2008 - %3, November

Public Service

| Tue Nov. 25, 2008 1:52 PM EST

PUBLIC SERVICE....In the New York Times today, David Kocieniewski tells us the story of the Charles B. Rangel School of Public Service at City College of New York. The school was having trouble raising money, so in the summer of 2006 a friend of Rangel's, Manhattan district attorney Robert Morgenthau, suggested that he hit up Eugene Isenberg, CEO of Nabors Industries.

Isenberg, unsurprisingly, was open to the idea of helping out the future chairman of the House Ways and Means Committee. Nabors Industries, you see, was one of the companies that had rushed to reincorporate offshore in 2002 even though they knew legislation was in progress that would retroactively prevent them from doing so. Rangel, who loudly blasted the companies who were moving offshore, favored the anti-Nabors legislation, but Republicans eventually killed it and Nabors retained its tax haven.

Fast forward to 2007, and the same legislation was introduced again. This time, though, Rangel opposed it:

On Feb. 12, the day the bill was being marked up by the committee he leads, Mr. Rangel held two discussions at the Carlyle Hotel in Manhattan. First, the congressman sat down for breakfast with Mr. Isenberg and Mr. Morgenthau to further talk about Mr. Isenberg's support for the Rangel center, Mr. Morgenthau said. Mr. Isenberg said that after breakfast, he escorted Mr. Rangel across the room, where the lobbyist for Nabors, Kenneth J. Kies, was waiting.

Over sweet rolls and coffee, Mr. Kies asked Mr. Rangel if he would maintain his opposition to the efforts to take away the company's loophole. Mr. Rangel said he would, Mr. Kies and Mr. Isenberg said in interviews.

.... Eleven days later, a check for $100,000 from Mr. Isenberg was cashed by City College....The next month, Mr. Rangel presided over Ways and Means hearings during which he presented four witnesses who testified that the effort to eliminate the loopholes was bad policy because it was a retroactive tax increase. No testimony was taken from those on the other side, and nothing was offered to explain why Mr. Rangel was now defending Nabors and the other companies.

In their defense, Isenberg committed the money to CCNY before the breakfast with Rangel, and Rangel says that he's philosophically opposed to retroactive tax increases. But this still doesn't look good, does it? As Michael Kinsely likes to say, the real scandal is what's legal.

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Job Creation

| Tue Nov. 25, 2008 12:30 PM EST

JOB CREATION....As word of Barack Obama's stimulus package starts making the rounds, conservatives are reviving one of their favorite tropes: that's sure an expensive way to put people to work! Basically, they divide $700 billion by 2.5 million jobs and announce that the cost of the plan is $280,000 per job, a whopping figure in anyone's book. But Mark Thoma does the actual math, and it turns out that the numbers at hand are actually $490 billion and 5.4 million jobs:

If we actually get the 5 million jobs the estimates say we will get, what is the cost per job? It is $490 billion divided by 5,425,000, or $90,323. (Note that by targeting spending to places that have a high employment rate per dollar spent, we may be able to do even better than this.)

But this is GDP per job, it includes wages, rent, interest, and profit, it's not the amount labor takes home. About 70 percent of income goes to labor....If we take 70% of $90,323, we get about $63,000 (actually, $63,226). That's less than a quarter of the $280,000 figure.

Read the whole thing for more. I'm just presenting this as a public service, since this talking point is almost certain to get extensive play on Fox News and elsewhere. Forewarned is forearmed.

FEMA

| Tue Nov. 25, 2008 12:08 PM EST

FEMA....Via Steve Benen, Al Kamen reports that FEMA may be getting a facelift under Barack Obama:

First off, the likely plan is to break off the agency from the Department of Homeland Security, a move that by itself would help restore the pride that folks at FEMA felt when it was an independent agency.

Second, there's increasing talk that former director James Lee Witt, who took over the then-troubled agency at the start of the Clinton administration and left it eight years later with a much-enhanced reputation, is coming back from retirement to run FEMA for six months to a year, to whip it into shape.

I assume this is one Clinton "retread" that no one will complain too much about?

Dishing on Geithner

| Tue Nov. 25, 2008 11:35 AM EST

DISHING ON GEITHNER....Andrew Ross Sorkin punctures the Tim Geithner bubble today, asking if he's really the financial star he's been portrayed as:

Perhaps what has most people on Wall Street stirring is Mr. Geithner's role in the fall of Lehman. At the time of its bankruptcy, he, along with Mr. Paulson, appeared to be the most vocal in supporting the government's refusal to bail out the firm, according to people involved in various meetings. With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government's decision to let Lehman crumble.

