government spending on infrastructure and services.  Since roads and bridges, education, and basic scientific research contribute to economic growth, he argues, we therefore need more of all of them. This conclusion does not necessarily follow for several reasons.

• Government infrastructure and services are financed by taking resources from the individuals and firms that produce them. If the disincentives created by these taxes are greater than the growth benefits of increased government spending, it’s a net growth loss to the economy.
• Government infrastructure spending is often guided by politics or policy goals other than accelerating economic growth.
• Marginal government spending increases are going to increased transfers to the elderly, not growth-enhancing government investments in physical or human capital.

In addition to the spend-more-on-infrastructure conclusion, if you think that luck and/or government contribute more to success than effort, ability, sacrifice, and risk-taking, then two further important policy consequences follow.

1. Incentives matter less and taxes don’t do as much damage. Raising taxes on economic success won’t undermine future success or significantly slow economic growth.
2. If you didn’t earn it, you don’t really deserve it.  There is a lower moral cost when government takes from the rich or from businesses, to the extent their economic success is due to luck or government.

The President’s framework supports his policy objectives.  By crediting government with an important role in the success of American business, the President justifies increased government spending. By stressing luck as an important determinant of who is successful, the President reinforces his argument for higher taxes on rich individuals and successful small business owners.

“You didn’t build that,” and “You didn’t get there on your own,” and “blessed” and “fortunate” have one thing in common.  They deemphasize the idea that success is earned.  This makes it easier for President Obama to justify taking more from those who have succeeded.

(photo credit: Keith Park)

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Income tax rate increases

It is easiest to understand the competing proposals with a graph.

If no law is enacted this year, income tax rates will climb from the orange line to the green line.  House and Senate Republican leaders propose to keep the current orange rate schedule for one additional year, through 2013.  President Obama and Congressional Democratic leaders propose the red line, which matches 2012 current law and the Republican proposal for incomes up to $250K but increases those rates (or “allows them to increase as under current law,” if you prefer) to the green line for incomes above $250K.

I have labeled four regions “hostages.” These are the rate increases that both parties say they prefer not to have take effect, but claim they are wiling to allow rather than sacrifice their position on the top rates (the “battleground”).  Whom you label as the hostage-taker probably depends on your preferred policy for incomes above $250K.  You can see these hostages go all the way down the income scale.  Especially in a weak economic recovery, threatening these hostages is both politically powerful and dangerous – like threatening a busload of nuns and puppies.

Historic recap on tax rate legislation

• The green line was in effect during the Clinton Administration.
• Then-Governor Bush campaigned in 2000 on moving rates down from the green to the orange line. The orange line was enacted in 2001 but the rate cuts were scheduled to be phased in over time.  The 2001 law was the result of a bipartisan center-right legislative coalition.  Because this coalition fell short of the 60 Senate votes needed to make these rates permanent, they were enacted for 10 years, through 2010.
• In 2003 President Bush proposed, and a Republican Congress enacted, a proposal to accelerate the scheduled rate cuts.  This law did not change the ultimate tax rates, it just made them all take effect immediately in 2003.  The 2003 law also cut dividend and capital gains tax rates.  It was enacted on a nearly straight party-line vote.
• In 2008 then-Senator Obama campaigned on raising tax rates for “the rich.” In 2010 President Obama did the same.  Shortly after the 2010 election President Obama flipped, seeking and enacting a deal with Congressional Republicans that extended the orange rate line for two more years in exchange for extending several policies from the 2009 stimulus law.  The deals in the 2010 law expire at the end of this year.
• President Obama is once again campaigning aggressively to raise the top income tax rates, and Governor Romney is campaigning to extend (or cut) them.  President Obama’s staff have threatened that the President will veto a bill that does not raise the top rates.
• In recent days and weeks, House and Senate Republicans and Senate Democrats have shortened the duration of their proposals to one-year policy changes.

Recent political history on income tax rates

The 2001 tax law, enacted under a Republican president, Republican House, and Republican Senate, included support from a significant block of Democrats.  On these graphs, Republicans are in red and Democrats in blue.  Heavily shaded areas are aye votes, lightly shaded areas are no votes.  Thus in the Senate, 46 Republicans and 12 Democrats voted aye on final passage, while two Republicans and 31 Democrats voted no, thus passing the bill 58-33.

This picture shows a classic center-right legislative alliance.  Democratic Senators John Breaux (LA) and now-Senate Finance Committee Chairman Max Baucus (MT) were the key Democrats in this effort.

The 2003 law, in contrast, was enacted along nearly party line votes.  Vice President Cheney broke the tie in a Senate split 50-50 to cast the deciding vote.

These partisan 2003 votes don’t tell the whole story.  In 2003 President Bush first made the argument that the top income tax rates are the rates that apply to successful small business owners.  This argument, combined with lingering support from those Democrats who had supported the 2001 law, meant that in early 2003 there was a consensus to accelerate all the income tax rate cuts, including the top rates.  In 2003 there was still a bipartisan center-right coalition to keep all income tax rates low.

There was not, however, Democratic support for the other component of President Bush’s proposal, the elimination of the double taxation of dividend income.  The 2003 legislative effort became a partisan fight over capital taxation, resulting in the above-displayed partisan final vote as well as today’s 15% rate for capital gains and dividend income.

The 2010 tax rate extension law was a deal between President Obama and Republican Congressional leaders.  Its vote pattern looks different from the prior two, reflecting a different balance of political forces and policy viewpoints.

This is a centrist legislative coalition.  Most Republicans who voted no did so because they opposed several other things in the bill unrelated to the income tax rate extensions.  Most Democrats who voted no did so because they didn’t want to extend the top income tax rates.

While in modern history Democrats have always been for higher taxes on the rich relative to Republicans, President Obama’s emphasis on raising taxes on the rich is a relatively new phenomenon.  The Clinton team placed their income inequality and tax policy emphasis on the bottom of the income spectrum – specifically, welfare reform and expanding the Earned Income Tax Credit.  Presidents Clinton and Obama both prioritized distributional issues and taxation, but they placed their emphases at opposite ends of the income spectrum.  President Clinton spent much of his legislative capital helping the poor, while President Obama is spending his trying to tax the rich.

Intraparty divisions in 2012

Republicans are more unified this year on tax rate questions than Democrats.  President Obama continues to argue for rate increases on incomes above $200K (single) and $250K (married).  Several Senate Democrats publicly split with the President, defining rich as incomes above $1M or saying we shouldn’t raise taxes on anyone for a year for fear of undermining an already weak economic recovery.  The Senate Democrat bill now being debated sticks with the President’s income levels.

A couple of months ago House Democrats, who are usually the most liberal grouping, took a surprising caucus position that proposed tax increases for those with incomes above $1M.  This was strange – to see House Democrats take a position right of the President on taxes.  I’m guessing House Democratic leaders did this to prevent moderates and nervous in-cycle Democrats from splitting off and voting with Republicans.

If you look at the 2001 and 2010 votes you can see the underlying political challenge facing the President and Leaders Reid and Pelosi.  Democrats often split on questions of taxing the rich.  The President is siding with the liberal bloc, at least for now.  Some moderate Democrats, those from high income states, and those in tough election cycles are being pressured by their party leaders to support tax increases on income thresholds lower than many of them might prefer right now.  Some may also fear being portrayed as opponents of successful small businesses.  President Obama and his allies in Congress have a fundamentally difficult task – holding their party together, during a tough election cycle, on a topic on which they have a history of splitting.

At the same time there is a segment of elected Republicans who would be willing to agree to some rate increase on high income taxpayers, if the thresholds are high enough (I’d guess at least $1M).  But unlike their moderate Democratic counterparts, there is little political risk for these moderate Republicans to stick publicly with the party position of not raising taxes on anyone.  I think this fragment of the Republican party is also smaller than its Democratic counterpart.  These moderates may be a legislative challenge for party leaders during post-election negotiations, but they don’t appear to pose a major problem during this period of political positioning and campaigning.

The intraparty division among Democrats presents a tactical opportunity for Republicans.  If, for instance, Senate Republicans can get a vote on raising the income thresholds in the Reid bill from $200K/$250K to something higher, they will maximize the pressure on these Democrats.  If such an amendment were to pass with Democratic support it would likely raise the income floor for future lame duck tax negotiations.

Tomorrow we’ll look at the policy and political consequences of no tax deal in 2012 and at the tax negotiating landscape in a lame duck session and in early 2013.  Remember that income taxes are not the whole tax picture, and taxes are only one of several important parts of the end-of-year fiscal conflict.

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Moving parts

1. taxes;
2. spending, including the sequesters;
3. debt limit;
4. repeal of all or part of the Affordable Care Act (aka ObamaCare);
5. tax reform;
6. a potential Grand Bargain on fiscal policy.

The first three categories will be dealt with between now and the end of Q1 of next year.  Deadlines under current law will force the Congress to make decisions on each, even if in some cases the decision is not to enact new legislation.  I label these must-do parts.

The last three categories may or may not come to a head over the next eight months.  Each has no fixed deadline forcing legislative action, and whether they are even priorities depends on who is elected President. I list them because they might, in some form, be included in legislation at the end of this year or the beginning of next, and because discussion about them can heavily influence the must-do items in the first three categories.

While the public tax battle is entirely about extending the top income tax rates, there are many other tax issues expiring at the end of 2012.  The tax category can be further broken down into buckets of tax issues:

• extending income tax rates;
• extending capital tax rates;
• extending the President’s refundable tax credit (sometimes referred to as a payroll tax credit);
• extending estate and gift taxes;
• extending other changes from the 2001 and 2003 tax laws (e.g., child credit, education and retirement incentives);
• “patching” the Alternative Minimum Tax again;
• a collection of recurring tax extenders covering a wide range of policy areas.

The spending category also breaks down into several buckets important enough to be considered separately:

• twelve regular FY13 appropriations bills and/or a Continuing Resolution
  [s];
• the defense sequester;
• the nondefense sequester;
• the sequester on Medicare and other entitlements.

There are a lot of moving parts.  I won’t drill down into each subpart in this series, but I want you to get a sense of how substantively complex this will be.

There is nothing magic about the way I have grouped issues.  One could just as easily separate the sequester issues from other spending, or group all appropriations issues together, or combine the discussion of tax rate extensions and tax reform.  For now I just want to lay out all the moving parts and propose a reasonable categorization so that it’s not all jumbled together.

Deadlines and timeframes

There are three hard deadlines and two soft deadlines that matter.

Hard deadline 1:  Election day is Tuesday, November 6.

Hard deadline 2:  December 31, 2012 – Taxes increase, automatic spending cuts begin to take effect.  This is also the last day of the outgoing Congress, and maybe of the Senate Democratic majority.

Hard deadline 3:  January 20, 2013 is Inauguration Day if Governor Romney wins.  If President Obama wins this date doesn’t matter much legislatively.

Soft deadline 1:  Whenever short-term Continuing Resolutions expire.  Policymakers can set this date.

Soft deadline 2:  At some point Treasury will run out of cash and debt management tricks and need a debt limit increase. Treasury isn’t saying when this will occur, but it’s likely between December and March.

These deadlines create a few important legislative timeframes:

• Campaign positioning window:  Between now and Election Day;
• Lame duck sessions:  November 7 – December 31;
• Pre-inaugural sessions:  January 1 – January 19;
• 2013 really begins:  January 21 and later.

Nothing big legislatively will conclude between now and Election Day.  House and Senate votes in July and September are mostly attempts to influence the election and to preposition forces for lame duck session negotiations.  Congress recesses in August and will spend much of October home campaigning.

The pre-inaugural timeframe is usually dead and often Congress doesn’t even meet.  This makes the December 31 deadline separating the outgoing Congress from the incoming one the most important break point after Election Day.

When legislative decisions are made influences who makes them, which in turn determines the policy outcomes.  I’ll go into this in more depth in a future post.

Election scenarios

There are two big scenarios to consider, plus one important variant.

1. Republican sweep:  Romney elected, Republicans keep the House and take the Senate majority;
2. Status quo election:  Obama re-elected, House stays R majority, Senate stays D majority;
3. Divided government:  Same as status quo except Republicans take the Senate majority.

There are plenty of other possible scenarios, the most notable of which is a Democratic sweep.  I think all scenarios other than the three I listed are remote enough that I’ll ignore them.  This is already more than sufficiently complicated.

Teaser

To get your gears spinning in anticipation of strategic analysis posts over the next few days, I’ll offer a few observations and questions.

• Don’t fall into the trap of thinking this is straight R-vs-D. The intraparty conflicts and tensions are at least as important.
• If President Obama loses, will he stick to his veto threat on taxes, knowing Congressional Republicans can wait him out? Or will he look for away around his veto threat and try to negotiate a deal during the lame duck so that he can extend some of his policies before he leaves?
• Same scenario — Suppose lame duck President Obama offers Speaker Boehner and Leader McConnell a good but not great deal (from their perspective) during the lame duck session.  Should Congressional Republicans take the deal and lock in this bipartisan consensus, or wait for Romney to be sworn in so they can jettison the parts they don’t like?  How much of a substantive sacrifice is bipartisanship worth to Congressional Republicans?  To President-elect Romney?
• Who would have the upper hand in a tax stalemate in which everyone’s tax rates increase on January 1?
• The legislative dynamics on each part can be complex.  What makes this analysis challenging are the interactions among the components when you start legislatively combining them.  What makes it super challenging is when you realize that different people may get to make these packaging decisions during different timeframes.

More tomorrow.

(photo credit: jjjj56cp)

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Here is the key sentence from the Senator’s Monday speech at Brookings (emphasis is mine).

So if we can’t get a good deal—a balanced deal that calls on the wealthy to pay their fair share—then I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle class families under the bus.

With this language Senator Murray did not rule out supporting a one or two year extension of all income tax rates, including the top rates.  She only ruled out “locking in a long-term deal this year.”

Technically she could also agree to a long-term deal that extends all the tax rates, as long as it was enacted in 2013 rather than this year.  She could, for instance, vote for a two month extension of all rates in December, allowing President Romney and Republican House and Senate majorities to then enact a long-term extension of all rates without her vote.   I think that is a minor scenario compared with the primary flexibility she left herself to support a one or two year extension of all tax rates if President Obama is reelected.

