Kevin Drum - December 2009

Income Tax Greatest Hits

| Tue Dec. 8, 2009 1:46 PM EST

Via Jonah Goldberg, AEI's Mark Perry reaches deep into his bag of greatest hits and hauls out the chart on the right:

As the chart below shows (data here), the top 1 percent of taxpayers paid 40.42 percent of all income taxes collected in 2007 ($451 billion), the highest share in modern history for that group....One could even argue that the Bush tax cuts of 2001 and 2003 were actually huge “tax cuts for the poor and middle class” because they helped to increase the number of “non-payers” by more than 14 million Americans between 2000 and 2007. Secondly, the tax burden on “the rich” — the top 1 percent of taxpayers — reached a record high in 2007 of more than 40 percent, and was higher after the Bush tax cuts than before.

It's true that the share of income tax paid by the rich went up between 1980 and today.  But that's because the share of income earned by the rich went up during that period.  In fact, it more than doubled.  And since income taxes are a percentage of income, you'd pretty much expect that if your share of income more than doubled, then your share of income tax would also more than double.

But for the top 1% it didn't.  It just doubled.  In other words, it went up a little bit more slowly than their actual increase in income.  Why?  Because tax rates on the rich have decreased steadily under Republican presidents since 1980.

Griping about taxes is every American's birthright.  But if your share of the income pie increases by 135% over thirty years while everyone else stagnates, you're a pretty lucky ducky.  Surely the least you can do is not complain that your share of the tax bill went up by only 100%?

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Housing vs. the Real World

| Tue Dec. 8, 2009 12:51 PM EST

A few days ago, riffing on a Tim Duy post, I wondered why, during the past decade, so much investment had flowed into the housing market.  Why didn't it flow into productive investments instead?  Why did investment in real goods and services suddenly become so much less attractive than housing?

To a certain extent, this is an ill-formed question.  What matters is the relative attractiveness of housing vs. productive investments, and you get the same effect regardless of whether the former goes up or the latter goes down.  Still, there is a difference, and as Duy points out, investment growth in software and equipment was objectively low during this period.  Mike Konczal takes a crack at explaining why:

One answer to Kevin’s question is because of the terrorist attacks on 9/11, and the financial scandals of Enron and Worldcom, bond markets were scared out of their minds that they might be lending to the next Worldcom. Noah Millman has an excellent description of that situation on the ground related to the beginning of the wave of structured finance. Worldcom is early 2002; people are spooked about the next landmine, and housing always seemed like a safe bet for both consumers, and because of some financial innovations and excellent ratings, for investors.

This sounds roughly plausible.  The dotcom bubble bursts, followed by recession and 9/11, followed by accounting scandals, and suddenly the real world looks like a pretty dangerous place to invest even if interest rates are low.  But there's still lots of money sloshing around, and it has to go somewhere.  Housing (and property in general) got the nod, this fed on itself, and eventually it spiraled out of control, producing a housing bubble.

Mike's secondary explanation is that, at the same time the real world got less attractive to investors, housing became more attractive to bankers because "financial innovation, deregulation, ratings agency’s behavior and changes in the repo markets" made mortgage loans more lucrative.  So they began marketing the hell out of mortgages.  This is also plausible.

But plausible is not the same thing is true.  We've had recessions before, we've had (regional) housing booms before, and we've had clever investment bankers before, but they've never produced the kind of national feeding frenzy we saw in the 00s.  (Not recently, anyway.)  So, while there's obviously something to both these arguments, I'd still like to see an effort by economists to try and quantify them.  Is there a way to do that?  Is there a way to somehow disentangle the importance of the decline in attractiveness of real-world investments vs. the rise in attractiveness of derivative-fueled housing investments?  It seems important to me.

GOP Fun and Games

| Tue Dec. 8, 2009 12:03 PM EST

Via ThinkProgress, Alan Grayson (D–FL) explains that the latest gag among House Republicans is to "forget" their ID cards so they can't vote electronically during roll calls:

They’d all walk to the front of the House and, laughingly and jokingly, put their arms around each other’s shoulder like it was some kind of clownish fun. And they did this over and over to make sure every vote took half an hour.

Steny Hoyer elucidates:

Well we’ve seen a couple of instances of that. Not so much forgetting their cards, but not using their cards and voting by the cards that are available at the desk. You have to write in and stand in a long line. And very frankly, the parliamentarian himself criticized that as delaying tactics which are not countenance by the rules. Obviously, every member has the right to vote. I thought they were unfortunate because it was such a transparent effort at solely delay as supposed to giving opportunity, fair opportunity to voting to every member.

