Kevin Drum

After November

| Tue Sep. 21, 2010 12:26 AM EDT

OK, so maybe Republicans can't repeal healthcare reform if they take over Congress in November. But they can try to nibble it to death:

For starters, Republicans say they will try to withhold money that federal officials need to administer and enforce the law. They know that even if they managed to pass a wholesale repeal, Mr. Obama would veto it.

....Republicans also intend to go after specific provisions. Senator Orrin G. Hatch of Utah, a senior Republican on the Finance Committee, has introduced a bill that would eliminate a linchpin of the new law: a requirement for many employers to offer insurance to employees or pay a tax penalty. Many Republicans also want to repeal the law’s requirement for most Americans to obtain health insurance.

Alternatively, Republicans say, they will try to prevent aggressive enforcement of the requirements by limiting money available to the Internal Revenue Service, which would collect the tax penalties. Republicans say they will also try to scale back the expansion of Medicaid if states continue to object to the costs of adding millions of people to the rolls of the program for low-income people. In addition, Republican lawmakers may try to undo some cuts in Medicare, the program for older Americans.

This is what America has to look forward to if Republicans win 40 seats in the House in this year's midterms. Plus endless manufactured investigations of the Obama White House. I sure hope all those wobbly centrists and disappointed Obama supporters understand what they're letting themselves in for if they give up now.

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Shovel Ready?

| Tue Sep. 21, 2010 12:02 AM EDT

The Wall Street Journal reports that spending stimulus dollars is harder than it sounds. The director of the Detroit agency managing weatherization projects, for example, was ready to go before the legislation even passed:

But on the same day in March 2009 that Shenetta Coleman picked up applications from 46 companies, she received an email from the Michigan Department of Human Services telling her she couldn't award work to anyone.

The problem: Ms. Coleman hadn't met requirements for her advertisement. Those included specifying the precise wages that contractors would have to pay, and posting the advertisement on a specific website. There were other rules—federal, state and local—for grant and contract-award processes, historic preservation and labor standards. The bureaucratic obstacles Ms. Coleman hit took more than a year to clear. Some were mandated by the stimulus bill, the same legislation that was supposed to rapidly create jobs.

....Things are very different from the 1930s, when Franklin Delano Roosevelt was able to create the Civil Works Administration in a lunchtime meeting and watch four million people go to work in the next four months on roads, schools, parks and airports.

For better or worse, doing stuff just takes longer today than it used to. The whole concept of "shovel ready" really doesn't seem to exist except for projects that are so far advanced they probably have funding already.

What Should We Tax?

| Mon Sep. 20, 2010 6:58 PM EDT

Matt Yglesias touts progressive consumption taxation as a superior alternative to what we have now:

To me, a big part of what this whole series of back-and-forths does is re-enforce the idea that it would be desirable to tax consumption rather than income, and simultaneously to make the rate structure more differentiated and more progressive....Switching the tax base to one focused on pollution and consumption is hardly a panacea, but it really would be a huge step forward relative to a system based on wages and income. Ultimately, whether or not we make that shift one of these days is going to be a bigger deal than whether we fully extend the Bush tax cuts or only mostly extend them.

A couple of things about this. First, when you talk about consumption taxes most people think of VATs and sales taxes. Roughly speaking, though, you can make the long-run effect of an income tax similar to a consumption tax just by setting the rate at zero for capital gains, dividends, interest, and estates. And guess what? We're pretty close to that right now. Capital gains and dividends are currently taxed at 15% and the estate tax has been steadily decreasing for the past decade. Among major sources of investment income, only interest is taxed at normal rates, and even that applies only to non-retirement interest income.

And how does this compare to other countries? It varies a lot, of course, but in addition to a VAT, most rich countries also levy a fairly stiff income tax that includes taxation of capital gains, dividends, interest, and estates. On average, their rates are about the same or higher than ours. It's true that most European governments get a bigger portion of their revenue from consumption taxes than we do, but that's because they have high VATs, not because they don't have the other taxes. VATs are in addition to income and investment taxes, not instead of it.

Second, be careful what you wish for. Investment taxes in the United States were at historic lows during the aughts, and that was also the decade that produced a huge credit bubble and, subsequently, the biggest economic crash since the Great Depression. Maybe that's just a coincidence, but I wouldn't bet the farm on it. There might be such a thing as incentivizing investment too much, after all.