I have no doubt that Senator Murray is serious in her desire to raise tax rates on the rich and successful small business owners.  At the same time, given that she voted for the 2010 law that extended all tax rates, including the top rates, for two years, I wonder how much her current threat matters.  I also wonder if her allies on the Left realize she has left herself an easy way out to support a bill they would oppose.

I still think she is using a Tea Party tactic and threatening serious economic damage if her tax increase demand is not met.  Her demand, however, is less rigorous than I had originally thought.

(photo credit: un flaneur)

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SEN. MURRAY:  So if we can’t get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal this year that throws middle class families under the bus.

A member of the Senate Democratic leadership, Senator Murray claimed to be speaking for other elected Democrats:

And I think my party, and the American people, will support that.

How is this different from those Tea Party-affiliated and conservative Republicans who last summer threatened to block a legislated debt limit increase unless spending was aggressively cut?

Last summer there was a broad consensus that the policy consequences of not raising the debt limit would be potentially catastrophic. Today there is a similarly broad consensus that allowing all tax rates to increase January 1 would be catastrophic.  CBO projects a recession in the first half of 2013  if taxes are allowed to increase and the spending sequester takes effect (another Murray threat if her demands are not met).

CBO:  Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

CBO projects about 1.3 million fewer people will be employed next year if Senator Murray’s threat were carried through 2013 (see table 3).

Today Senator Murray’s threat matters only if elected Republicans refuse to agree to her demand to raise taxes on the rich and on successful small business owners.  Without this disagreement her threat has no effect.  Last summer the conservatives’ threats to block legislation raising the debt limit mattered only because President Obama and Congressional Democrats refused to agree to conservative demands to cut government spending.  Had Democrats been willing to agree to the conservatives’ spending cuts, the conservatives’ debt limit threat would have had no effect.

Today Senator Murray or her allies could argue that those refusing to agree to their condition are, in fact, the ones “holding middle class taxes hostage.” Conservative Republicans could have argued the same last summer about the debt limit, that the debt limit increase was in fact held hostage by those refusing to cut spending.

Last summer conservative Republicans argued that the policy damage done by a debt limit increase was being exaggerated.  Yesterday Senator Murray did the same about, arguing that allowing income tax increases on everyone to take effect would not be catastrophic.  Both the Tea Party and conservative Republican members and Senator Murray argued that the effects of carrying through with their threat were undesirable but worth withstanding if necessary to achieve a more important policy goal.

The Budget Control Act signed into law last sumer increased the debt limit and cut spending, although not deeply enough to satisfy many of the conservatives who issued the threat.  At the time I wrote their threat tactic was “undesirable, necessary, and effective.”  Those wanting to cut spending achieved a medium-sized policy win, at a significant political cost to the Republican brand.  Senator Murray may surmise that she will not be treated as harshly by the press as were conservative Republicans last year, despite her use of the same tactic and her threat to produce a similarly damaging economic outcome.

Unless her demand to raise taxes is met, Senator Murray is threatening to cause a recession in the first half of 2013.  Her threat should be treated the same as the parallel threat made by some Republicans last summer.

(photo credit: captured from Brookings Institution video)

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Last week former Michigan Governor Jennifer Granholm (D) argued that any Governor who rejected the Affordable Care Act’s new Medicaid expansion was either stupid or evil.  This is a common refrain from the law’s defenders, that only an irrational or uncaring Governor would reject the ACA’s new Medicaid subsidies to provide health insurance to poor adults without kids.

This question is now relevant thanks to the Supreme Court’s recent ruling.  The Roberts Court ruled that the federal government may not deny the federal share of funds for a state’s existing Medicaid program if that state refuses to avail itself of the new subsidies offered for expanding program eligibility.  In the wake of this ruling several Governors have said they will not, or may not, expand their Medicaid programs, notwithstanding the ACA’s offer of generous matching federal funds.

How generous?  Under the ACA the Feds will pay all benefit costs for this new population through 2016, and then phase down to a 90 percent federal share from 2020 on.  That compares to an average federal share of 57 cents of each dollar spent on Medicaid benefits for existing populations.  The exact federal share varies by state and ranges from 50 cents federal to 78 cents federal for basic Medicaid benefits.

New Jersey Governor Chris Christie might say,  “I have to pay 50 cents of state money for each Medicaid dollar spent in New York.  If I expand my Medicaid program to these poor childless adults, I’ll have to pay ten cents of state money for each Medicaid dollar spent on them after the first few years.”  From a state’s perpective, the decision to expand Medicaid means higher state expenditures but at a drastically reduced cost in state funds per new enrollee.  Adding new people still costs you scarce state funds, but these new enrollees would be cheaper to the state than the people already in your program.

Why, then, would a Governor reject such a generous offer?  She can provide health insurance for poor residents of her state for no cost in the first two years and at an extremely reduced cost after that.  If a Governor refuses, ACA defenders argue she will be leaving enormous amounts of federal money “on the table.”  Governor Granholm points out that states already subsidize hospitals to cover some of the costs of the uncompensated care delivered to these poor uninsured people.  And since in most cases Medicaid pays providers low payment rates, adding them to Medicaid is a relatively inexpensive way to provide them with health insurance.

Charles Blahous was first to publicly explain how the Court’s decision could make the ACA’s finances untenable.  He examined the incentive the Court’s decision would have for Governors to abandon Medicaid expansions in favor of federally-funded subsidies through state exchanges.

Let’s briefly review seven additional challenges to the case made by advocates for Medicaid expansion under the ACA.  The bar is low: we don’t have to prove that a Governor should not expand Medicaid, only that one can make this decision without being irrational or evil.  Thanks to a knowledgeable friend for helping me with these.

1.  “Leaving federal money on the table” looks at the problem backwards.  The law does not offer states free money without conditions, it reduces the price to the state of covering these new people.  A state must still find the funds to cover its 10 percent of the new Medicaid costs.  While that’s a tiny fraction of the total new costs, Medicaid is a huge program and many states are already in dire financial condition.  If a state can’t afford its share it doesn’t matter how much the Feds are offering.  A Governor must look at her budget and prioritize the state resources at her disposal.  Medicaid spending is one of the two largest components of most state budgets.  It is  reasonable for a Governor to conclude she would rather use her limited resources for other needs (education, emergency services, public infrastructure) than to expand her state’s obligations for its biggest and fastest-growing entitlement.

2.  A smart Governor recognizes that a commitment to expand Medicaid eligibility is likely to be permanent, so she may be risk averse.  It is quite difficult to cut off eligibility for a group of people once it’s been granted.  Our Governor must also consider political and legislative risk from Washington.  Sure, the Feds are offering to pay all benefit costs for the first three years, and most costs after that.  But the law might be repealed in 2013.  Even if it’s not, Congress could cut federal match rates in the future to address federal spending pressures.  In his budget President Obama has proposed to “align” match rates in Medicaid and CHIP, code for cutting CHIP match rates.  A federal “Grand Bargain” fiscal negotiation would certainly consider cutting federal match rates for Medicaid and CHIP.  In any of these scenarios the state and our Governor bear the downside fiscal risk.

3.  A Governor must also worry about creeping federal requirements for this new population.  States have some flexibility designing benefit packages for their Medicaid populations and a lot of flexibility in designing insurance structures and setting payment rates.  The Feds, however, are looking at this new group of people as part of their “ACA eligibility expansions,” along with others who will buy subsidized insurance through state exchanges.  What happens, then, if the Feds want to impose new requirements on the exchanges, and then require states to do the same with their Medicaid programs?  The Feds have a history of doing this in Medicaid.

4.  There are hidden costs to this expansion.  Any time a program like Medicaid is expanded there is a woodwork effect.  Some mothers and their kids who were eligible for Medicaid before the ACA, but who had not enrolled, would be drawn to enroll with the increased publicity to enroll newly eligible poor childless adults.  If your focus is on enrolling poor people in Medicaid this is a good thing.  It is also an increased cost to the state budget, especially since these mothers and their kids are not eligible for the higher federal match rate in the ACA.  A Governor considering whether to expand her program must include these additional costs in her decision, even though they don’t directly impact the target population.  A state also bears the administrative expenses and challenges of expanding its program.

5.  Adding new people increases government spending and total spending on health care.  Yes, those who lack prepaid health insurance impose uncompensated care costs on hospitals.  Yes, the states pick up some of these costs through subsidies to those hospitals.  Both would be reduced if more people had prepaid health insurance.  But while expanded Medicaid eligibility means more and better medical care for those who were previously uninsured, it comes at an added cost to the government (Feds + States).  There is no free lunch here, only a reduced price lunch.  More people X more medical care = more spending.

6.  A Governor creates negotiating leverage with the Feds by saying no, even temporarily.  The Feds and States are constantly engaged in negotiations over funding and rules for Medicaid and CHIP.  Governors know that the Obama Administration needs them to expand their Medicaid populations for PPACA to approach its coverage goals.  Congress wrote the law with an effective mandate on states to cover these people.  The Court inverted that power dynamic, and any Governor who says no to an expansion gains leverage for more federal funds or flexibility in other areas.

7.  If it’s such a good deal why did the Feds mandate it?  There’s a parallel here with the individual mandate and accompanying subsidies.  The law’s authors knew that subsidies would encourage some individuals and some states to buy health insurance or expand their Medicaid programs.  They knew that others would not take advantage of these subsidies, so they mandated participation with penalties for noncompliance.  The individual mandate and penalty tax survived the Court challenges while those imposed on states did not.  It is reasonable to assume that, without the mandate, some states will now choose not to expand their biggest (or second-biggest) state spending program any further.

When the ACA was enacted in 2010 CBO estimated that the Medicaid expansions would result in 17 million more Medicaid enrollees by 2016.  The Supreme Court’s ruling and subsequent decisions by Governors should reduce that.  We will see by how much if the law is not repealed next year.

(photo credit: White House photo by Pete Souza)

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CBO answered this in April 2010. They projected that in 2016, when the mandate is in effect and the tax is fully phased in, there will still be 21 million uninsured people.  This belies the advertised “universal coverage” label.

Oversimplifying a bit, for most people the tax in 2016 will be $750 per adult and $375 per kid.

But while 21 million people will be uninsured, CBO said “the majority of them will not be subject to penalty.” That’s an understatement.

You won’t have to pay the tax if:

• you’re not in the U.S. legally;
• you’re in prison;
• you’re poor (measured two different ways);
• you’re a member of an Indian tribe;
• you’re in a period of being uninsured that’s less than three months long;
• your religion forbids getting health insurance; or
• you get a waiver from HHS.

Given HHS’ behavior in handing out waivers since the law was enacted, this waiver authority bears further observation and scrutiny.

In addition, some who are legally required to pay the tax will not do so.  CBO/JCT therefore assumes a certain amount of noncompliance (aka cheating).

This gets CBO’s 21 million uninsured in 2016 down dramatically to 3.9 million who will be both uninsured and pay the tax.  Total U.S. population in 2016 will be about 327 million. This means that, in 2016:

• almost 94 out of every 100 people will have health insurance in some form;
• five out of every 100 will be uninsured and pay no tax;
• a bit more than one out of every 100 will be uninsured and pay a tax to the government.

If I’m that one person out of 100, I’m going to be pretty ticked off at those five.  All six of us are uninsured but I’m the only one of the six who has to pay higher taxes.

CBO also estimated the income levels of those 3.9 million uninsured who will pay higher taxes.  More than 3/4 of them are not rich.

Reading the first line of this table, CBO says that under this law in 2016 there will be 400,000 people below the poverty line who will be uninsured and pay the tax. (More will be required to do so — this is the number who will comply with the law.) Singles in that income range will have annual income less than $11,800, and families of four in that range will have annual income less than $24,000.  These are 400,000 poor uninsured people who will be forced to pay higher taxes.

Similarly, if we add up the rows up to 500% of poverty, we see that under this law there will, in 2016, be three million people with incomes less than $59,000 (singles) or $120,000 (families of four) who will be uninsured and have to pay the tax. These three million people are not rich, they will be uninsured, and they will be required to pay higher taxes. The tax increases on these people, as well as some fraction of those in the “>500%” category, clearly violate the President’s pledge not to raise taxes on anyone earning less than $250K.

Jim Capretta points out that these estimates may be low. In 2010 CBO assumed a mandate enforced by a penalty for noncompliance.  Before today’s ruling, the law created both a legal and a moral obligation to buy health insurance. If you didn’t buy insurance, you would be violating the law and have to pay a penalty to the IRS.  Some people would buy health insurance even though financially it would make more sense for them to just pay the penalty, because they didn’t want to be perceived as breaking the law and paying a penalty.

Chief Justice Roberts’ opinion converts the mandate+penalty into a “pay or play” choice model by turning the penalty into a tax you can choose to pay, without moral opprobrium, rather than buying health insurance.  By removing the “should” implication of the mandate, the Roberts opinion should increase CBO’s estimate of how many people will go uninsured and pay the tax instead.

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In a defined benefit (DB) pension plan firm managers set aside cash now to pay benefits later.  The firm then invests that cash and hopes that future cash contributions, plus the investment returns on the assets, will be sufficient to pay these benefit promises in full. It’s a bit tricky to project future pension benefits, but the principal challenge is estimating the rate of return on investing the assets in the pension fund. If a firm manager assumes a high rate of return, then he doesn’t need to set aside a lot of cash now to pay future benefits and he can use that cash for other purposes now.

Of course if the investment returns fall short of his overly optimistic assumptions then the pension plan will be underfunded. There won’t be enough in the plan to pay future benefits. That becomes a huge problem if the firm goes bankrupt. Then the firm hands the plan assets and benefit promises over to a government-run insurance company, the Pension Benefit Guaranty Corporation (PBGC), whose sole purpose is to insure DB pension plans of firms that go bankrupt.

PBGC then takes those (insufficient) pension fund assets and distributes them among the firm’s retirees. Since the plan is underfunded, retirees have to take a “haircut” on their pension benefits.  Someone who spent decades of his life working for a firm finds, in retirement, that the pension promise upon which he has relied is now broken.