Bloomberg tries to restore some of his luster:

Timothy Geithner was among the first policy makers to shine a light on the unregulated $47 trillion credit-default swap market back in 2005. The New York Federal Reserve president has struggled since then to get dealers to carry out reforms.

...."In classic Tim and New York Fed style, the work has been done behind the scenes, among technocrats, largely by consensus," said Adam Posen, a former Fed official who is now at the Peterson Institute for International Economics in Washington. "The downside is that it takes awhile to get consensus."

Of course, the problem here is that virtually everyone who's qualified to deal with the financial meltdown had at least some role in it while it was happening. And given the speed and ferocity of the meltdown, there probably isn't a person in the country who got every call right during the past year, including Geithner. (And that rather pointedly goes for the kibitzers, too, none of whom got every call right either.)

Anyway, Geithner seems like a pretty good pick, but it never hurts to remember that these guys are human. I don't think Obama could have done much better, but that doesn't mean the guy is a superman.

Bad Signs for Chrysler: Buy One Truck, Get One Free

| Tue Nov. 25, 2008 11:12 AM EST

We all knew the Big Three were in trouble when the top executives of Chrysler, Ford, and General Motors flew their private jets to Washington last week, hat in hand, asking for taxpayers' money to save their companies. But this is getting ridiculous. Online consumer watchdog Consumerist.com noticed this ad:

buy-one-get-two.jpg

There's some fine print, but basically the deal is the deal: buy one truck, get a second one free. Maybe those private-jet-flying car company executives really do need a bailout.

The Rise and Fall of Lobbyists

| Tue Nov. 25, 2008 1:47 AM EST

THE RISE AND FALL OF LOBBYISTS....On K Street, the free market is hard at work:

An assistant department secretary leaving the Bush administration three years ago, with Republicans in control of the House, Senate and White House, might fetch as much $600,000 to $1 million a year in the influence business, recruiters and lobbyists said. But the same person might now expect less than half as much.

....But for Democrats, the bidding is fierce. Three years ago, a Democratic staff director for an important House or Senate committee might have earned about $130,000 a year on Capitol Hill, and jumped to K Street for an annual salary of about $250,000. Now, the same person might command as much as $500,000 to $800,000 a year, several recruiters said.

OK, but it still sounds like Republicans work at a higher pay scale than Democrats. How come? The answer, perhaps, comes from Republican John Feehery, a former MPAA lobbyist who lost his job after Democrats took over in 2006:

A spokesman for the association declined to comment on the departure. So did Mr. Feehery, who now runs his own lobbying shop. But he said Republican lobbyists would always be in demand because Democrats lack the stomach to push for industry goals that go against their party, like rolling back environmental regulations.

"At the end of the day," Mr. Feehery said, "Democrats don't like to ask for the order" — the client's objective.

So there you have it. Democrats just aren't willing to screw their own party and violate their own principles quite enough. It's a pretty sad state of affairs.

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Taxes and Christina Romer

| Mon Nov. 24, 2008 9:23 PM EST

TAXES AND CHRISTINA ROMER....Brad DeLong says of fellow Berkeley economics professor Christina Romer — who has just been appointed by Barack Obama as head of the CEA — that she is "very good at explaining economics." That's good, because I have a question.

Last year Christina and David Romer wrote a paper that attempted to quantify the effect of tax changes on economic growth. I read it at the time and didn't understand it. I read it again a few minutes ago and I still don't understand it. So my question is: Can you please explain your paper titled "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks"?

Here's my understanding of what the paper says. Basically, the Romers looked at every tax measure enacted since 1945 and classified them into two groups. The first group they call endogenous. These are tax changes made in response to current or future economic conditions, including responses to spending changes or recessions. Since the effect of these tax changes is difficult to separate from the effects of the events being responded to, they are discarded.

The second group they call exogenous. These are tax changes designed either to reduce a deficit or to raise long-term growth. Since they aren't motivated by current or future economic conditions, their effect on the economy is untainted by external factors.

The Romers use this second group to calculate the effect of tax changes on economic growth without confounding factors, and their conclusion is that a tax increase of 1% of GDP reduces output three years later by nearly 3%.

Aside from the difficulties inherent with this kind of classification, I've got a few problems with this. First, their methodology eliminates a whole bunch of tax changes simply because their effect is hard to calculate. This might make practical sense, but doesn't it also introduce a whole new kind of bias?

