Kevin Drum - November 2010

Carbon Taxes and the Budget Deficit

| Wed Nov. 17, 2010 9:39 AM PST

Matt Yglesias wants the liberal community to drop its longtime love affair with a VAT as a way of raising revenue and instead start showing some love for a carbon tax:

I really think the VAT is a decent idea whose time is past and is now obsolete. VAT recommends itself as an economically efficient revenue raiser, with the downside being that it’s regressive. The result is that from a 2010 point of view it’s completely dominated by the idea of a carbon tax. A carbon tax is also an efficient, but regressive, form of consumption tax. But by specifically taxing consumption of carbon dioxide emissions it also manages to contribute to solving a massive ecological problem. The political obstacles to a carbon tax are formidable, but so are the obstacles to a VAT. Under the circumstances it would be tragic for a political coalition to muster the power necessary to implement a hefty regressive consumption tax that isn’t specifically targeted at greenhouse gas pollution.

I agree, and the regressive nature of both kinds of taxes can be minimized with decent implementation choices. There are plenty of plans on the table for doing this.

But I'll add one other thing. A few days ago I wrote a poorly phrased post in which I said that any plan for reducing the budget deficit should also include a plan for reducing the trade deficit. It sounded vaguely as if I was suggesting that reducing the trade deficit would directly affect the budget deficit, but that's not really what I meant. What I meant was that, other things equal, you can only reduce the budget deficit if you also reduce the trade deficit at the same time. One corollary of this is that policies to reduce the budget deficit are more likely to be effective if they work with policies to reduce the trade deficit rather than against them.

A carbon tax is a good example of this. On one level, it raises revenue and helps close the budget deficit. But it also makes energy more expensive and is likely to reduce our imports of oil. Whether it actually does or not depends on a lot of other issues, but at least it pushes in the right direction. You're giving budget deficit reduction a tailwind instead of a headwind.

So: a carbon tax is good for the environment, probably good for the trade deficit, and therefore probably also helpful for reducing the budget deficit. What's not to like?

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Deficit Plan #2 Hits the Street

| Tue Nov. 16, 2010 11:58 PM PST

I imagine I'll still be asleep when Pete Domenici and Alice Rivlin announce their version of a deficit reduction plan on Wednesday morning, but their op-ed in the Washington Post sure makes it sound awfully similar to the Simpson-Bowles plan. That's no surprise, I guess, since there are only just so many ways to skin this particular cat. Short version: Cut tax rates and eliminate most deductions and credits. No carbon tax, no VAT, no financial transaction tax. Freeze domestic and military discretionary spending for several years at 2011 levels, which amounts to a gradual cut of about $100 million on each side, and then cap future growth. Balance Social Security by raising the earnings cap, cutting benefits for high earners, and changing the COLA calculation. Control healthcare costs by phasing out the tax exclusion for employer-provided health care and reforming medical malpractice laws.

A few things are different. They make a point of phasing in their plan gradually beginning in 2012 so it doesn't interfere with the current economic recovery. There's a one-year payroll tax holiday for 2011 to stimulate the economy. They raise some revenue via a 6.5% "debt-reduction sales tax," whatever that is. They don't increase the retirement age for Social Security. And they address the health costs tied to rising obesity by imposing a tax on high-calorie sodas. Seriously.

More later, I'm sure. Like it or not, it's deficit season in Washington D.C. Resistance is futile.

Irish Eyes

| Tue Nov. 16, 2010 9:46 PM PST

The latest on Ireland:

Senior European officials laid the groundwork for a bailout of Ireland that could reach €100 billion ($136 billion), saying experts would travel this week to Dublin to examine the country's finances amid alarm about the dire straits of the Irish banking system.

I suppose this statistic is going to be splashed everywhere before long, but this is roughly 60% of Ireland's GDP. It would be about equivalent to the United States getting a bailout of $9 trillion. Just so you know.

Will There Be An Investor Uprising?

| Tue Nov. 16, 2010 5:17 PM PST

The Senate Banking Committee met today to hold hearings about the foreclosure fraud crisis. MarketWatch has a brief summary here. After it was over, Dave Dayen, Atrios, and Mike Konczal (rortybomb) chatted on Twitter:

ddayen: It's a national crime that this foreclosure fraud hearing won't lead the nightly news

ddayen: hearing ending, yes these things are a lot of hot air, but I think this one might have done some good

Atrios: what possible good? nice that maybe some senators get it, but... then what?

ddayen: point is that this has gone from a backwater on blogs to the chair of Senate Banking saying this is a crisis. Baby steps

Atrios: yes that's progess but..Treasury unlikely to do anything and of course congress is useless

ddayen: Congress is useless but investors, AGs not necessarily. Investors watched this hearing and $ signs lit up in their eyes

Atrios: true, long thought that the only slim hope for this mess was investor uprising

rortybomb: You only need a little bit of successful investor uprising to put ratings agencies into motion, which sends whole thing collapsing.