If the assets are insufficient to pay full benefits, PBGC will fill in the gap in a retiree’s pension promise, but only up to a specified amount (about $56K/year in 2012). Above that the retiree is shafted. That is problem #1.  Firm managers benefit while they are underfunding the pension plan.  They have more cash on hand to use for other purposes:  investing in plant and equipment, hiring workers or paying them more, paying themselves more, or paying dividends to the firm’s owners.  Future retirees lose by bearing some of the risk of the firm going bankrupt and then short-changing the promised pension benefits.

Problem #2 is that the PBGC insurance plan for DB plans is also underfunded. Firms with DB pension plans must pay premiums to PBGC, and those premiums are set by statute. These same firm managers and their lobbyists persuade Congress not to raise the premiums, creating the PBGC underfunding problem.

What happens, then, if in the future a firm with a DB plan goes bankrupt, and PBGC doesn’t have the money to fill in the benefit gaps as it is required to do?  Current law provides no answer, leaving two possibilities:

To their credit, the new highway bill negotiators increased legislated PBGC premiums, but they allowed firms to underfund their plans more. While future retirees bear some of the risk of today’s underfunding, taxpayers bear the rest of it.

Here is how the scam works:

Now for the kicker: in many cases the labor leaders who represent the firms’ employees cooperate in this effort. Management and labor leaders team up, both to underfund the DB pension plan and to lobby Congress to allow them to do so. This frees up immediate cash in the firm, which management and labor then wrestle over. When they do this, labor leaders are prioritizing current wages and current benefits over future pension benefits, and at the same time shifting some of the risk associated with paying those future pension benefits to taxpayers.

The firm managers lobby Republicans in Congress and the labor leaders lobby Democrats. “Give us pension funding relief,” they argue. Members of Congress and staff, who are used to management and labor doing battle, are happy to see that at least on this issue they agree. There is then a strong bipartisan push for a legislative “fix” for pension funding “relief” which allows the continued underfunding of both the DB plans and the PBGC to continue.

No one lobbies on behalf of future retirees who face increased risk of having their pension benefits cut when their employer goes bankrupt. No one lobbies on behalf of the taxpayer who faces increased risk of paying for a future PBGC bailout.

The details and justification of the particular proposed legislative change, including the one now in play, are unimportant. This is a world of actuarial assumptions and accounting conventions that is at best complex and at worst obtuse and intentionally obfuscated by those trying to behave irresponsibly.  The big picture is always the same: management and labor team up to change the legislated rules to allow the firm to pay less cash now to an underfunded DB pension plan.  Future retirees and taxpayers bear the increased risk and cost of Congress allowing irresponsible behavior now by firm managers and labor leaders.

The lobbyists play a clever game depending on the financial environment.  When financial markets are performing well they say “Look at what great investment returns we have been getting! Congress should change the law to allow us to assume these great returns continue, meaning our plans are no longer underfunded and we don’t have to contribute any more cash.”

When markets perform poorly, the lobbyists cry poverty. “Our firms are hurting. Yes, our investment returns have been poor, and yes, our pension plan is severely underfunded. But every dollar we put into our underfunded pension plan is a dollar we cannot spend to hire a worker or invest in plant and equipment.  Congress should change the law to allow us to contribute less cash to our pension plans in the short run. Then when the economy has come back we’ll have more cash on hand to fill in the underfunding.”

In the past the preferred tactic was to legislatively change the rules for calculating the amount of underfunding. This is legislated lying — firms were allowed to make unreasonable assumptions and falsely show that their plans are not underfunded. Based on these spurious calculations they then had to contribute less cash. It also allowed them to tell their employees, “Based on the government’s rules for calculating pension plan funding, your plan is healthy.”

In 2006 the Bush Administration worked with a few responsible Members of Congress (most notably Speaker Boehner and Senators Baucus and Grassley) to change the law to bring more honest accounting to DB pension plans.  We were largely but not completely successful.  It is harder to lie about your plan’s underfunding than it used to be.

The pension provision in the Senate version of the highway bill does not change the way pensions are measured. It instead changes the method for calculating the required minimum cash contribution to a pension plan. If this becomes law it will allow those firms with the most underfunded pension plans to contribute even less cash toward closing their funding gaps. Congress will once again be complicit in allowing firm and labor leaders to violate promises made to workers.

Everyone says they hate taxpayer bailouts. The best way to stop taxpayer bailouts is not to block the bailout after the catastrophe has occurred, it’s to avoid creating the catastrophe in the first place.  By stripping this provision (which was Section 40312 of the Senate bill) from the final highway bill, Congress can avoid making it easier for irresponsible firm managers and labor leaders to shaft future retirees. They can also avoid increasing the risk of a future taxpayer bailout of PBGC.

Some day in the future firms with defined benefit pension plans will go bankrupt, their retirees will be shafted, and Congress will be pressured to make taxpayers finance a PBGC bailout. Members of Congress will give angry speeches and everyone will ask how this could have happened. The answer will be in part that Members of Congress voted for and the President signed this highway bill containing this “pension funding stabilization provision.”

Congress, you have been warned.

The post How to avoid shafting future retirees & creating another bailout appeared first on Keith Hennessey.

1. The short-term path of the U.S. economy;
2. The Supreme Court’s upcoming decisions on the Affordable Care Act;
3. The economic and financial mess in Europe;
4. A possible Israeli attack on Iran and whatever Iranian response that provokes.

I see four commonalities:

• Each has a moderate chance of going wrong before Election Day;
• The short-term domestic economic policy effects of each are significant;
• Each could change the agenda and course of the U.S. election;
• Each is largely outside the President’s control.

James Carville’s line from the 1992 campaign, “The economy, stupid,” may be too narrow this year. Yes, the domestic economy is the most important subject for the election.  But the U.S. economy may not be the only subject this fall, and if we drill down further we can find complexities beyond the simplistic political analysis of “Economy bad, incumbent loses.” President Obama’s economic campaign challenge is multidimensional.

• The recovery is weak and recent data make it hard to claim things are getting better. The level is bad (8.2% unemployment) and the direction and rate of change are nothing to brag about.  Today the Fed knocked half a percentage point off their projected GDP growth rates for the remainder of 2012. The President and his team made a tactical political error by betting on a continuing positive trend, hoping they’d be able to argue “Things may be bad but they’re getting better because of our policies.” This backfired with the last jobs report but could change again in the next four months.
• Downside macro risks are more significant than upside risks. Europe teeters.
• Stimulus is behind us. The Court may overturn health care reform next week. If it does this leaves Dodd-Frank as the only lasting major economic policy accomplishment of the President’s term.
• Stimulus and health care are also unpopular.
• Other than raising taxes on the rich and spending a few tens of billions of dollars more, the President is not proposing a significant domestic economic agenda for the second term. He’s saying a lot but has few big policy proposals and nothing to address our medium-term fiscal challenge.
• He also doesn’t have a good answer for how to accelerate short-term economic growth other than “Be patient.”

The monthly jobs and GDP data are the most important data points affecting the choice this November, but they are not the only ones. It’s not just the economy.

(photo credit: Aaron Webb)

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1. President Obama blames Republican theory for the financial crisis, recession, and slow recovery and links Governor Romney’s policies to that “failed experiment.”

In the past President Obama has harped on the problems he “inherited” and blamed President Bush for the financial crisis, ensuing recession, and even the slow recovery. Similarly, the Obama campaign is attacking Governor Romney’s experience and record, both at Bain and as Governor.

In this speech he instead attacks “Republican theories” and “the failed experiment” of the previous decade. He links Governor Romney to those policies and

The post Hello, Cleveland! appeared first on Keith Hennessey.

This is my attempt to build a detailed outline of the economic speech President Obama gave in Cleveland yesterday (watch it).

I used his language in some parts, but in many parts these are his concepts expressed in my words, I hope to provide more clarity.

It won’t surprise regular readers that I disagree with much of this. I have tried not to let that cloud this summary.

Detailed outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big choice — two paths

A. Choice / two fundamentally different visions.
B. Choice and debate are not about whether we need to grow faster, but instead about how to:

1. Create strong, sustained growth;
2. Pay down our long-term debt;
3. Generate good, middle class jobs so people can have confidence that if they work hard, they can get ahead.

C. Big decisions. Not new challenges. Problems more than a decade in the making.

D. Being held back by a stalemate over two different paths for our country. Election should is about resolving this stalemate.

II. Define & blame Republican theory for bad stuff.

A. Long before 2008 the basic bargain had begun to erode
B. Define Republican theory: cut taxes, no regs, market solves everything
C. Results of Republican theory: worked well for the rich, but prosperity never trickled down to the middle class.

III. Be patient.

A. Not your normal recession.
B. It has typically taken countries up to 10 years to recover from financial crises of this magnitude.
C. We’re in better shape than Europe.

IV. Take credit for the good stuff

A. We acted fast. My policies are working.
B. We’re recovering from:

1. Financial crisis of 2008;
2. A decade of middle class falling behind;
3. Erosion of basic bargain over decade[s?]

V. Romney wants to repeat the failed experiment of the last decade.

A. We implemented Republican theory last decade:

1. Best way to grow the economy is from the top down;
2. Eliminate most regulations;
3. Cut taxes by trillions of dollars;
4. Strip down government to national security and a few other basic functions.

B. This failed theory created the fiscal problems we face now and the financial crisis that caused this weak economy.

C. Romney wants to return to and repeat this failed theory.

VI. Romney’s plan is bad for the middle class.

A. Keep Bush tax cuts in place and add another $5T in tax cuts on top of that.

1. 70% of those will go to >$200K/year, and >$1M/year will get an average tax cut of about 25%

B. Cut valuable government programs: student loans, Head Start, health research and scientific grants.
C. Eliminate health insurance for 33m (repeal ACA) + 19m more (Medicaid cuts).
D. Scale back or eliminate tax breaks that help middle class families: health care, college, retirement, homeownership.
E. Repeat of failed top-down growth theory.

VII. My plan is an economy built from a growing middle class. Race to the top.

A. Education;
B. Energy;
C. Innovation;
D. Investment;
E. Tax code based on American job creation and balanced deficit reduction.

VIII. I’m a centrist, look at my record.

A. I have cut taxes.
B. Fewer regulations than Bush in first three years.
C. Signed into law $2T of spending cuts.
D. Deficit reduction plan to slow health cost growth, not shift costs to seniors.
E. Domestic discretionary spending lowest share of GDP in nearly 60 years.

IX. I’m for keeping the American tradition of bipartisan government involvement in the economy.

A. Government is not the answer to all our problems, and I’m not proposing government run everything.
B. Romney and Republicans want to return us to no rules and unregulated market free-for-all.
C. America has succeeded not by telling everyone to fend for themselves, but by all of us pitching in, all of us pulling our own weight. That’s what I’m for.

I hope you find this useful.

(photo credit: Obama campaign)

The post President Obama’s Cleveland economy speech – detailed outline appeared first on Keith Hennessey.

Here is my attempt to outline the meaty 53 minute economic speech President Obama gave yesterday in Cleveland. I built this outline to help myself analyze the speech, then realized that others might find it useful. While it is true that little of the substance was new, this is nevertheless a serious policy speech that makes what the President and his advisors think is the economic part of their best case for reelection. I will take it seriously and recommend you do so as well — this isn’t just another blow-off stump speech. This is the theory of the economic case the way the President wants you to see it.

If you’re a student of economic policy I recommend you watch or read the whole speech. No summary or analysis can substitute for the candidate’s own words and presentation.

Here is my plan of attack: summarize first; then explain; then respond. Today is just the first step, the summary.

In some cases i use the President’s words, but I’m often using my own more colloquial language to express his arguments more clearly if I can. So in some cases these are his thoughts (I think) in my words. I have done my level best to capture his arguments in their most effective and convincing form, especially when I disagree with them. I will express my disagreements another time.

This post contains just the highest level outline. The next post contains a much more detailed outline. I recommend you skim this one, then read that one.

High level outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big and fundamental choice — two paths.

II. Define & blame Republican theory for bad stuff.

III. Be patient.

IV. Take credit for progress / the good stuff.

V. Romney wants to repeat the failed experiment of the last decade.

VI. Romney’s plan is bad for the middle class.

VII. My plan is an economy built from a growing middle class. Race to the top.

VIII. I’m a centrist, look at my record.

IX. I am for keeping the American tradition of bipartisan government involvement in the economy.

That’s the short, high-level outline. Here is the detailed version.

I hope you find this useful.

(photo credit: Obama campaign)

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In this election cycle I have donated to the following campaigns:

• Mitt Romney for President;
• Paul Ryan for the House;
• Rob Portman for Senate; and
• Ted Cruz for Senate.

I am not “an advisor to” or “affiliated with” these campaigns or any others. And my financial support for these candidates does not mean that I agree with everything they say. I will sometimes write things that are consistent with the policies they advocate. I will also criticize or disagree with them when I think it’s important to do so.

If I contribute to other campaigns I will disclose that here as well.

The post Campaign finance disclosures appeared first on Keith Hennessey.

The President’s second mistake is as important but less obvious. President Obama spoke a second time Friday afternoon. He did not, as reported by some, correct his earlier statement. He instead reinforced it. The President’s second mistake was his decision to stick with an economic argument that is unsupportable by facts, easy to disprove, and politically damaging to him. President Obama will never again say “The private sector is doing fine,” but it appears he will continue to make an economic argument that Republicans can easily rebut.

In addition to the specific deadly quote, this second Presidential mistake presents a significant election opportunity for Governor Romney and other in-cycle Republicans, but only if they treat the President’s argument as serious and seek to debate him, not just to hurl invective. The President is sticking to his guns about what ails the economy and how to fix it. Republicans should relish the opportunity to debate this question extensively.

President Obama’s argument has two components.

1. Diagnosis:  Employment weakness is principally a problem of too few government jobs.
2. Prescription:  Despite record high deficits and debt and while private sector unemployment is high, the federal government should give States and localities money to protect the jobs of existing government workers and hire new ones.

President Obama’s diagnostic error

The President’s diagnosis is incorrect. The principal drag on U.S. economic growth is high unemployment, but the bulk of that unemployment is among people who previously had private sector jobs. The President is correct that private sector employment has been growing slowly over the past 2 1/4 years, while government employment has been shrinking slowly. And yet laid off government workers are still a small fraction of the unemployment problem.

