Kevin Drum - November 2008

The Car Tax

| Tue Nov. 11, 2008 11:41 AM EST

THE CAR TAX....The LA Times chimes in this morning to suggest that if Arnold Schwarzenegger wants to raise revenue, he should think about reimposing the old vehicle license fee, which he cut when he took office, rather than raising sales taxes:

The car tax is a smarter choice than a sales tax for digging out of the current budget hole. Asking Californians to pitch in through their vehicle registration fees rather than at the cash register would have fewer negative effects on sales, which we can expect to be diminished too much already in the coming months.

Sales taxes are regressive: They take a higher percentage of household income from the poor than from the rich. A 1999 California Policy Research Center study found vehicle license fees to be nearly as regressive, but at least the proceeds are unrestricted and could be used to bail the state out of its mess. Because of voter fiat, sales taxes paid at the gas pump are off limits for any use but transportation. Local government also claims a share. Another advantage of car taxes: They are deductible from federal income tax. Try deducting your sales tax on your 1040 form and see how far you get.

I'll add another couple of related points. First, the California sales tax is already high, and local add-ons make it even higher. Schwarzenegger's proposal would hike it above 10% in most places, and most of the tax literature I've read suggests that 10% is an upper bound for an effective sales tax. Above that it has serious effects on sales revenue, promotes out-of-state purchasing, and produces compliance problems.

Second, sales taxes are regressive by nature and there's only a limited amount you can do about it (exempting food purchases is the most common approach to adding a bit of progressivity). Not so with the vehicle license fee. Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

And finally, here's one more great reason for increasing the VLF. It's a truism that if you tax something, you get less of it. So ask yourself: which could California use less of? General consumption? Or cars? The question answers itself, doesn't it?

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Stimulus Math

| Tue Nov. 11, 2008 1:11 AM EST

STIMULUS MATH....Goldman Sachs says we're about to suffer the deepest recession since World War II, with unemployment expected to top 8.5% next year and maybe inching a little higher in 2010. So how big should a stimulus package be given the size of the economic tsunami we're headed into? Paul Krugman tells us today that since Okun's Law suggests that every point of unemployment above 5% represents a 2% output gap, an 8.5% unemployment rate means that the economy is performing 7% under its potential:

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it's too small. What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Given the likely length of this recession, we'll probably need nearly this much again in 2010. Call it an even trillion bucks when it's all said and done.

As recently as a few months ago that would have seemed unimaginably large to me. Today, not so much. Stimulate away, President Obama.

Larry Summers

| Mon Nov. 10, 2008 2:57 PM EST

LARRY SUMMERS....Sheryl Sandberg defends Larry Summers:

At the World Bank, he was a tireless advocate for girls' education. At Treasury, he fought for social security benefits for women working in their homes, better enforcement of child support obligations, and an expansion of child care tax credits.

....Larry has been attacked by some in the women's community for remarks he made about women's abilities. As he has acknowledged himself, this speech was a real mistake. What few seem to note is that it is remarkable that he was giving the speech in the first place — that he cared enough about women's careers and their trajectory in the fields of math and science to proactively analyze the issues and talk about what was going wrong. To conclude that he communicated poorly — and even insensitively — is fair. To conclude that he is opposed to progress for women overlooks the fact that improving this progress was precisely the subject he was addressing.

Jon Cohn defends him too:

On the issues I know best and over which the Treasury Secretary has sway, Summers is good. Very, very good. In the last few years, he has become a persistent critic of inequality and advocate for government action to redress it. He's a true believer in health care reform, both as a way to alleviate economic insecurity and to address the country's long-term fiscal crisis. He wants major action on climate change. And he has argued for aggressive action to stimulate the economy, despite high deficits.

And Brad DeLong:

Larry is — in Paul Krugman's words — a "a force of nature....You can bring him up to speed on anything in fifteen minutes....If you do a piece of something for him excellently — a link in a chain, say — he will do his damnedest to make sure that all other links in that chain are done equally excellently....If he thinks you know more about something than he does, he will listen to you very patiently and then trust and act on what you have told him....Very good people want to work for Larry because he will, if he thinks you can handle it, push you forward into the limelight and give you more responsibility than you thought you could handle.

The anti-anti-Summers backlash appears to be gathering steam.

Recession Watch

| Mon Nov. 10, 2008 2:28 PM EST

RECESSION WATCH....Via Brad DeLong, the Wall Street Journal reports the following:

The unemployment rate is expected to rise to 8.5% by the end of next year and inch even higher in early 2010, economists for Goldman Sachs wrote Friday. The cumulative trough-to-peak increase of more than 4 percentage points in the jobless rate would be the most since World War II, they said.