Living in Newt Gingrich's World

| Mon Sep. 20, 2010 2:06 PM EDT

Via John Sides, here's a fascinating paper from political scientists Sean Theriault and David Rohde. They first note that virtually all models suggest that the Senate should be less politically polarized than the House. Partly this is because you can't gerrymander states and partly it's because the nature of the Senate generally demands bipartisan cooperation to get anything done. In reality, however, it turns out that the current Senate is just as polarized as the House. Why?

They suggest a simple answer: it's due to the effect of "Gingrich Senators." That is, almost all of the increased polarization in the Senate over the past three decades is due to House members elected since 1978 who have since migrated to the Senate. From the paper:

To be clear, non-House veteran Republican and Democratic senators of the same time period, Republican senators with House experience prior to 1978, and Democratic senators with House experience are no more polarized than they were in the 1960s and early 1970s; the source of the increased polarization are those senators who are jointly (1) Republican, (2) former House members, and (3) elected to Congress after 1978. These traits are not additive.  If a senators has one — or even two — of these traits, she is no more likely to be systematically more polarizing than her colleagues. It is the combination that systematically increases a senator’s polarizing tendencies.

The charts on the right demonstrate this. The one on the top shows that the partisanship of Republican senators with no previous House experience has gone up only slightly. Likewise, Democrats of all stripes have become only modestly more partisan. But Republican senators who migrated from the House (red line) have become far more partisan.

The bottom chart shows the end result. If you remove the Gingrich Senators, you see that Senate polarization increased a bit during the 80s and then just a bit more after that. But add in the Gingrich cohort (red bars) and polarization skyrockets.

Take from this what you will. But there's not much question that the radicalization of House Republicans during the 80s and after was largely a Newt Gingrich phenomenon, and Theriault and Rohde demonstrate pretty convincingly that he was eventually responsible for the radicalization of the Senate too. Nice work, Newt.

Looking Back at the 70s

| Mon Sep. 20, 2010 1:01 PM EDT

Karl Smith says:

I like to focus on inflation because I think just about all of us have agreed that inflation is primarily controlled by actions at the Fed.

I'm ripping this completely out of context1 because it reminds me of a question I have for any economists who care to respond. Here it is: it's now been 30 years since the stagflation of the 70s. Is it still the consensus view that the inflation of that era was caused by a union-triggered wage-price spiral? Or do we believe that Milton Friedman was right, and inflation is always and everywhere a monetary phenomenon, even in the 70s? Or something else?

Just to be clear, I should add that I'm not asking if the wage-price spiral was a factor — I'm sure it was — but whether it was the proximate cause. Or were loose fiscal and monetary policy the cause, and union demands simply a reaction? The reason I ask is simple: Paul Volcker jacked up interest rates from 1979-1981, and inflation fell. This suggests that union demands were mainly a response to perceived Fed seriousness about inflation, not a primary cause of 70s inflation. Likewise, although unions have declined in the U.S., they've remained pretty strong in much of Europe and there's been no repeat of 70s-style inflation there. This also suggests that monetary policy is considerably more important than union wage demands.

But I don't know. So I'm tossing it out. Any macro or labor economists care to venture an opinion?

1But you can, of course, click the link to see what he's talking about. Hint: inflation is going down unless the Fed decides to do something about it.

Shutting Down Over Healthcare

| Mon Sep. 20, 2010 11:33 AM EDT

Apparently Rep. Steve King (R-Iowa) is demanding that the GOP leadership sign a "blood oath" to include repeal of healthcare refrom in every single appropriations bill next year, even if it leads to a government shutdown. This is nothing surprising coming from King, who's a famous loon, but Steve Benen says it's yet more evidence that the prospect of a government shutdown is real, not just a Democratic scare tactic to motivate the troops:

This really isn't manufactured drama — much of the Republican Party is intent on making this happen. It's why talk of a shutdown is already being pushed by a House Republican leader (Rep. Lynn Westmoreland of Georgia); a Republican Senate candidate (Joe Miller of Alaska); a Republican House candidate (Teresa Collett of Minnesota); and a variety of prominent Republican voices (Newt Gingrich, Dick Morris, and Erick Erickson).

It's not theater; it's not posturing; it's not an idle pre-election threat. Voters should appreciate how serious this is before heading to the polls.