I covered this in detail in yesterday’s post. For today here is the key statistic:

For every net lost government job since employment peaked in January 2008, the U.S. economy has lost more than eleven private sector jobs.

President Obama’s prescriptive error

Since his diagnosis is wrong it’s not surprising that the President’s policy prescription is misguided.  Yes, police officers, firefighters, and teachers are valuable members of their communities. One can like these kinds of public servants and still think the President’s policy is a bad idea.

First, the loss of government jobs over the past few years is almost entirely a local phenomenon. Outside of a steadily shrinking Postal Service, there are 142,000 more federal government employees today than when the President took office.

Police, firefighters, and teachers are all local government employees, traditionally funded by localities from local revenue sources. Localities vary widely. They have different needs, their tax and spending priorities differ, and they express different degrees of fiscal responsibility. Federalizing this local spending forces taxpayers in one area to subsidize high cost, inefficient, or fiscally irresponsible local governments in another.

Second, it’s not like the federal government has money to spare. Federal budget deficits and debt are at record highs. Even if Congress were to pay for increased grants to localities, the spending cuts and/or tax increases used to offset this spending would then be unavailable for other federal priorities.

Third, the President is arguing that government job growth is the engine of the U.S. economy. Here is the President last Friday:

The folks who are hurting, where we have problems and where we can do even better, is small businesses that are having a tough time getting financing; we’ve seen teachers and police officers and firefighters who’ve been laid off — all of which, by the way, when they get laid off spend less money buying goods and going to restaurants and contributing to additional economic growth.

The President’s prescription is to spend more federal taxpayer dollars (that government must borrow) to subsidize localities hiring more government workers, in the hopes that those government workers will then spend their income in ways that will help private sector growth.

The President is wrong. The private sector, not expanded government payrolls, is the path to faster economic growth. Policies should prioritize creating conditions under which private firms choose to expand and hire. This relates closely to recent debates in Wisconsin, New Jersey, and other States.

Fourth, even if you think increased local government hiring is a good idea, temporary federal subsidies don’t create long-term government jobs. Three years ago the President and a Democratic Congress juiced local budgets with the stimulus bill. Now that those funds have run out, they are seeking to do so again. If Congress says yes they’ll be back again and again each time those funds will run out. Temporary subsidies will become permanent.

Fifth and finally, the President argues that government employment should not decrease when the economy is weak. He contradicts what I call the Christie Principle of Shared Sacrifice. This is my wording but the Governor’s concept:

At all times, and especially during a difficult economy, it is unfair to exempt government and government workers from the difficult financial decisions that privately employed and unemployed citizens must make. Sacrifice should be shared and include government cutbacks.

The Republican response

Republican responses to the President’s Friday comments have been aggressive and clumsy. Some have attacked the President for arguing that the economy is doing fine, but he did not say that. Others have attacked him for saying that he prefers government jobs to private sector jobs, or at least sees them as morally equivalent. He might, but again he didn’t say that either. Still others link “The private sector is doing fine” to an assortment of economic woes, including indirectly related problems like high budget deficits and debt.

These are poorly targeted responses to the President’s first mistake last Friday, the devastating quote that we know he will never repeat. Republicans would be more effective if they rebutted his specific claim, that the private sector, and specifically private sector employment, is doing fine.

The President’s second strategic mistake presents an additional and ongoing opportunity that Republicans should not miss. Policymakers and candidates should seek to debate the President’s intellectual premise, to engage him in a serious public discussion about both his diagnosis and his prescription.

Doing so requires hard work of the kind involved in battling the health care and stimulus laws. This hard work will pay off. The President’s intellectual premise is so weak that Republicans can win this debate with both elites and voters, but only if they treat it as a serious policy matter and not just a sound bite. Engaging in and winning this debate will advance good policy and increase Republicans’ chances of victory on Election Day.

(photo credit: White House video)

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1. Private sector employment is doing fine in absolute terms.
2. Private sector employment is doing fine relative to government employment.

His opening remarks emphasize absolute job growth in the private sector.  Note “our businesses have created” in the following quote.

THE PRESIDENT:  After losing jobs for 25 months in a row, our businesses have now created jobs for 27 months in a row — 4.3 million new jobs in all.  The fact is job growth in this recovery has been stronger than in the one following the last recession a decade ago.  But the hole we have to fill is much deeper and the global aftershocks are much greater.  That’s why we’ve got to keep on pressing with actions that further strengthen the economy.

As you would expect from any President he is highlighting the positive: both the change in level (+4.3 M jobs) and the trend line (created net jobs for 27 months in a row). These are prepared remarks, so we know he intended to make these points.

Here is the second quote, the one that is causing controversy.

THE PRESIDENT:  The truth of the matter is that, as I said, we’ve created 4.3 million jobs over the last 27 months, over 800,000 just this year alone.  The private sector is doing fine. Where we’re seeing weaknesses in our economy have to do with state and local government — oftentimes, cuts initiated by governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don’t have the same kind of flexibility as the federal government in dealing with fewer revenues coming in.

And so, if Republicans want to be helpful, if they really want to move forward and put people back to work, what they should be thinking about is, how do we help state and local governments and how do we help the construction industry.

In a future post or two I’ll look at the why behind the President’s logic. In this post I just want to focus on the what, the basic facts of the case.

Let’s take the President’s claim seriously. What would lead him to claim that (1) the private sector is doing fine, and (2) the problem is in government employment rather than private employment, thus necessitating his policies of increased federal spending to create more government jobs?

I think you will see that there are facts that support the President’s arguments, but only if you choose one particular timeframe.

First let’s look at the claim that private sector employment is fine in an absolute sense.  Rather than making my argument in text surrounding the graph, my core arguments are on the following three graphs, so please study them carefully. You can click on any graph to see a larger version.

President Obama is focusing on changes since employment bottomed in February 2010 – we know that from his “past 27 months language,” as well as his measure of the change since then (+4.3 M private sector job). I’m calling February 2010 the employment trough.

There is nothing wrong with focusing on the positive, and it’s to be expected when you’re running for office. If, however, it leads you or those listening to you to incorrect policy conclusions, then it can be quite dangerous.

Which number is the right way to think about private sector employment?  Is it the +4.3 M jobs created since February 2010? Is it the 4.6 M fewer jobs that exist then when we were at peak employment in January 2008? The right answer is “both and neither.” There is no single right way to think about the change in employment. It is important that we see as full a picture as possible, and the President is showing us only part of the picture, the upward sloping portion of the above graph.

Now let’s examine the change in private sector employment relative to the change in government employment. We will study it over two time frames: first using the President’s framework of changes since the trough in February 2010, and second using my framework of changes since the employment peak in January 2008. Here is a graph that supports the President’s controversial quote.

The above chart makes the President’s case, but it tells only part of the story, just as you only get part of the story if you begin the first graph at the employment trough.  If we expand our timeframe back to the employment peak in January 2008 we get a chart that looks like this.

This chart tells a very different story. We’re still down 4.6 M private sector jobs from the employment peak in January 2008, compared to down 407,000 government jobs.  For every net lost government job since employment peaked in January 2008, the U.S. economy has lost more than eleven private sector jobs.

That’s the opposite story from the one told by the President. While the U.S. economy has been slowly creating private sector jobs over the past 2 1/4 years, the hole left to fill is overwhelmingly one caused by the destruction of private sector jobs.

The President is right that the public sector is not creating net new jobs because of local layoffs.  But by focusing on recent trends and ignoring the nearly nine million private jobs lost before his measurement window began, he is leading us to the wrong conclusion. Even if government job growth were to resume, our economy needs to create millions more private sector jobs to be restored to full health.

My charts understate the size of the employment gap because they only measure the decline from January 2008. To return to full employment we need to account for population growth since January 2008, so we need more than 4.6 M new private jobs.

The private sector is not fine, in absolute or relative terms.

The post Is private sector employment fine in absolute or relative terms? appeared first on Keith Hennessey.

Lefty: Growth of the U.S. economy is slowing due to insufficient domestic demand and headwinds, especially from Europe. We need to make sure we don’t make the same mistakes as those Europeans who are weakening their economies through austerity. I’m for growth now. We need to increase highway spending, hire more teachers and policeman, and prevent tax increases, except for on the rich.

Righty: I’m not sure I agree with your diagnosis but want to focus on your “growth now” point. Why does it have to be either-or? Why can’t we pursue growth policies and austerity policies simultaneously? You and I disagree both on what policies best lead to increased economic growth and on the best way to address our underlying fiscal problems, but I don’t see why we have to choose between the two goals.

Lefty: Because austerity hurts economic growth and because our need for growth policies is urgent. We need to prioritize growth now because the economy is weak now.

Righty: I’m not being clear. I agree that the short-term outlook is for weak growth at best, and I don’t want to do anything to hurt that.

Lefty: Except you want to slash government spending. That will have a countercyclical effect. Not only will teachers and policemen be laid off, they won’t have income to spend and so shop clerks and plumbers will lose business.

Righty: You and I disagree about the magnitude of that effect. You think it’s big, I think it’s small, and some of my associates think it’s zero. But let’s assume for the moment that you’re right. My principal focus is not on cutting today’s spending. My top austerity priority is to reduce future deficits by reforming and slowing the spending growth of the the big 3 entitlements: Social Security, Medicare, and Medicaid.

Lefty: Your House Republican friends left Social Security reform out of their budget.

Righty: Yes they did, and I wish they hadn’t. But my point stands — I want to fix our government’s unsustainable borrowing path by making big changes to medium and long-term government spending, especially in the big 3 entitlements. In any conceivable reform those changes don’t even begin for a few years, and once they do, the spending “cuts,” as you call them, phase in gradually over time. I propose policy changes that have no effect for the next few years, then a small effect for a few years. It then grows gradually over time to have huge long-term effects.

Lefty: You want to destroy Social Security, Medicare, and Medicaid.

Righty: That’s a cheap shot and you know it. For the moment let’s set aside the specific changes I want to make. My argument holds even for a very different type of austerity package.

I think that in the long run you want to make only minor tweaks to those entitlement spending programs and instead rely heavily on tax increases to reduce future deficits. I’m just guessing, though, because the only thing you ever say is …

Lefty: I want a balance of spending cuts and tax increases to address our long-term deficit problems.

Righty: Right on cue, thank you. You’re always a bit light on the specifics of your long-term tax increases. But let’s suppose you had specifics. Like mine, your austerity package would have little fiscal effect immediately, and, like mine, your package would phase in gradually over time. This is true if you only raise taxes or if you combine incremental entitlement spending reforms with tax increases. The fiscal effects start small and build up slowly.

To achieve its principal goal, the austerity, also known as deficit reduction, package does not have to have any immediate fiscal effects. I’ll tell you what: you pick a delayed start of up to five years, however much time you think we need for the economy to fully recover and for us to return to full employment. I’ll commit right now that whatever deficit reduction we negotiate will not begin until we are past your initial delay as long as we actually solve the long-term problem. That way, in your Keynesian view of the world, our austerity / deficit reduction package won’t hurt our prospects for short-term growth.

Lefty: So growth now, austerity later? I’m good with that. Always have been. In fact, that’s what I have been saying, if only you had listened more closely.

Righty: Right. I think we both know what each of us wants for short-term economic growth. As I said, I’ll start the deficit reduction discussion with the House-passed Ryan plan + Social Security reform, with a delayed start date of your choosing of up to five years. What is your opening for deficit reduction?

Lefty: Well, I have already proposed $4 trillion of deficit reduction over the next 12 years…

Righty: … which would still leave more than $6 trillion of increased debt over the next decade. And that includes only the beginning of the steep part of the entitlement spending curve.  Your proposal would still leaving a massive medium-term increase in debt. My plan would solve the long-term fiscal problem. You don’t like its effect on Social Security and the health entitlements.  Fine.  What is your solution to the long-term fiscal problem, rather than your first step toward a solution?

Lefty: I’ll tell you later.

Righty: What?

Lefty: I’ll tell you later, when we negotiate austerity, maybe in 2013 or 2014, whenever we’re past this short-term economic weakness. Or maybe we’ll just negotiate this first austerity step after the economy has recovered, and then tackle the rest sometime after that.  You said it:  growth now, austerity later. I’ll tell you my complete solution later.

Righty: No, no, no. We need to negotiate both now.

Lefty: But you said growth now and austerity later!

Righty: I was talking about implementation dates. We need to agree to both sets of policies now, or at least soon. I am committing that the implementation of whatever austerity we agree to won’t begin until after your delay. We negotiate growth now and austerity now. The growth policies are enacted now and start taking effect now. The austerity policies are enacted into law now but don’t begin to take effect for a few years.

Lefty: Why not wait to negotiate austerity? Growth is more urgent, and we both know how hard it will be to reach agreement on solving our long-term fiscal problem.

Righty: My biggest reason is that I lack confidence in anyone’s promises that they will make hard decisions and cast hard votes at some unspecified future date. But let me invert your question: why wait to negotiate on austerity?

Lefty: Because I don’t want to slow growth.

Righty: But enacting legislation soon to reduce future spending, on a time delay, isn’t going to slow short-term growth, especially in your Keynesian view of the world.

Lefty: If it doesn’t start to take effect for 3-5 years then we have 3-5 years to negotiate.

Righty: No we don’t, because markets are forward-looking and so are people. There is an immediate and significant market benefit in committing the U.S. to a fiscally sustainable path as soon as possible. And people need time to plan for big future changes in old age retirement and health promises.

Lefty: Well we’re not going to be able to negotiate either growth or austerity before the election. It’s too risky.

Righty: You’re probably right, and I’m not locked into any particular timing. The sooner the better. If sooner means right after Election Day, then I’m good. If it means early in 2013, immediately after concluding a short-term negotiation or a new President Romney takes office, I can live with that, too. I don’t need short-term growth and long-term austerity to be negotiated simultaneously or enacted as part of the same legislation.

But it’s crazy to argue that we must wait for the short-term economy to recover before we enact long-term changes that reduce future deficits. The constraints on proposing, negotiating, and enacting long-term deficit reduction are political and legislative, not economic. A weak short-term economy is not a valid excuse for delaying the legislative enactment of policy changes that would solve our deficit and debt problem. It is an excuse only for beginning the immediate implementation of those policy changes, and we can delay that implementation to address short-term growth concerns. Long-term austerity can be proposed, negotiated, and enacted while the short-term economy is weak and even if it is getting weaker.