The BLS unemployment series is above, modified to show 9% unemployment in 2010. I guess this would technically beat out the 1979-81 "double-dip" recession because there was a pause in the middle of that one. To me, the current recession still doesn't look quite as bad '79-'81, but then, we haven't had a sudden oil crisis yet either. And let's hope we don't. It looks plenty bad already.

Arnold on Marriage

| Mon Nov. 10, 2008 1:48 PM EST

ARNOLD ON MARRIAGE....The latest from the Governator:

Gov. Arnold Schwarzenegger on Sunday expressed hope that the California Supreme Court would overturn Proposition 8, the ballot initiative that outlawed same-sex marriage...."It's unfortunate, obviously, but it's not the end," Schwarzenegger said in an interview Sunday on CNN. "I think that we will again maybe undo that, if the court is willing to do that, and then move forward from there and again lead in that area."

Have I mentioned recently just how disgusted I am with Schwarzenegger? Yes? Well, I still am. In addition to single-handedly causing at least half or more of our budget crisis, he also twice vetoed bills that would have legalized gay marriage in California. And now I have to listen to his crocodile tears over the subject? Spare me.

The Golden Rule

| Mon Nov. 10, 2008 1:34 PM EST

THE GOLDEN RULE....Ross Douthat is skeptical that things are (yet) really that bad in the Republican Party:

Oh, the pundits will fight, as they have been for a while, but for a serious circular firing squad you need the activist groups to turn on one another. You might think that a defeat like the one the GOP endured last week would prompt Grover Norquist to argue that the Republican Party needs to ditch its warmongers and its theocrats, or prompt Tony Perkins of the Family Research Council to argue that the GOP needs to ditch its flat-tax obsessives, or prompt the Federalist Society's Leonard Leo to complain about all those anti-intellectual hicks who loved Sarah Palin. But in practice the incentives probably cut the other way: Nobody wants to fire the first shot against their fellow movementarians, because then everybody else might just close ranks and train their fire in your direction. So the social-conservative activist groups will stand by the economic-conservative activist groups, and so on, lest they all hang separately.

He's probably right, but that's because the single-issue activist groups mostly don't have any beef with each other. They're pretty much on board with the entire movement conservative agenda, and are convinced that they just need to make their case to the American people and everything will be fine again.

The business community, however, is both more practical and more ruthless than the activist groups. Richer, too, and at some point they're going to conclude that Something Must Be Done. They don't want Dems writing new regulations and taking away their offshore tax shelters and making unions more powerful, and if the activist groups are in the way of getting Republicans back in power — well, they're just going to have to be dealt with. If that means backing more moderate Republicans with huge fistfuls of cash, then that's what they'll do. If it means more direct threats, that's fine too. And if James Dobson and Grover Norquist get caught in the crossfire, that's unfortunate, but you can't make an omelet without breaking a few eggs. It's nothing personal, guys. Just business.

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First Things First

| Mon Nov. 10, 2008 12:53 PM EST

FIRST THINGS FIRST....The first thing any new president does is to reverse his predecessor's rules on support for international family planning groups that receive U.S. aid. As part of this tradition, Obama will be rescinding Bush's regulation, which itself was a change from Clinton's policy, which in turn was a repudiation of the original rule put in place by Ronald Reagan. Starting January 20th, the mere mention of the word "abortion" will no longer make you ineligible for American aid.

But that's not all. The Washington Post, New York Times, and Wall Street Journal all ran stories over the weekend about the hundreds of other Bush-era executive orders Obama plans to overturn as soon as he's in office, and John Podesta was on TV Sunday morning saying the same thing, which means that this is pretty obviously something the Obama team is eager for the world to hear about.

So what's on tap? Changes to federal funding rules for stem cell research (which makes California's stem cell initiative from a couple of years ago redundant — thanks, initiative process!), some drilling decisions near national parks, and several other things. The most interesting one, however, is probably this:

The president-elect has said, for example, that he intends to quickly reverse the Bush administration's decision last December to deny California the authority to regulate carbon dioxide emissions from automobiles. "Effectively tackling global warming demands bold and innovative solutions, and given the failure of this administration to act, California should be allowed to pioneer," Obama said in January.

California had sought permission from the Environmental Protection Agency to require that greenhouse gas emissions from vehicles be cut by 30 percent between 2009 and 2016, effectively mandating that cars achieve a fuel economy standard of at least 36 miles per gallon within eight years. Seventeen other states had promised to adopt California's rules, representing in total 45 percent of the nation's automobile market. Environmentalists cheered the California initiative because it would stoke innovation that would potentially benefit the entire country.

....Before the election, Obama told others that he favors declaring that carbon dioxide emissions are endangering human welfare, following an EPA task force recommendation last December that Bush and his aides shunned in order to protect the utility and auto industries.

This, along with an EPA that decided to obey the law and classify carbon dioxide as a pollutant, could have extremely far-reaching effects. Pair them up with something close to the energy policy that Obama campaigned on and it would finally send a message to the world that the United States is no longer in denial about global warming.