I dunno. Steve may be right that the threat is real, but I think I'd still put my money on any shutdown over healthcare reform being shortlived. The problem for Republicans is that it would give President Obama a perfect soapbox for talking endlessly about all the benefits of ACA, and the drama of a shutdown means that plenty of people would actually be listening. So not only would Republicans look petulant and childish if they repeatedly passed bills that either failed in the Senate or got vetoed, but Obama would spend the entire time talking about how he'll never let the Republican Party take away your right to insurance even if you have a preexisting condition. And he'll never let them take away the small business tax credits. And he'll never let them reinstitute the doughnut hole. Rinse and repeat.

Not only would Republicans lose the showdown, but they'd quite possibly end up making ACA popular for the first time in its existence. I suspect the saner elements of the GOP leadership are pretty well aware of this. They might feel like they have to make a pro forma effort to repeal healthcare reform, but if they shut down the government I think they'll pick a different excuse.

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Taxes and the Rich

| Mon Sep. 20, 2010 11:07 AM EDT

Venture capitalist Garrett Gruener has some advice for his fellow capitalists:

For nearly the last decade, I've paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn't affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax.

....No one particularly enjoys paying taxes, but one lesson we should have learned by now is that for the good of the country, we need to tax people like me more. At a minimum, we need to return to the tax rates of the Clinton era, when the economy performed far better. Simply taxing the wealthiest 2% of Americans at the same rates they were taxed before the Bush tax cuts could reduce the national deficit by $700 billion over the next 10 years. Remember, paying slightly more in personal income taxes won't change my investment choices at all, and I don't think a higher tax rate will change the investment decisions of most other high earners.

What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth. In order to get there, we first need to let the Bush-era tax cuts for the upper 2% lapse. It is time to tax me more.

Fine. Gruener is a lefty. But this is the simple truth: changing the top marginal rate from 35% to 39.6% will have no measurable impact at all on work or investment decisions. From a macroeconomic perspective, it will reduce the future deficit and nothing more. It's a pure win for everyone, even the rich.

How To Order Thai Food

| Mon Sep. 20, 2010 10:40 AM EDT

Last night at a Thai restaurant, Mark Kleiman wanted to order Tam Kah with just mushrooms, which produced the following question from our server:

OK. Would you like the chicken and mushroom soup without the chicken, or the shrimp and mushroom soup without the shrimp?

A pretty philosophical conundrum, no?

Good News and Bad on Wall Street

| Mon Sep. 20, 2010 10:12 AM EDT

The New York Times reports both good news and bad today:

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

....As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect.

Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year. The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.

Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer.

Wall Street should be earning less. Ideally, though, it should be earning less because margins have become thinner and the market for lucrative but idiotic rocket science finance has declined. So the good news here (maybe) is that prop trading activity is down and margins are getting squeezed. The bad news is that core businesses like issuing bonds and managing IPOs are also down. That's just a sign of a sluggish economy.

And speaking of a sluggish economy....

What Can Ben Do?

| Sun Sep. 19, 2010 11:07 AM EDT

Tyler Cowen says today that the Fed has an easy way to boost the economy: just commit itself to an inflation rate of 3% over the next few years and people will open their checkbooks again. Personally, I'd prefer 4%. But either way, he's not very optimistic that this will happen:

If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year.

In a self-fulfilling prophecy, the Fed could stimulate spending and the economy, and at no cost to the Treasury. Of course, if no one believes the Fed’s commitment to price inflation, spending and employment will not go up. The plan will fail, and people will view their skepticism as vindicated.

In other words, one of our economic problems can be solved, but only if we are willing to believe it can.....Sadly, although [Ben] Bernanke clearly understands the problem, the Fed hasn’t been acting with much conviction. This is understandable, because if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence.

....Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.

It's not clear, of course, if (a) Bernanke agrees that we should target higher inflation but hasn't been able to persuade the rest of his colleagues, or (b) he's part of the problem. Option A is plausible, but I've read nothing suggesting that Bernanke has even mooted higher inflation targeting. How likely is it that he could do that with any vigor and not have word leak out?

Not very, I think. So I'd conclude either that Bernanke himself isn't on board with this or that the political climate is so obviously hostile that he knows it's hopeless to try. Neither one is very reassuring news.