Lefty: Umm…

Righty: Will you therefore put on the table now a delayed-start austerity plan to compare to mine? If this coming election is to be a choice about two different visions of America, will you present your long-term fiscal vision now so voters can compare our plans? If not, will you commit now to proposing a specific long-term austerity plan no later than January 2013 with a goal of concluding negotiations within a few months? There is no good policy reason to wait longer than that, even if the U.S. economy is in the tank.

Lefty: <Lefty looks at his watch.> Oh my! Look at the time. I am so sorry to rush out on you but I am late for another meeting. I’ll catch you next time. <Lefty shakes Righty’s hand and hurries out.>

Righty: <sigh>

(photo credit: mementosis)

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Over Obama’s four budget years, federal spending is on track to rise from $3.52 trillion to $3.58 trillion, an annualized increase of just 0.4%.

Referencing and relying on this article (rather than on the hundreds of talented OMB career staff who sit nearby), White House Press Secretary Jay Carney told reporters:

I simply make the point, as an editor might say, to check it out; do not buy into the BS that you hear about spending and fiscal constraint with regard to this administration. I think doing so is a sign of sloth and laziness.

President Obama then followed suit in a campaign speech in Iowa one week ago:

But what my opponent didn’t tell you was that federal spending since I took office has risen at the slowest pace of any President in almost 60 years.

President Obama and Mr. Carney are both relying on Mr. Nutting’s key quote above. Let’s examine the quote as Mr. Carney suggests we should do.

Problem #1: The President argues that his fiscal stimulus law, enacted in February 2009, had a big positive effect on the growth rate of the economy. We are now asked to believe that President Obama’s policies did not significantly increase spending but did significantly increase economic growth. This is, to say the least, an intellectually inconsistent argument. The whole Keynesian fiscal stimulus argument is premised on a significant increase in government spending.

Problem #2: Mr. Nutting assumes that since a President serves a four year term he should be measured for four budget years. But since budget years begin in October and Presidential terms begin in January, the fairest and most accurate way to measure the budget effects of a one-term President is to look at five budget years, not four.

Mr. Nutting mistakenly assumes that FY 2009 spending must “belong” to either President Bush or President Obama. As I explained a while back, the two Presidents should share responsibility/blame for this transition year, since each influenced the spending within it. A form of FY 2009 spending should count in both of their records. The same is true for any budget year that spans a Presidential transition.

The easiest way to see the flaw in Mr. Nutting’s four year budget window is that his 0.4% average annual growth rate assumes the Obama Presidency began on October 1, 2009.  That can’t be right.

Problem #3:   Beginning measurement eight months into a Presidency would be bad under any circumstances, but in this case it’s critical. The year Mr. Nutting excludes is the financial crisis year, when government spending spiked because of bailout costs for the banks, AIG, Fannie & Freddie, and the auto manufacturers, as well as the first year effect of President Obama’s stimulus law.

Mr. Nutting therefore measures the growth rate not just from the wrong date, but relative to a spending level that was extraordinarily high because of one-time events.  Any spending growth rate, over any timeframe, measured relative to the $3.52 trillion starting point of FY 2009 will look good because that starting point is so unusually high.  Mr. Nutting cherry-picked his start date to make President Obama’s record look good.

The start/end point gimmick is not a new tactic. Rep. Debbie Wasserman Schultz did something similar with job creation two years ago.

Problem #4: Mr. Nutting mistakenly uses $3.58 trillion to represent the President’s budget for FY 13.  This is CBO’s projected baseline spending (i.e., current law spending), not their estimate of what President Obama has proposed.  The correct number for the President’s FY 13 proposed spending is $3.72 trillion. (See Table 2 here.)

So in the key Nutting quote upon which the President relied:

• “Obama’s four budget years” should be five;
• $3.52 trillion skips all spending increases in the first eight months of the Obama Administration, including the early implementation of the stimulus law;
• $3.58 trillion is a simple factual error;
• and the calculated 0.4% average annual growth rate depends on all three of the above.

If you instead do this calculation the right way and measure the average annual growth rate from FY 2008 to CBO scoring of the President’s budget proposal for FY 2013, you get an average annual growth rate of federal spending of 4.5%.  That’s a nominal growth rate, so the real growth rate will be in the 2s.

As I describe, below you should be careful even using my number because growth rates are an incomplete and therefore inaccurate measure of spending.

Problems 1-4 above reveal the core fiscal policy lesson, which as best I can tell no one else has publicly revealed:  don’t rely only on growth rates.

Problem #5:  It is a mistake to judge a fiscal policy only by looking at growth rates.  At a minimum you need to look at both levels and growth rates.  The best thing to do is to examine average levels over time.  The spending levels reveal more useful information, and it’s nearly impossible to gimmick spending levels as the Nutting article gimmicks spending growth rates.

The second most important gimmick in the Nutting article is his choice of FY 2009 as his starting point for measurement.  The most important gimmick is his choice of an average annual growth rate as the right metric for spending.  You calculate an average annual growth rate by picking a starting point and an ending point, drawing a line between them, and then figuring out the slope of the line.

• This works fine if the path you’re measuring is a smooth line or even a smooth curve.  The more irregular the path, the more your choice of endpoints affects the measurement of the slope.  Mr. Nutting took advantage of that arithmetic fact here by choosing his start point to make President Obama’s spending growth look surprisingly low, but even someone not trying to spin you would be relying too heavily on judgment calls about the appropriate start and end points.  The 4-vs-5 years debate matters a lot if you’re measuring the slope of the line, and much less if you’re instead measuring levels.
• The average annual growth rate metric also ignores all the intervening years and therefore loses a lot of potentially useful information.  Measuring average levels over time includes this information.
• As a policy matter we should care about how much government is spending (the level), and whether based on our values we think that amount is too much, too little, or just right. If properly calculated, growth rates can be a useful shorthand to allow us to evaluate how levels are changing over time, but growth rates are useless if we don’t understand the levels.  A 5% growth rate from a historically high starting spending level is a very different animal than the same growth rate from a much lower starting level.

Conclusions

I will conclude with some facts.

• The historic average is federal spending of 20% of GDP, +/- 0.2 percentage points depending on when you start your measuring window.  That’s pre-2008 crisis, so I’m ending the measurement with FY 2008.
• Federal spending averaged 19.6% of GDP for President Bush before the crisis year of FY 2009.  If you include FY 2009 in President Bush’s average, including the Obama stimulus and the appropriations laws President Obama signed, Bush’s average is 20.1%.
• The highest level since the end of World War II, pre-financial crisis, was 23.5% of GDP in 1983.
• In FY 2009, the financial crisis year that spanned the Bush and Obama presidencies, federal spending was 25.2% of GDP.
• If President Obama’s FY 13 budget is enacted as he proposed it, during the first term of an Obama presidency spending will average 24.1% of GDP. If for some reason you want to exclude FY 2009 as Mr. Nutting did, your average is still 23.8% of GDP for a one-term Obama presidency.

Federal government spending in the first year of the Obama Administration was extremely high, and much of that was either put in place before President Obama took office or was out of his control.  Nevertheless his policies have maintained an extraordinarily high level of spending through his first term, and he proposes to continue to do so if elected to a second term.

Federal spending has averaged 20% of GDP for decades.  President Obama is presiding over a much bigger government, at 24% of GDP.  If his latest budget were enacted in full and he were elected to a second term, the average over his tenure would be 23.4% of GDP.  This means that, relative to the economy, federal government spending would be 20 percent larger than the historic average during a one-term Obama presidency and 17 percent larger than average during a two-term Obama presidency.

That is a spending binge.

(photo credit: Purple Slog)

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THE PRESIDENT:  How can we want to maintain tax cuts for the wealthiest Americans who don’t need them and weren’t even asking for them?  I don’t need one.  I needed help back when I was your age.  I don’t need help now.  (Applause.)  I don’t need an extra thousand dollars or a few thousand dollars.  You do.

Let’s assume you agree with the President — that a college student has a greater need for an extra thousand dollars than a rich person.  By itself that judgment does not mean that raising taxes on the rich to further subsidize student loans is good policy.  To make a balanced decision you also need to incorporate the harm done by taking money from someone, a factor the President’s quote ignores because it treats tax cuts as given rather than taxes as taken.

The President’s language assumes this thousand dollars originates with the government and that policymakers must choose either to give it to students to help pay for college or to give it to rich people.  Under this logic since we agree that the college students have a greater need, government should give the money to them.  In this framework resources belong to the government, the government should allocate those resources according to need, and the government gives tax cuts to people only when government officials determine these people need them.

This approach ignores that government gets this thousand dollars to spend only by taking it from someone.  This act of taking has costs — it harms the person from whom the government took the money and it weakens incentives to work and invest.

Am I drawing too strong of an inference from a single Presidential comment at a rally with a bunch of college kids, in which he doesn’t even say “give,” he says “maintain”?  I don’t think so.  A search of whitehouse.gov for “give tax cuts” turns up 171 hits.  Throw in “giving tax cuts” and you get another 77.  Yesterday’s Presidential remark emphasized the need comparison, while the giving tax cuts approach is a common Presidential refrain and one of his frequent underlying themes.

You may still think the President’s proposed policy makes sense — that the harm done to the rich guy by taking his money, combined with his need for it, is less than the college student’s need.  I’m OK if you reach this conclusion since you included in your evaluation the harm done to the person from whom the taxes were taken.  Maybe you assigned little value to it, but you did not ignore it completely.  President Obama appears to ignore this cost.  The same is true every time you hear an elected official refer to “giving tax cuts” to someone.  If  we accept that government gives tax cuts, then when government does not give tax cuts, no harm is done since no action is being taken.  If instead we acknowledge that government is taking more from someone, we must recognize the cost of that taking in our decision.

Government doesn’t give tax cuts, it takes more or less taxes.

The President’s language puts us on a slippery slope. Under this approach we treat all tax revenues as if they originate within the government.  We create moral parity between giving tax cuts and increasing government spending.  We trust government officials to reallocate society’s resources to those whom they determine most need it while ignoring the harm done by the taking.  By ignoring this harm we set no limiting principle on the government’s ability to take that which we earn and own and give it to others.  We make the rich pay more since they have greater ability to pay and less need.

At the end of this slippery slope we find a general principle:

From each according to his ability, to each according to his needs.

Karl Marx (Critique of the Gotha Program, 1875)

(photo credit: White House photo by Chuck Kennedy)

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Point 1:  If you do not change Social Security’s promised benefit payouts you would need to set aside $23.2 trillion today to permanently fill the hole between promised Social Security benefits and dedicated Social Security taxes (almost all of which are payroll taxes).

For comparison $23.2 trillion is about one and a half years of U.S. GDP.  Take the entire economic output produced in the USA for the next 18 months.  Set it aside.  Now you have enough cash, when combined with future projected Social Security payroll and other dedicated taxes, to pay current and future benefit promises.  That’s a mighty big hole to fill.

For the technicians, the present value of the infinite horizon liability is $20.5 trillion, but that assumes one will magically find $2.7 trillion of change under the couch cushions to “pay back the Social Security Trust Fund’s obligations.”  The concept I’m trying to capture with the $23.2 trillion is the cash needed now to defease the Social Security liability:  suppose you were going to give someone all future revenues dedicated to Social Security, and they would commit to forever paying all promised Social Security benefits.  How much additional would you have to pay someone today to accept this deal?  I think that’s the appropriate way to measure the size of the Social Security funding gap.

Point 2:  For the next two decades demographics are a bigger driver of entitlement spending growth than is health cost growth.  Here are the Trustees:

Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary factors will be population aging caused by increasing longevity and health care cost growth somewhat more rapid than GDP growth.

There is an incorrect and misleading conventional wisdom that health care costs are the principal driver of our long-term entitlement spending problem.  That’s true, but only starting about 20 years from now.  For the next two decades demographics, specifically the retirement of the Baby Boomers, is the biggest driver of entitlement spending growth.  The point that everyone misses is that Medicare (and Medicaid) spending growth are driven by a combination of health cost growth and demographics.  When you combine the demographic factor driving part of Medicare spending growth with the demographic cost driver of Social Security, you account for more of the total spending growth than if you look only at the effect of per capita health spending growth.

Health cost growth dominates everything in the long run, but on our current path we won’t make it to the long run.  If policymakers do not change the spending paths of Social Security and Medicare (and Medicaid, but that’s not in these reports) soon, things will break long before we get to the time when health costs are the principal driver.

This conventional wisdom and confusion result from two factors:

1. People ignore the demographic drivers in Medicare spending.  Medicare grows because there are more seniors collecting it and because spending per senior is growing unsustainably fast.
2. Advocates for the Affordable Care Act, including President Obama and his former budget director Peter Orszag, worked hard to convince people that “It’s all about health cost growth.”  This served two of their purposes:  to make an argument for their health care reform proposal and to rationalize not doing anything to fix Social Security.

I am not arguing that we should ignore health cost growth; just the opposite.  It is a huge driver of short-term entitlement spending growth, it’s just not the biggest factor in the next two decades.  Instead we must change policy to address both demographics and health cost growth, and we must address demographics in all three major entitlement programs: Social Security, Medicare, and Medicaid.

(photo credit: RenoTahoe)

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Last year Senate Budget Committee Chairman Kent Conrad (D-ND) committed to his ranking member, Senator Jeff Sessions (R-AL), that the committee would mark up a budget resolution this year.  By itself that’s only a first step but it’s a lot more than the Senate has done in the past three years.

Senate Majority Leader Reid (D-NV) has repeatedly said that he will not bring a budget resolution to the floor this year.  If Leader Reid were to carry out such a threat he would be violating the Budget Act requirement, but until now the issue has been moot. As long as the committee has not reported, the responsibility to act and blame for legislative inaction falls on Chairman Conrad.  If the committee reports a budget resolution then the responsibility for action and blame for inaction shift to Leader Reid.

Chairman Conrad’s announcement

Today Chairman Conrad announced that:

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I imagine Chairman Conrad will receive favorable press coverage for proposing the bipartisan Bowles-Simpson recommendations.  If he doesn’t use his power as Chairman to force a vote, however, then his proposal is little more than an interesting debate topic.