And not a moment too soon. Julia Whitty explains why here.

Mahdi Army Update

| Mon Nov. 10, 2008 12:30 PM EST

MAHDI ARMY UPDATE....Ned Parker of the LA Times reports that Muqtada al-Sadr has fallen on hard times:

In a telling measure of the militia's power, the U.S. military credits Sadr's decision more than a year ago to call a cease-fire as one of the chief reasons for the sharp drop in violence in Iraq.

But Sadr's fortunes have also plummeted, and his followers now contemplate a world where they are on the run and their Shiite rivals have the upper hand.

....Sadr's troubles are rooted in the fighting between his militia and Iraqi security forces that erupted in March after Prime Minister Nouri Maliki ordered the army to clear the militia's strongholds in the southern city of Basra. The clashes there ended only when Sadr commanded his militia to stand down, and then did the same in Sadr City six weeks later.

....With his armed wing formally frozen, Sadr looked to repair his movement's image. He announced in June that his fighters should form a new social and religious education organization, named Mumahidoon, which aims to teach Iraqis about Islam.

...."To avoid having his organization continually targeted, he had to do something with them, so he followed the Islamic Brotherhood and Hezbollah model," a U.S. military intelligence officer said, referring to other Islamist movements that provide charitable services and enjoy popularity in the Arab world.

At the time, I was skeptical that the Basra operation was a big win for Maliki, but obviously I was pretty spectacularly wrong about that. It's still not clear to me exactly what happened in Basra — did Sadr get beaten? did he sincerely decide that the violence had gotten out of hand? did he take direction from Iran? — but there's not much question that the eventual result was an enormous drop in influence for Sadr and a victory for Maliki and his Badr Organization allies.

In any case, read the whole thing if you're interested in the current lay of the land in Sadr City. It's certainly possible that Sadr could someday Hezbollah-ize his operation and end up more influential than ever, but in the meantime the cease-fire looks like a pretty permanent decision.

Obama and FDR

| Mon Nov. 10, 2008 11:26 AM EST

OBAMA AND FDR....Paul Krugman writes today about the New Deal and the American economy:

Now, there's a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it's important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.

That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the '30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful "not because it does not work, but because it was not tried."

....F.D.R. wasn't just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy....What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy's needs.

I'm curious about something. I've read a number of conservatives recently taking liberals to task for thinking that the New Deal fixed the Great Depression. Some of them are the folks Krugman talks about, who like to pretend that the New Deal made things worse, but others are more moderate, insisting only that liberals stubbornly overestimate the macroeconomic impact of FDR's policies.

But here's the thing. I'm a liberal and I grew up (academically speaking) in the 70s and 80s. I wasn't an economics major or a history major, so everything I learned about FDR and the Great Depression came from a bog standard layman's viewpoint. And the conventional wisdom I learned (apparently based on Cary Brown's 1956 work, though I didn't know that at the time) was that although the New Deal was a fine thing that helped a lot of people etc. etc., it didn't get us out of the Great Depression because, in the end, FDR wasn't a Keynesian and the New Deal just didn't provide enough economic stimulus. What got us out of the Great Depression was World War II.

In other words, exactly what Krugman says. But if that's how I learned this stuff 30 years ago, it's not exactly a big secret, is it? Surely most liberals do, in fact, know this?

I'm also curious about why conservatives are so enamored with this argument in the first place. After all, the conclusion one draws from it is that the New Deal wasn't big enough. Hoover shouldn't have raised taxes, Roosevelt should have spent even more, and deficits should have been even bigger. I can see how they'd like the tax part, but do they really want to convince everyone that the New Deal was too timid? Doesn't that make the argument for an enormous stimulus to address our current mini-depression all the more forceful?

Section 382

| Mon Nov. 10, 2008 1:24 AM EST

SECTION 382....Today, Amit Paley of the Washington Post tells us the riveting story of Section 382 of the tax code, which the Treasury Department suddenly gutted (via a five-sentence notice) a few weeks ago while the rest of us were wrapped up in the drama of the bailout bill:

The change to Section 382 of the tax code — a provision that limited a kind of tax shelter arising in corporate mergers — came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

The reason it looks like a corporate giveaway, apparently, is that it is a corporate giveaway — and it's going to cost the taxpayers something north of $100 billion. Plus, the notice was probably illegal. But no one wants to complain about it because it might put some big bank mergers in jeopardy:

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."

More than a dozen tax lawyers interviewed for this story — including several representing banks that stand to reap billions from the change — said the Treasury had no authority to issue the notice.

....Several [congressional] aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.

"None of us wants to be blamed for ruining these mergers and creating a new Great Depression," one said.

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

"It's just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system," said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. "We're left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?"

I guess some things never change. On either side.