It really is like presiding over a junior high school student council meeting, isn't it?  Except a little less mature.

Jobs Jobs Jobs

| Tue Dec. 8, 2009 11:17 AM EST

So today Obama announced his new jobs program.  It includes (a) a bunch of tax cuts for small businesses, (b) increased spending on infrastructure projects, and (c) new incentives for both private and commercial investments in energy efficiency.  I wonder which of these will get enthusiastic bipartisan support?  Hmmm.....

Making Bankers Pay

| Tue Dec. 8, 2009 12:07 AM EST

The British government aims to get tough with bankers making big bonuses at bailed-out banks:

Alistair Darling will try to force a "permanent culture shift" in the City as he announces a one-off punitive super-tax of more than 50% on the bonuses of tens of thousands of bankers as the centrepiece of the pre-budget report.

....The tax will be set higher than the 50% income tax rate coming in from April for those earning more than £150,000 a year [about $250,000 –ed], sources indicate.1

....But City accountants said there was a strong likelihood of a legal challenge against a punitive tax aimed at one sector of the workforce. Bill Dodwell, head of taxation at accountants Deloitte said: "We have had calls from bankers asking about what action they might take under the Human Rights Act. There's never been a precedent."

Hey, this means that conservatives might finally find something they like about the EU Convention on Human Rights!  Assuming, of course, that they can convince a judge that making bankers pay high taxes on high incomes is a violation of human rights.  Seems a stretch to me, but I know zilch about EU law or the British implementation of it.  Anyone who knows more should feel free to chime in.

1Just so you know, Darling announced a few months ago that the basic tax rate for income above £150,000 would rise from 40% to 50% starting next April.  The new super tax would be above and beyond that.

Old Dogs, Old Tricks

| Mon Dec. 7, 2009 11:09 PM EST

Matt Yglesias says it's puzzling that Ben Bernanke isn't adopting a more expansionary monetary policy in order to jumpstart the job market.  Brad DeLong says, "I am puzzled too."  A bunch of other liberally inclined economists have said similar things recently.

I dunno.  I guess I wish we could stop pretending to be surprised by this.  Ben Bernanke may be a specialist in economic contractions, but he's also a mainstream conservative economist.  And mainstream conservatives have always been more concerned with inflation than with unemployment.  Likewise, they tend to be opposed to entitlement spending, opposed to serious financial regulation, and opposed to expanded consumer protections.  And guess what?  Bernanke is more concerned with inflation than with unemployment and he's opposed to entitlement spending, serious financial regulation, and expanded consumer protections.

This was all pretty plain several months ago, when virtually every liberally-minded economist supported Bernanke's reappointment.  So what's the point of bellyaching about it now?

For what it's worth, I'm surprisingly bitter about this and I keep stewing over it.  Maybe I'm just being an asshole.  But I've been reading liberal economists yammer on for years about liberal economic policies, so when an actual opportunity came along to appoint a liberal economist to an important position it was really disappointing to see them all circle the wagons around Bernanke almost instantly.  It felt like the worst kind of professional backscratching.

I guess I should get over it.  But we all have our dumb little pet peeves to be bitter about, don't we?

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Controlling Healthcare

| Mon Dec. 7, 2009 7:41 PM EST

Will the Medicare cost control measures in the Senate healthcare bill actually stick?  Past history says they might, but Tyler Cowen is skeptical.  Sure, some cost-control measures have made a difference for a few years at a time, but the long-term growth rate of Medicare has been pretty steep regardless.  Plus there are these points to consider:

1. The period of Medicare cost savings, in the early to mid 1990s, coincides roughly with a more general period of cost savings in health care, due to managed care.  This was soundly rejected by the American public, both in their roles as consumers and voters.

2. There will be more and more older voters in the years to come.

3. We should give at least some consideration to a "mean reversion" theory, by which current cost savings increase the pressure for future splurges.  I don't want to push this view too hard, but the aggregate data, as I eyeball them, seem to imply "do not reject" for this hypothesis.

For what it's worth, I don't really disagree.  Not much, anyway.  But I'd make a few points in rebuttal.  First, past measures haven't really been intended as long-term game changers.  They've mostly been small compromises here and there meant to save a bit of money as part of some larger deal.  And even at that, they have made a difference.  Just not a big one.