Unless I’m missing something Chairman Conrad is not marking up a budget resolution tomorrow.  He is instead convening the committee for a discussion.  He will lay down the Bowles-Simpson numbers as his own and everyone will talk.  Then he will adjourn the meeting tomorrow without any votes, without any date to reconvene, without any deadline or forcing action for private bipartisan negotiations he hopes will then occur but for which he has low expectations of success.

It’s not a markup if you don’t vote.

Talking vs. voting

The job of a Member of Congress is to vote on legislation, not to talk about legislation.  Talk is sometimes helpful but If Members of Congress are not voting they’re not doing their job.

Press coverage often equates public statements with votes.  That’s a huge mistake. While it’s easy to speak against a policy you oppose, casting a vote against it increases the public pressure on you to support an alternative and cast an affirmative vote for it.  Even failed votes can drive legislative progress by pressuring members to say what they’re for, not just what they’re against.

For a few years the Senate has had a problem of talking rather than voting, especially on fiscal policy.

• Leader Reid is not blocking a budget resolution reported by the Budget Committee. He is saying he will block a budget resolution if one is reported by the Committee.
• Leader Reid says he won’t bring a budget resolution to the floor because he knows that it would be impossible to reach a conference agreement with those wild and crazy House Republicans. If the committee were to report a budget resolution, then Leader Reid would be forced to back up his verbal threat with a procedural decision not to bring the resolution to the floor.  The threat and the decision to enforce that threat are fundamentally different, because the threat could be a bluff or the conditions surrounding the decision could change when it’s confronted.
• The Senate Democratic majority has for three years verbally attacked the House-passed budget resolutions but has not marked up a budget resolution in committee or brought one to the Senate floor.  Senate Democrats have talked but not acted legislatively, and as the majority they have primary responsibility to act.
• It appears Chairman Conrad plans to propose a budget but not to force any Members of his committee to vote on it.  Instead everyone will just talk about his proposal.

Senate Republicans are not blameless here. For three years they have justifiably attacked the Democratic majority for failing to uphold their responsibility to pass a budget, but the Senate minority has not offered their own budget resolutions.  The primary responsibility for action rests with the majority, but the minority has opportunities to act and to force votes as well, especially in the Senate.  Senate Republicans have generally chosen not to do so. They have, however, talked a lot.

To their credit both the House majority and minority(!) have proposed and voted on budget alternatives.  House Republicans have done so each year since they regained the majority, and this year even House Democrats, led by Committee Ranking Member Van Hollen, offered an alternative budget and forced a floor vote.  I strongly oppose the substance of the Van Hollen amendment but House Democrats at least deserve credit for putting their votes where their rhetoric is.  House Republicans deserve extra credit for carrying out their legislative responsibilities and taking electoral risk while knowing that the Senate was unlikely to to the same.

Tomorrow’s Senate Budget Committee discussion

It is possible that tomorrow’s discussion will lead to a sudden outpouring of bipartisan legislative action in the Senate. The Gang of Six, who fouled up the Obama-Boehner grand bargain negotiations last year with their weak policy and poor timing, have a chance to redeem themselves by supporting the Conrad mark and demanding the committee and full Senate vote on it.  They could form the beginning of a legislative center that could pressure both party leaders to act.  I oppose the Bowles-Simpson recommendations because they would result in too big of a federal government, but nonetheless I think that voting on Senator Conrad’s implementation of those recommendations would represent legislative progress.  At least members would be making choices and backing them up with votes, and I would hope that Senate Republicans would then propose an alternative that would be more to my liking.

If tomorrow Chairman Conrad does not use the power he has to drive the process forward I don’t see why we should anticipate any legislative progress.  Last fall the Super Committee had a formally binding process and a fixed deadline and they failed to negotiate a compromise. This is now an election year.  Chairman Conrad has missed his deadline and appears unlikely to create a new one. He seems resigned to the likelihood that his proposal will go nowhere, but that is in large part a result of his apparent decision not to force either the committee members or the full Senate to vote on his proposal.

The Senate has spent three years talking about fiscal policy.  Senators have a responsibility to vote on specific proposals even if they know those votes will fail.  As Budget Committee Chairman it is Senator Conrad’s responsibility to force the Senate to act, not just to offer an interesting proposal for discussion.

(photo credit: Talk Radio News Service)

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We also need to keep investing in clean energy like wind power and solar power.

…  And as long as I’m President, we are going to keep on making those investments.  I am not going to cede the wind and solar and advanced battery industries to countries like China and Germany that are making those investments.  I want those technologies developed and manufactured here in Ohio, here in the Midwest, here in America.  (Applause.)  By American workers.  That’s the future we want.

The President has picked three industries and is arguing for an industrial policy to subsidize them in part because other countries are subsidizing them.

Let’s extend this logic.  Suppose China or Germany starts subsidizing the biotech industry.  Should the U.S. government subsidize American biotech firms so that “those technologies [are] developed and manufactured … here in America, by American workers?”

What if China subsidizes web development firms, Germany subsidizes auto manufacturers, France subsidizes biotech firms, Japan subsidizes advanced battery firms, Brazil subsidizes ethanol firms, and South Korea subsidizes chip manufacturers?  Should the U.S. subsidize all of those domestic industries so that we don’t cede any of them?

What if the Canadian or Mexican government were to subsidize high-tech oil production firms, or Brazil to subsidize advanced tobacco production?  Is the President’s policy to keep here in American through subsidies all industries that other governments are subsidizing, or only the “good” industries that he thinks should be kept in America?

More generally, should the U.S. government (a) subsidize particular industries and if so (b) determine those subsidies based on what other countries are doing?

If we are to subsidize particular industries over others, how do we square that with the argument, made by the President and others, that we need to remove such subsidies from the tax code?

If the rule for structuring subsidies is to make sure we don’t cede certain industries to other countries, how is that different from giving the governments of those countries control over the shape and structure of the U.S. economy?

If the President wants to subsidize wind and solar power because he wants to accelerate the development of carbon-free alternatives to coal and natural gas, he should make that argument.  If President Obama is instead going to subsidize industries either because he likes them or because other Nations’ governments are subsidizing them, then we must acknowledge that he is engaged in industrial policy, aka state-managed capitalism, with an open question about whether the managing state is based in DC, Berlin, or Beijing.

(photo credit: Maryellen McFadden)

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1. President Obama’s proposed medium-term deficits
2. The Ryan budget proposes lower deficits and less debt than the Obama budget
3. How will President Obama respond this year to Chairman Ryan’s lower deficits and debt?
4. Comparing the Ryan and Obama long-term deficits and debt

Yesterday I showed you the long term deficit and debt paths for both Chairman Ryan’s and President Obama’s budgets.

Today will be easy. I’m just going to add the Bowles-Simpson long-term deficits in the mix.

In early 2010 President Obama created a bipartisan fiscal commission co-chaired by former Clinton White House Chief of Staff Erskine Bowles (D) and former Wyoming Senator Alan Simpson (R).

Although Messrs. Bowles and Simpson failed to get the 14 of 18 vote 3/5 supermajority the President required of them, I maintain that they succeeded.  They build a bipartisan plan that would have significantly reduced future budget deficits and that quite surprisingly had support from Senate Democratic Whip Durbin (D-IL),Senate Budget Committee Chairman Kent Conrad (D), the then-ranking Democrat on the House Budget Committee, John Spratt, and Republican Senators Coburn, Crapo, and Gregg.

The President did nothing with the recommendations of this commission that he created.

Here are the long term deficit paths from yesterday with one addition: the Bowles-Simpson recommendations are a new purple line.

The long-term deficit story is fairly clear.  You can see that the purple line ends up below the red line and the two track closely together.  Bowles-Simpson is therefore slightly more aggressive on deficit reduction than the Ryan budget in the long run.  Bowles-Simpson and Ryan have quite similar deficit paths, both of which are sustainable in the long run and are therefore quite different from the President’s proposed long run path.

Having similar deficit paths is not enough for us to adequately compare the Ryan and Bowles-Simpson plans.  To do that at a minimum we need to look at the gross spending and revenue components of each plan.  We’ll get to that next week.

For now we can draw two conclusions by adding the Bowles-Simpson plan to this graph:

1. The Ryan and Bowles-Simpson plans have similar deficit paths.
2. It is silly to claim, as President Obama’s team does, that President Obama’s budget is similar to Bowles-Simpson, at least in terms of long term deficit reduction.  Bowles-Simpson is a fiscally sustainable long run path while the President’s budget is not.

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In case you missed it here are the earlier posts in this series:

1. President Obama’s proposed medium-term deficits
2. The Ryan budget proposes lower deficits and less debt than the Obama budget
3. How will President Obama respond to Chairman Ryan’s lower deficits and less debt?

There is uncertainty in every budget projection, and every projection requires making certain assumptions.  The longer your timeframe the more your projection is vulnerable to those uncertainties and assumptions.  In addition the policy specificity in both plans declines significantly after 10 years.

Despite all these caveats, it makes sense to look at long run projections.  Yes, they are inaccurate, and yes, things will change in both the economy and policy.  But that’s no reason to ignore our best guess/estimate of what trends each leaders is proposing.  As long as we don’t assign too much false precision to multi-decade projections we can still draw valuable conclusions from these long-term estimates.

Here is the long-term deficit comparison.

• Once again you can see that both budgets project declining deficits (relative to the economy) for the next six years (through 2018).
• Ryan’s deficits then tick up a big to 1.25%, hold flat until 2030, then begin a steady decline, reaching balance in 2039 and a 3% surplus by 2050.
• After ten years President Obama’s deficits begin to climb steadily over time, reaching 6.6% of GDP by 2050.

I am using each advocate’s claims about their long-term projections. The impartial referee has not scored the policy effects of either proposal beyond 10 years, so we have to rely on the advocates’ claims.

Would we reach a 3% surplus in 2050 if the Ryan budget were enacted in full?  Certainly not.  Would we hit a 6% deficit in that same year under the President’s budget?  No.  At 40 years out, each is little more than an educated guess.

But the long term lessons of this graph are not guesses.

• Chairman Ryan proposes stable deficits of a bit over 1% of GDP, below the historic average deficit, followed by a gradual path to balance and eventually to surplus.
• President Obama’s budget would result in deficits that are always greater than the historic average, and that would cause debt/GDP to increase again beginning about 10 years from now.
• The gap between the two proposed deficit paths widens over time.
• President Obama’s proposed deficit path is unsustainable.  Our economy can tolerate high and even very high deficits for a short time. High and steadily rising deficits like those described by the blue line cannot be sustained.  Something in the economy will break.

Now let’s look at long-term debt. Debt is, of course, the accumulation of annual deficits and occasionally surpluses. Deficits measure an annual flow while debt measures a stock.

The divergent paths are even clearer here. Under both plans debt/GDP would increase this year and next, then begin to decline.

Chairman Ryan’s plan would result in debt/GDP steadily declining over time. It would take decades to return to a pre-crisis average.

President Obama’s plan would result in debt/GDP stabilizing by the end of this decade, then steadily and forever growing. At some point, and no one knows when, that debt becomes unsustainable.

Again, please don’t get too wrapped up in the point estimates I have shown for each plan for 2050.  The point is that the Obama debt would eventually break 100% of GDP and keep climbing, and the Ryan debt would steadily decline over time.  The gap between the two is significant and ever-increasing.

The red path is economically sustainable, the blue path is not.

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This is the third in a three part post.

1. President Obama’s proposed medium-term deficits
2. The Ryan budget proposes lower deficits, less debt than the Obama budget.
3. (this post)

I’ll begin with the conclusion from the second post.

Conclusion: Over each year of the next decade the Ryan budget would result in lower deficits, less debt, and a better long-term debt trend than the President’s budget.

Key strategic point:  Last year President Obama’s fiscal strategy was to claim to match Republicans on deficit and debt reduction, then point out that he did so in a way that he claimed better fit the priorities of most Americans.  The difference, the President wanted to claim, was not in deficits or debt, but in how he and the Republicans reached the same end goal.  His budget, the President argued, was both fiscally responsible and more compassionate because he raised taxes rather than cut spending deeply.

Rewind one year

Early last February the President proposed a budget.  About two months later Chairman Ryan proposed a budget that would have resulted in significantly lower deficits and less debt than the President’s proposal.  This undermined the President’s public strategy, so a week later the President counter-offered.  He released a new budget proposal that he claimed matched the Ryan budget on deficits and debt.

While the President did put more spending cuts and tax increases on the table in his second proposal, he did not actually match the deficits in the Ryan budget.  He couldn’t or wouldn’t make enough hard choices so he (a) relied on an ambiguously defined automatic trigger to justify some of his deficit reduction claims and (b) used a longer timeframe to measure his proposal than Ryan’s.  The Ryan budget proposed $4 trillion of deficit reduction over 10 years. The President said his new proposal reached the same $4 trillion in 12 years, hoping that no one would notice that this meant he was proposing $2.8 trillion of deficit cuts over 10 years (and even that number is a generous interpretation). By showing you results rather than changes from a baseline I hope that my graphs will make a repeat of any such tricks more transparent this year.

Setting aside the holes and timing gimmicks in the President’s second budget proposal last year, the strategic move stands. When it became obvious that the House Republican budget would result in significantly lower deficits and less debt than the President’s budget, President Obama proposed a second budget.

All this happened well before the grand bargain negotiations with Speaker Boehner, the debt limit showdown that resulted in the Budget Control Act, and the failed Super Committee negotiations.  The challenge the President faces today is identical to the one he faced a year ago, but there has been a lot of intervening action that might provoke a new Presidential strategy this year.

Same challenge. Same solution?

Today President Obama faces the same strategic challenge he did last year at this time.  The President has two options.

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The President and his team are smart enough that they should have seen this coming.  I wonder how they will answer the deficit/debt comparison question today?  Has the President made this strategic choice yet?

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This is the second in a three part post.

1. President Obama’s proposed medium-term deficits
2. (this post)
3. How will President Obama respond this year to Chairman Ryan’s lower deficits and debt?

If you have not done so already I recommend you first read yesterday’s post on the President’s proposed deficits. You will see why I am focusing on displaying proposed results rather than proposed changes.  I hope that today’s post drives home my point about the benefits of apples-to-apples comparisons of results without the distraction of the baseline/increase/decrease squabbling.