Second, it assumes that if politicians say a tax increase is designed to spur economic growth or reduce the deficit, then that's what it's for. But ever since 1980, conservative politicians have said this about practically every tax cut whether it's true or not. For this reason, the Romers tag nearly every tax change since 1980 as exogenous. Doesn't this make their post-1980 analysis a little slippery since it essentially includes all tax changes while the pre-1980 analysis doesn't?

Third, it doesn't take into account different kinds of tax changes. If, say, exogenous changes tend to be capital gains cuts while endogenous changes tend to be payroll tax increases, wouldn't you need to take that into account?

Fourth, there have been tax changes practically every year for the past 50 years. How do you separate the effects of one tax change from another?

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Anyway, those are my questions. I've found very little discussion of the paper on web (see here and here for a couple of exceptions) and I'm curious to know what the economics profession in general thinks of it. Can anyone point me in the right direction?

POSTSCRIPT: One of the Romers' conclusions, by the way, is that tax increases designed to reduce an inherited deficit have a positive impact on economic growth. So if Obama ever does raise taxes, expect this to be the reason he gives for it. Luckily for him, it will probably be true.

Susan Rice to the UN: A Positive Sign for UN-US Relations

| Mon Nov. 24, 2008 5:52 PM EST

article_image.php.jpg ABC is reporting that Susan Rice, a former member of President Bill Clinton's National Security Council and a former Assistant Secretary of State for African Affairs, is about to be named US Ambassador to the United Nations in the Obama Administration. Why is this of note? Rice is extremely close to Obama, and has been for years. Mark Goldberg, of UN Dispatch, is jazzed about what that means for the future of US-UN relations:

This is great news. The fact that President-elect Obama is entrusting US diplomacy at the United Nations to such a close adviser is a sure sign of the high priority to which the new administration will place US-UN relations. Deeper still, her background as a regional Africa expert will come in handy. About 2/3rds of all discussions at the Security Council are about situations in Africa.
More broadly, Rice is known in foreign policy circles as an innovative, forward thinking foreign policy wonk who pays special attention to the connectivity of today's threats and challenges. As a diplomat, I expect her to be fairly sharp-elbowed, which is not a bad quality for Turtle Bay!

I suspect this is a sign that Obama will be involved in (or his administration will be a full partner in) worldwide efforts to bring stability to places like Darfur and Somalia. That's great news. And just take a moment to consider the difference between the Obama Administration and the Bush one. Bush named to this same post John Bolton, a man who believes force is always the right option and is so hostile toward the United Nations that he once said wiping out 10 floors of UN headquarters wouldn't make a "bit of difference." And now we have someone who has spent years studying how to engage in the world in order to reduce conflict. The democratic transfer of power is a remarkable thing.

Solicitor General Says Uighur Detainees Have An Immigration Problem

| Mon Nov. 24, 2008 5:05 PM EST

The Bush administration is clearly getting desperate: Monday, it sent the Solicitor General of the United States to federal court to try once again to justify its detention of 17 innocent Uighur detainees held for the past six years at Guantanamo Bay. The administration's top litigator, Greg Garre usually spends his time at the Supreme Court, but the administration dispatched its big gun to the DC Circuit courtroom to make its best possible case that no court in the land has the power to tell the Bush administration what to do. It will not go down in history as one of Garre's finest moments.

As Obama Taps Larry Summers, Recalling Summer's Days as a Regulation Foe

| Mon Nov. 24, 2008 4:58 PM EST

On Monday, President-elect Barack Obama announced his economic team, noting that Lawrence Summers would be the director of his National Economic Council. In touting Summers, Obama praised the former treasury secretary for his work during the Clinton years

Larry helped guide us through several major international financial crises – and was a central architect of the policies that led to the longest economic expansion in American history, with record surpluses, rising family incomes and more than 20 million new jobs. He also championed a range of measures – from tax credits to enhanced lending programs to consumer financial protections – that greatly benefited middle income families.
As a thought leader, Larry has urged us to confront the problems of income inequality and the middle class squeeze, consistently arguing that the key to a strong economy is a strong and growing middle class....And as one of the great economic minds of our time, Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges.

While some of that might be true, Summers has been a controversial figure, and it's likely no accident that he is being handed a position that does require him to be confirmed by the Senate.

But despite Summer's intellect and experience, it's worth remembering that he did blow one of the major calls of the 1990s: what to do about financial derivatives--those esoteric financial products (such as credit default swaps) that helped grease the way to the subprime meltdown. Not only did Summers oppose greater regulation for those financial instruments; he led the opposition against it.