Second, you have to start somewhere.  The private sector has shown itself completely unable to slow healthcare spending even a little bit, so why not support the current efforts to try something else?  If they don't work, they don't work, and we'll have to try something else.  But there aren't a whole lot of compelling alternatives out there right now.  (And no, I don't really consider tort reform or HSAs compelling alternatives.  Your mileage may vary, but I haven't seen any evidence that the former would have a big effect or that the latter would provide decent coverage.)

Third, and most important, the biggest reason for rising healthcare costs is the simple fact that Americans want more healthcare.  They've made this crystal clear through both the private market and the ballot box.  It seems plain that spending will slow down only when we've collectively decided we're spending enough, and for that to happen people have to understand just how much we're spending.  Employer-based insurance hides this, which is why European national healthcare systems have had a little more luck than we have at controlling expenses: in Europe, the money spent on healthcare is right out in the open and subject to bruising political battles every year.  The cost of higher healthcare spending is higher taxes, and that acts as a natural brake.  The current healthcare reforms in both the House and Senate start to make that clear.

Not everyone will find this persuasive.  But the alternatives all seem like pie in the sky, combinations of special pleading and ideological utopianism.  The national approach, conversely, has a long track record in other countries and holds out at least some hope of controlling costs in the real world.  Right now, it's the best model we've got.

UPDATE: That said, this is not encouraging news.  If we can't even stop ourselves from watering down the best cost-control measures before the reform bill is even passed, what chance to we have of holding on to them when they actually start to bite in?

Public Option Finale?

| Mon Dec. 7, 2009 1:57 PM EST

Healthcare reform took a fairly unexpected detour this weekend.  A consensus seems to be developing, even among liberal senators, that the public option just isn't going to happen, so now a whole bunch of alternatives are being discussed to make up for its loss.  Including this:

Sources who have been briefed on the negotiations say that Medicare buy-in is attracting the most interest. Expanding Medicaid is running into more problems, though there's some appeal because, unlike increasing subsidies, expanding Medicaid actually saves you money. There's also ongoing discussion about tightening regulations on insurers, but I don't know the precise menu of options being considered.

The idea here is that you could buy into Medicare if you're between the age of 55 and 65.  It's the ultimate public option, but only for a subset of the population.  On the bright side, it's a pretty big demographic, and it's also the demographic that, on average, has the most health issues.  On the less bright side, I also imagine that it's a demographic that's pretty well covered by employer insurance already.

In any case, I think it's a great idea, though I have a hard time believing it's going to be suddenly resurrected at the 11th hour like this.  Still — and with the caveat that I'm a lukewarm supporter of the public option in the first place — I'd probably take this over the public option as a straight-up trade any time.  Not only does it do a lot of good, but it sets the stage for possible future age reductions.  Ezra Klein runs down the rest of the possible compromises here.

TARP Unbound

| Mon Dec. 7, 2009 1:06 PM EST

The much-derided TARP program has turned out to be remarkably successful:

The White House had projected in August that the $700 billion Troubled Assets Relief Program, or TARP, would lose about $341 billion over the next 10 years. But officials scaled back the estimate after once-shaky Wall Street firms began recovering much more quickly than expected. In addition, several TARP initiatives have been funded at a smaller amount than originally planned.

....The new, more optimistic estimates of TARP losses could pave the way for Democrats to tap some of the program's unspent funds for a jobs bill currently being crafted in the House. White House press secretary Robert Gibbs said Friday that President Obama is likely to discuss such a plan during a speech Tuesday at the Brookings Institution.

....Some leading Republicans are opposed to proposals to use TARP funds for job creation, saying it would violate the intent of the law. These lawmakers say they simply want the program to end. "The money went out to financial institutions. Now it's coming back, and as it comes back, what we ought to do with that money is use it to reduce the budget deficit," House Minority Leader John A. Boehner (R-Ohio) said on Bloomberg TV last week.

It was always a mystery to me why so many people insisted that the program was likely to have a net cost of $700 billion, when that was never remotely likely in any scenario short of a full-on rerun of the Great Depression.  In the end, it's been extremely successful and surprisingly cheap, even cheaper than I suspected at the time.

In related news, I'd say that John Boehner is quite correct in theory and abysmally wrong in practice.  But at least that's better than his usual batting average.

The Great BCS Cop-Out

| Mon Dec. 7, 2009 12:07 PM EST

I would like to associate myself 100% with this.  That is all.