Here is yesterday’s deficit graph with a new line added in red for the Ryan budget.

I won’t repeat yesterday’s explanation of the chart, which includes explanations of the green and orange lines.  The historic line is now black.  Now we can compare the President’s budget in blue to the Ryan budget in red.  As always, everything is measured relative to the economy (% of GDP).

This chart makes the deficit comparison easy:

• The Ryan budget proposes a 5% deficit for FY13, lower than the President’s proposed 6.1% deficit for that same year.
• Chairman Ryan’s proposed deficits are lower than the President’s proposed deficits in each year of the next ten. The gap widens over time to a maximum of two percentage points in 2021.
• The Ryan deficits would drop below the 2.1% historic average in 2015 and would remain significantly below the average through the rest of the 10 year budget window. The President’s budget is above the average in each year of the next 10.
• At the end of the decade Chairman Ryan proposes a 1.2% deficit compared to the President’s proposed 3.0%.

We can do the same thing with debt.

Again by focusing on results rather than changes relative to a disputed baseline, the comparison is quite easy:

• Under the Ryan budget debt would peak at 77.6% of the economy in 2014. Under the President’s budget debt would peak at 80.4% of the economy in that same year.
• The Ryan budget would cause debt to steadily decline to 62.3% of GDP by the end of the decade.  Under the Obama budget debt would flatten out by 2018 and end the decade at 76.3% of GDP, 14 percentage points higher than under the Ryan budget.
• At the end of 10 years debt would be declining relative to the economy under the Ryan budget, while it would be flat under the President’s budget.
• For comparison the pre-crisis (1960-2007) average debt/GDP was 36.3%.

Conclusion:  Over each year of the next decade the Ryan budget would result in lower deficits, less debt, and a better long-term debt trend than the President’s budget.

This deficit and debt comparison poses a strategic challenge to the President identical to one he faced last year.  In a separate post I explain this challenge and the President’s options.

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You can, if you like, compare it to something I posted at the time:  Why the Obama-Boehner talks fell apart.  I think this means I scooped the Post by about eight months.

I also wrote a contemporaneous post opposing the Gang of Six plan that received some attention at the time.

(photo credit: Franklin B Thompson)

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1. (this post)
2. The Ryan budget proposes lower deficits and less debt than the Obama budget
3. How will President Obama respond this year to Chairman Ryan’s lower deficits and debt?

The business of Washington, DC is changing policy.  Almost everyone in Washington is trying either to change some element of policy or to prevent someone else’s changes.

As a result the public debate centers almost entirely on the fight over how and how much policy would change rather than on what the absolute results would be.  Both are important, but public debate usually ignores the results and only argues about the proposed change. That’s bad.

In fiscal policy this often leads to endless debates in which both sides agree on what the result of a proposed policy would be, but disagree on whether that result is an increase or a decrease because of disagreements about the baseline, the starting point for measuring a change. It also leads to poorly informed decisions in which policymakers ignore whether the results are acceptable relative to an objective standard.

I care a lot about whether a proposal increases or reduces the deficit.  I care a lot more about these changes, and about deficits in general, when the resulting deficits are 7-10 percent of GDP than when they are 1 or 2 percent.

I am therefore going to do something a bit unusual with today’s chart.  I’m going to show you the deficits proposed by President Obama in his budget without telling you whether they are increases or reductions relative to some (easily disputed) future baseline.  By doing this I hope to focus your attention on a different way of thinking about the deficit that may be more important than the way Washington traditionally looks at a budget.  Instead we’re going to compare the President’s proposed deficits to two results standards that are difficult to gimmick.

Here are deficits and surpluses since 2000 and President Obama’s proposed deficits for the next ten years.  I’d like you to focus on (1) the shape of the the dark blue proposed line and (2) how it compares to the green and orange dotted lines.  As always, click on the graph to see a larger version.

• This graph is measured in percent of GDP.
• Actual historic surpluses (in 2000 and 2001) and deficits are in medium blue.  The President’s proposed deficits are in dark blue, to the right of the black vertical line.
• The red dot shows the most important proposed deficit, that for Fiscal Year 2013, the year Congress is now working on (in theory).  This fiscal year begins October 1, 2012.  The President proposes a 6.1% deficit for FY13.  This year’s (FY12) deficit is projected to be 8.1% of GDP.
• The dotted orange line represents the average (pre-2008 crisis) budget deficit of 2.1% of GDP.  That’s the average from 1960-2008.
• The dotted green line is at 3% of GDP, a rule-of-thumb line for the deficit/GDP that would result in debt/GDP staying constant.  Deficits above the green line mean the debt is increasing relative to our economy, while deficits below the green line mean the economy is growing faster than government debt
  [held by the public].

I suggest you memorize three numbers when you’re discussing deficits: 0, 2, and 3.

• Zero is a balanced budget, of course.
• The historic (pre-crisis) average budget deficit is about 2% of GDP.
• A deficit of roughly 3% of GDP will hold debt/GDP stable.

(Technically the 2 is between 1.8 and 2.1, depending on exactly when you start the window. For a rule of thumb, two works great.)

Key #1 to understanding the President’s budget is that he would bring the deficit down below the green line and then make sure he doesn’t break above it again.  I’d bet heavily that’s the principle his budget director used in building this budget – get me to a point where we are (just barely) not increasing debt/GDP, at least at the end of the 10-year budget window.

Key #2 is that at no point in the next ten years would his deficits be at or below their historic average.  The proposed blue line is at all times above the orange line.

This is consistent with where the President has been on the deficit since his “second” budget proposal last spring.  If Congress does what the President proposes, the debt/GDP situation will briefly stop getting worse for a few years at the end of the next decade before entitlement spending pressures once again start driving deficits up.

It also means that the President would not, for a single year, get deficits below their historic average.  Rather than fluctuating around 2% of GDP as it has since 1960, the President proposes a new medium-term deficit ceiling of 3% of GDP.

Conclusion:  The President’s budget would result in deficits that are always higher than the historic average but would, beginning six years from now, temporarily stop government debt from increasing relative to the U.S. economy.

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And when he faced his country, who looked to him for answers, he would not dwell in blame or dreamy idealism.

(photo credit: White House photo by Pete Souza)

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Almost every time President Obama talks about energy he mentions wind and solar power. He used to talk about nuclear power as well. Doing so was politically courageous for a Democrat because nuclear power splits the environmental left. The President rarely mentions nuclear power these days, I presume because of the Fukushima earthquake + nuclear incident a year ago.

The White House blog post accompanying the Blueprint includes the following highlight:

Doubling Renewable Energy Generation: Thanks in part to the Obama Administration’s investment in clean energy – the largest in American history – the United States has nearly doubled renewable energy generation from wind, solar, and geothermal sources since 2008.

“Nearly doubled” in less than four years sounds pretty good but reminds me of this Dilbert cartoon.  In it Dilbert raises his hand and asks the marketing manager:

Are you asking a room full of engineers to be excited about a big percentage increase over a trivial base?

Let’s look at my favorite energy graph, produced by Lawrence Livermore National Laboratory, a part of the Department of Energy.  It translates all energy usage into a common unit (BTUs) for comparison.  You’ll probably want to click on the graph to see a larger (and readable) version.  In particular look at the size of the solar (yellow), wind (purple), and geothermal (brown) connecting lines, especially in comparison to the lines for nuclear (red), coal (black), and natural gas (light blue).

Wind, solar, and geothermal sources are trivially small sources of U.S. energy.  Doubling their usage is significant within those industries but when compared to the overall pattern of energy usage in the U.S., the increases are tiny.

Here are three basic facts to know about energy sources for electricity production in the U.S.:

1. We have lots of really cheap coal.
2. Thanks to new fracking technologies we now have lots of cheap natural gas, too.
3. Nuclear comes in third and represents about 20% of our source of electricity production.

Don’t forget two points from yesterday’s post which you can see easily from the above graph:

• In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.
• If you could make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Let’s compare BTU totals in sources of U.S. energy excluding transportation.

From this graph you can see how small wind and solar power are relative to other energy sources in the U.S.  Even large percentage increases in the use of solar and wind power will have trivial impacts on the patterns of American energy usage.  Doubling, tripling, or quadrupling our usage of these technologies will not fundamentally change the three above basic facts about electricity production in the U.S.  Until there is a technology breakthrough, the U.S. is a land of electricity production from coal, natural gas, and nuclear, with hydro and biomass trailing and with wind, geothermal, and solar too small to matter much at all.

The value of increased solar and wind production is not the marginal short-term reductions of coal and natural gas we use in America.  These increments are too small to matter. The benefit is instead whatever we learn about producing and using these technologies that might, at some point in the future, result in innovations that so significantly reduce the cost of these technologies that it becomes less expensive to produce power from these renewable sources than it does with our abundant supplies of coal and natural gas.  If the technology ever crosses (or even approaches) those breakeven thresholds, then these energy sources will rapidly and significantly alter the shape of the U.S. energy picture.

Until then the President has a rhetorical point that sounds good but matters little to how we use and produce energy in the U.S.

(photo credit: Nedra)

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But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil. We need an all-of-the-above strategy that relies less on foreign oil and more on American-made energy – solar, wind, natural gas, biofuels, and more.

Solar, wind, and natural gas have almost nothing to do with the price of gasoline.

Policies that affect oil, gasoline, ethanol and biodiesel, hybrid vehicles, battery technology, and vehicle fuel efficiency can all directly and significantly affect the price of transportation fuel (although often quite gradually).

In America, there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.  If you could magically make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Similarly, the development of massive shale (natural) gas resources in the U.S. will make electricity more affordable in the U.S. but will have almost no effect on the cost of our transportation fuel.

Yes, there are linkages.  There are a few hybrid vehicles on the road, and some commercial vehicle fleets use natural gas as fuel.  But these are vanishingly small when compared with the petroleum-based and bio-based fuels we put in our cars, trucks, boats, and planes.

Some American homes are heated with oil, so reducing the cost of electricity can gradually, over many years, shift home heating away from oil.

And in some countries where oil is used to produce electricity, reducing the cost of other types of power production can reduce their use of oil, which through the wonder of global oil markets can lower the price at an American gas station.  But these effects are for now quite small.

These linkages mean that the President’s statement is qualitatively correct. But the effects are so small that the President is quantitatively misleading the listener when he suggests that expanded use of solar and wind power will lower gas prices.

If (when?) battery technology leaps forward to make hybrid or electric vehicles a significant share of the market, then electricity and its sources will begin to act as significant substitutes for gasoline and diesel fuel.  At that point R&D to reduce the cost of solar power, wind power, nuclear power, hydropower, and natural gas power could start to affect the price at the pump enough for you to notice.

But until then fuel and electric power are for all practical purposes separate issues, and when an elected official’s response to high fuel prices is more research on or subsidies for some form of electric power production, he is either confused or misleading you.

(photo credit: Jonathan Dueck)

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This morning the Bureau of Labor Statistics reported that in February the U.S. economy created 227,000 net new jobs and the unemployment rate held steady at 8.3%.

We are still 5.3 million jobs shy of peak employment in December 2007 and 864,000 shy of January 2009 when President Obama took office.

Same data, different views

Different audiences look at employment data in different ways:

• People’s lives are most affected by the level of employment: how many people are working and what is the unemployment rate? At 8.3 percent this number is still bad.
• As both a policy and political matter, Washington, DC cares about the level, but even more about the direction and rate of change: are we adding or subtracting jobs, is unemployment rising or falling, are we “headed in the right direction?” From this view today’s report offers good news, at least on the jobs created front. I assume the Administration will cite 17 months of continuous job growth. Possibly more significant is that we have had four months of job growth > 150,000/month, which is roughly what you need to keep up with population growth.  The trend continues to be positive, although you should want even bigger numbers since the unemployment rate is still high.
• Markets and market commentators care even more about how the change compares with expectations before the data was released. Today’s numbers slightly exceeded expectations of about 200,000 net new jobs so the reaction from this perspective should also be positive.

Three data reminders

The unemployment rate does not include those who are discouraged and no longer seeking work.  As hiring picks up you could see more of these discouraged workers starting to look for jobs.  This could cause the measured unemployment rate to decline more slowly than if the number of people looking for work remained constant.

The +227K number is a net figure.  It’s the difference between something like 4.2 million hires and 4 million separations last month.  (We’ll know for sure when a different survey comes out soon.) Even when the net number is small or declining there is still a lot of hiring and firing going on.

Most economists measure full employment somewhere between 5 and 5.5%.  I use 5.

Political impact

I imagine they are smiling in the Obama White House this morning.  There are still downside risks like oil/gasoline, Israel/Iran, and ongoing European debt problems, but the underlying trend is upward and consistent, and downside risks are nothing new.

This positive trend highlights a question about the politics of the economy.  Do voters make their judgment principally on the level of the economy or principally on the direction and rate of change?  Republicans will stress the former:  “Are you better off now than you were four years ago?”  President Obama and his allies will stress the latter: “Things are getting better.”  I am a bit surprised that I cannot find any political scientists who have studied which matters more to how people vote.

Even if the current positive trend were to accelerate I would anticipate economic policy to be a (the?) central focus of the election.

• The political economic debate has already started to shift to gas prices.
• If the economy looks good, debate will shift to the fiscal picture which is still miserable.
• The parties will debate whether the recovery is because of Democratic policies or in spite of them.

Everybody loves pictures

The Administration is using their standard graph to make their case.

While I think they should be showing all employment rather than just private sector employment, the good news is the string of columns above the 0 axis. As expected, this graph focuses on the direction and rate of change of employment, the view the Obama White House wants to emphasize:

• the direction is positive when the columns are above the 0 axis;
• the height of the columns represents the rate of change – higher above the 0 axis is better;
• when the columns exceed about 150K the rate of change is big enough to keep up with population growth.

It is also important to understand what is going on with the level of employment as shown in the following graph. I think this graph better shows both the good news on the trend (upward slope since Jan 10) and the bad news on the level (yellow and blue arrows).

Finally, the unemployment rate graph tells a similar story.  Unemployment is still quite high but is declining.

The post A good Jobs Day appeared first on Keith Hennessey.

The President’s Buffett Rule is vaporware.

Here is the President speaking yesterday:

Congress needs to make the Buffett Rule a reality.  This is common sense.  (Applause.)  If you make more than a million dollars a year — make more than a million dollars a year — you should pay a tax rate of at least 30 percent.  (Applause.)  And if you do that, that means that if you make less than $250,000 a year, like 98 percent of Americans do, you shouldn’t see your taxes go up.  And we won’t be adding to the deficit.

These are things we can do today.  It shouldn’t be that difficult.  Now, whenever Congress refuses to act, Joe and I, we’re going to act.  (Applause.)

The President has not actually proposed a tax policy that fits this principle.  Neither his budget nor the tax proposals released by Treasury include any policy specifics to establish a new minimum 30% tax rate for those with income > $1M.

Treasury released 200 pages of proposed tax policy changes, including obscure things like repealing the preferential dividend rule for Real Estate Investment Trusts. They did not release specifics to accompany the one tax policy change the President talks about almost every day (and twice yesterday).

It’s OK to call on Congress to enact a policy that you describe only through broad-based principles. But when you do this you cannot also claim “We won’t be adding to the deficit.”  The only way you can legitimately make such a claim is if you offer a specific proposal to back it up.

When you call on Congress to enact a policy that you describe only as a principle, you generally send Treasury officials to engage with the chairs of the tax writing committees to help draft legislation. Other than the President’s public comments I can find no evidence that the Administration is actually trying to get Congress to enact the Buffett Rule in legislation. The logical explanation is that President Obama wants Congress not to act so that he has a rhetorical weapon to use against Republicans in an election year.

Administration officials appear to be describing a policy that would replace the Alternative Minimum Tax, yet their budget also contains no proposal to repeal or replace the AMT.

And yet the President is calling on Congress to enact his vaporware proposal today.

Or is he? Here is White House Press Secretary Jay Carney responding to questions yesterday:

Q:  I just wanted to ask you also about something the President said today.  In the payroll tax cut extension context, he was pressing Congress to take action on other matters and said that Congress needs to make the Buffett Rule a reality.  And the way he framed it seemed to suggest that this is something before Congress right now like the small business tax cuts and so forth.  But the White House isn’t actually asking for the Buffett Rule to be put into law right now, is it?  I mean, that’s a principle for tax reform.  Are you asking them to act now?

MR. CARNEY:  Well, it is a principle for overall individual tax reform.  He is calling on Congress to make it a reality within the context of tax reform.  The overall principle should be adhered to as we look at issues of the balance we have in our tax code going forward.  We have a — as you know, the Bush tax cuts expire at the end of the year.  This President believes that, short of overall tax reform, that the middle-income tax cuts need to be extended, made permanent.  That’s long been his position.

He’s opposed to the extension again of the higher-income tax cuts, which we simply cannot afford.  And the President’ overall approach to this is informed in part by the Buffett principle, by the Buffett Rule, that millionaires and billionaires should not be paying a lower effective tax rate than hardworking, average folks out there.

Q    But he’s not asking Congress to turn that into a law right now, is he?

MR. CARNEY:  Well, I think if you — it depends on how — what Congress’ approach is to issues of the tax code this year.  If they address income tax, individual income tax, then they ought to ensure that the Buffett Rule is made law, if you will, through that practice — through that legislation.

Which is it? “These are things that Congress should do today,” or “It depends on what Congress’ approach is to issues of the tax code this year?” Both cannot be true.

The President is promoting and marketing a Buffett Rule policy that he may never produce and that it appears he may not really want Congress to enact.  That’s vaporware.

(photo credit: White House photo by Pete Souza)

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We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together.

Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts.

Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

Table S-3 from the newly released President’s Budget starts measuring deficit reduction a year ago, in January 2011.  The table shows $5.3 T of deficit reduction over the next ten years resulting from a combination of laws enacted last year and the President’s new proposals released in today’s budget.

The President’s budget is a set of policy proposals for the future.  When most people hear the “The President’s budget has $1 of revenue for every $2 1/2 of spending cuts,” they think this ratio applies to the changes the President proposes for the future.

I will therefore split the OMB table and recalculate this ratio, ignoring spending cuts and tax increases that have already been enacted into law and looking only at future policy proposals.  I argue this is the right way to do this ratio.  Like the OMB table, this one shows deficit reduction for the next 10 years ($ in billions, 2013-2021).

Looking only at new proposals, the President’s budget proposes 83 cents in spending cuts for each dollar it proposes in tax increases.  Or we could say the President’s budget proposes $1.20 in tax increases for each dollar in proposed spending cuts.

The gimmicks

The President’s team is playing at least two games to generate their 2.5:1 ratio:

1. They are cherry-picking their timeframe to make the ratio look at high as possible; and
2. They are counting all interest savings as spending cuts.

Why did they start measuring in January 2011?  Because that was the start of the Republican Congress, because last year only spending cuts were enacted, and because that timeframe maximizes the spending increase to tax cut ratio.

Good rule of thumb:  if you cut government spending or raise taxes by $100 over the next ten years, you’ll also save about $20 in interest costs. These interest savings show up as reductions in government spending even when they result from tax increases.  If, for instance, the President proposed no spending cuts and $100 B of tax increases, he’d get scored with $20 B of interest savings which would show up as reductions in spending.  Using Team Obama’s logic that would count as a 5:1 ratio of tax increases to spending cuts even though common sense would suggest the ratio is infinite because the President isn’t proposing to cut any spending.

The right way to measure this ratio is therefore to exclude the interest effects and to measure only the ratio of deficit effects of proposed policy changes.  The Administration counts interest savings from tax increases as spending cuts to inflate their ratio.

The Administration may also be playing games with how they define spending cuts and tax increases.  I have not yet looked into their details on this point.

This ratio is a stupid measure

Even when it’s not distorted by games like these, the ratio of spending cuts to tax increases is a misleading way to analyze fiscal policy for two reasons.

1. Both the numerator and the denominator measure a change rather than an absolute level. But for both spending and taxes the change that you measure depends on the starting point you pick. Even well-intentioned people can disagree on the right baseline from which to measure spending cuts or tax increases. In addition, it is easy to gimmick the starting point for either measurement to make the change look big/small as needed. Both the discretion involved in choosing spending and tax baselines and the opportunities for gimmickry mean that both the numerator and denominator of this ratio are at best somewhat arbitrary and at worst just made-up numbers.
2. What kind of ratio of spending cuts to tax increases you should want depends not only on your fiscal policy views, but also on the starting point.  Most people would say that if government spending is historically high then it makes sense to rely more on spending cuts than tax increases.  Saying we need “a balanced approach to deficit reduction” and using this ratio (even when properly calculated) presumes the current starting point for policy is good or at least reasonable. With government spending starting way above the historic average that’s a huge assumption.

The political strategy of emphasizing this ratio

I think that by using this distorted 2.5:1 ratio, the President’s team wants you to conclude:

• that the President is a reasonable fiscal policy centrist who believes in reducing the deficit through a balance of spending cuts and tax increases;
• that his proposed balance relies much more heavily on spending cuts than tax increases; and
• that Congressional Republicans are therefore unreasonable and extreme for rejecting the President’s “balanced approach.”

When we look at the corrected ratio of $1.20 of tax increases for $1 of spending cuts, measured relative to a starting point of historically high government spending, we see the Obama Administrations actual fiscal strategy revealed.

• The short-term logic is, “Republicans got their spending cuts last year. Now it’s our turn to restore balance by relying mostly on tax increases to reduce future deficits.”
• The long-term goal is to lock in as high a level of government spending as possible and to rely principally on tax increases for deficit reduction.
• But since neither of these will sell to a center-right American public, they created a new way to measure this ratio and hope you won’t pay attention to the details.

Despite the Obama Administration’s rhetoric, the president’s budget relies more on tax increases than on spending cuts for the limited deficit reduction it proposes.

(photo credit: NBC News)

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The post Data sources for response to the Klein deficit comparison chart appeared first on Keith Hennessey.

Here is my response. You can click on the chart to see a larger version.

For those who care here are the sources I used in building the chart.

The post Response to the Klein deficit chart appeared first on Keith Hennessey.

1. the loss of American manufacturing employment;
2. America’s dependence on oil;
3. America’s sub-par (my phrase) education and training; and
4. increasing income inequality.

Each of these trends began decades ago:

• Our employment has been shifting from manufacturing to services for decades, as it shifted from agriculture to manufacturing in the 19th century (all while American manufacturing output continues to grow over time);
• We have been dependent on oil as a fuel source for oh, about 100 years;
• The seminal report on American education, A Nation at Risk, was published in 1983, yet it reads as if it were written this year; and
• Income inequality has been increasing since about the 1970s, while even the spike in inequality at the very high end is probably 20ish years old.

There is nothing wrong with prioritizing long-term economic problems and challenges; in fact, quite the opposite.  Washington usually focuses only on problems and challenges that will bite before the next election.

And yet:

• The President barely mentions the greatest long-term (and, increasingly, short-term) economic policy challenge we face, the size and growth of unfunded entitlement spending promises to the (current and future) elderly;
• The second greatest long-term economic policy challenge, closely related to the first, continues to be the unsustainable growth in per capita health spending, notwithstanding mistaken claims that the Affordable Care Act will slow that growth;
• The most urgent economic policy challenge we face is the slow recovery of the U.S. labor market, with housing weakness and macro/financial threats from Europe in a close second and third;
• In last year’s State of the Union address, President Obama framed the central policy challenge as infrastructure and public investment competition from China and India, something that doesn’t really make his top four this year (his manufacturing message is somewhat different);
• President Obama emphasizes frequently that he doesn’t want to “return to the policies of the past,” meaning the Bush era, yet these policies were not the cause of the problems he now stresses; and
• The President is not claiming that his proposed policies would solve even a significant portion of the problems he describes.

I would like instead to see the President set economic policy priorities like these:

• Clear out the barriers to private sector expansion and investment, in particular by reducing both the drags induced by recently enacted expansions of government and the massive uncertainty caused by lingering open policy debates;
• Stop trying to “fix” the housing market and let housing prices find a painful but market-clearing bottom so that more normal growth could resume;
• Make structural reforms to Social Security and Medicare and Medicaid that adapt them for inevitable demographic trends as well as evitable unsustainable promised benefit growth; and
• Aggressively expand international trade and investment rather than throw up protectionist barriers and rhetoric.

The massive recent and planned future expansions of government are the greatest threats to ongoing American economic strength in both the short and long term. Expanding the scope of government further as the President proposes will make things worse, not better.

(photo credit: Lawrence Jackson for The White House)

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THE PRESIDENT:  In exchange for help — see, keep in mind, that the administration before us, they had been writing some checks to the auto industry with asking nothing in return.  It was just a bailout, straight — straightforward.  We said we’re going to do it differently.

In exchange for help, we also demanded responsibility from the auto industry.  We got the industry to retool and to restructure.  We got workers and management to get together, figure out how to make yourselves more efficient.

This “asking nothing in return … It was just a bailout, straightforward” claim is false.

A brief history of this false claim

President Obama’s former CEA Chair Austan Goolsbee first made this claim in June of 2009. The rebuttal I wrote then is the most detailed and specific debunking of this claim:  Dr. Goolsbee gets it wrong on the auto loans.  I’ll repeat the essential elements below.

President Obama’s former Chief of Staff Rahm Emanuel repeated the false claim one year later. I responded, and Politifact rated Mr. Emanuel’s claim as false.

In September 2010 President Obama made this same claim.  The Associated Press responded, demonstrating that the claim was wrong without explicitly labeling it as incorrect (wimps).

Both Politifact and the AP relied on my analysis, although their judgments are of course their own.

Now the President repeated this falsehood in his post-State of the Union tour this week and the Washington Post called him on it.  Here’s Mr. Lane:

But in campaigning for re-election on this aspect of his record, he has shown an unfortunate, and remarkably ungracious, tendency to distort the record of his predecessor.

… President George W. Bush never gave the companies an unconditional bailout. He reluctantly loaned them money in return for what The Detroit Free Press described as “deep concessions” — and he did so in part so that Obama would not have to take office amid a full-blown industrial meltdown.

… On page 42 of his book on the bailout, former Obama auto-czar Steven Rattner praised the “thoughtful” Bush approach, noting that its “conditions–as imperfect as they were–provided a baseline of expected sacrifices that paved the way for our demands for give-ups from the stakeholders.”

What actually happened

In December 2008, after Congress left town without addressing this issue, President Bush had two viable options.

• He could allow market forces to work.  GM and Chrysler would run out of cash by early January and a supplier run would begin sometime soon thereafter. The firms would begin liquidating in January with an industry-wide job loss we estimated at about 1.1 M jobs.  This was during the late stages of the financial meltdown of 2008. In addition this choice would mean that about a month later President Obama would enter office facing not just a severely weakened economy and financial industry, but an in-progress collapse of the auto industry for which he would have no viable recourse.
• Or President Bush could provide a three-month “bridge loan” to allow President Obama time to get his feet set and decide whether he wanted to provide a longer-term loan to the firms.

President Bush chose the second option. In the final days of December Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to President Obama’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals.

1. repay the loan and any other government financing;
2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could nevertheless still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:

1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
3. eliminate the jobs bank;
4. develop work rules that are competitive with the transplants by 12/31/09; and
5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by President Obama’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 7 liquidation process. We gave the President’s designee the authority to extend this process for 30 days.

The Bush-era loans were not a blank check, not a “straightforward bailout.” President Obama was wrong when he said they were.

(photo credit: paul bica)

The post The President repeats the “blank check for autos” falsehood appeared first on Keith Hennessey.

Together the memo and article provide insight into the formerly private thinking of President Obama and his advisors. Their approach to fiscal policy is quite different from my own, most especially the confidence they express in their estimates of the effectiveness of government spending to accelerate economic growth.

Even more interesting is that given this approach to economic policy, the memo and story describe a President who chose to ignore his policy advisors and to waste tens of billions of dollars of taxpayer money so he could have an inspiring talking point and help his partisan Congressional allies get their pork. That’s disturbing even if you accept the pro-stimulus approach to fiscal policy.

Three quotes in the Summers memo describe a tension in the design of the stimulus proposal.  Here is the first (p. 7):

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