Atrios: true, tho i think problem with investor uprising solution is that many investors are on both sides of this

rortybomb: You could also have an investor uprising which doesn't really help homeowners/communities at all. That's a worry.

Atrios: yes i agree with that, investor uprising no guarantee of helping homeowners. just slim possibility

ddayen: That is a worry, but there are a combination of pressures here, particularly from courts denying foreclosures....pt. being, a multi-pronged attack w/courts, investors, munis and AGs, could get the banks to a homeowner-friendly endgame

So will investors who bought securities backed by fraudulent mortgages lead a revolution against the banks who sold them? Maybe! Though probably not. In any case, I just thought everyone might enjoy eavesdropping on the postgame show a bit.

Mortgage Interest and the Middle Class

| Tue Nov. 16, 2010 3:57 PM PST

Is the mortgage interest deduction a "middle class" benefit? Sort of. Based on data from the Tax Policy Center, Ezra Klein offers the chart on the right, which shows how much it saves various income groups. If you're low-income, the average benefit is 0-0.1% of your income. If you're smack in the middle of the income range, the benefit is about 1% of your income. If you're at the top of the income range — but not in millionaire land — the benefit is about 1.6-1.7% of your income.

The reason for this is obvious. Lower income people are unlikely to own homes or have big mortgages, so they get no benefit. Median earners are more likely to own homes, but their mortgages are still small. High earners nearly all own homes and all have big mortgages. The result is a tax break that doesn't merely rise linearly with income. Even in percentage terms it's actively more beneficial the more money you make.

So what if you wanted to make it a little less plutocratic? Some ideas are here, but probably the simplest would be to reduce the cap. Currently the mortgage interest deduction can be taken on loans up to $1 million. If you cut that to, say, $250,000, the middle class would largely keep the same benefit it has now and the upper income brackets would get a benefit about the same or a bit lower (in percentage terms). Plus it would reduce the artificial incentive to buy ever bigger houses. Seems like the least we should do.

Fat Dollar, Skinny Dollar

| Tue Nov. 16, 2010 12:03 PM PST

I almost wrote this myself a couple of days ago, but Karl Smith beat me to it. Or, rather, Mrs. Smith beat me to it:

As a quick note, the Fed for good reasons does not have a mandate to maintain a strong dollar. I wish I could devote more time to this. My wife says that we could clear up a lot of confusion by replacing strong dollar/weak dollar with fat dollar/skinny dollar. Then we could just say that the dollar is morbidly obese and millions of Americans would immediately think it a moral imperative to make the dollar lose weight.

I'm pretty much convinced that conservatives instinctively believe that strong = good in all cases, and this causes all sorts of problems for currency policy. Eons ago, we happened to choose the adjective "strong" to refer to overvalued currencies, so now conservatives are hellbent on insisting that the U.S. dollar must always be overvalued even though that's about the last thing the U.S. economy needs right now. Because, you know, that's strong. And who'd choose weak over strong?

So sign me up for the fat/skinny dollar club. Right now the dollar needs to lose some weight and get into fighting trim. Doesn't that sound like a much better pitch than arguing that we need a weak dollar?

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Is New START Road-kyl?

| Tue Nov. 16, 2010 11:26 AM PST

Laura Rozen reports that Jon Kyl (R–Ariz.) doesn't think the New START arms control treaty is ready for prime time:

“When Majority Leader Harry Reid asked me if I thought the treaty could be considered in the lame duck session, I replied I did not think so given the combination of other work Congress must do and the complex and unresolved issues related to START and modernization,” Kyl said in a statement.

....In further discussions between Democratic leaders and Kyl, congressional sources said, they interpreted Kyl's statement to mean "no" -- and not last-minute wrangling for more concessions from the Obama administration.

...."Issuing a press statement while sensitive private talks are ongoing strikes me as an act of bad faith," [a] nonproliferation hand said. "It only reinforces those who believe that Kyl is playing the administration for a fool, stringing out a series of concessions before abruptly calling the whole thing off."

That would be a shocker, wouldn't it? A Republican pretending to negotiate but with no intention of ever actually supporting a final product? Hard to believe.

Of course, as Kyl well knows, if New START doesn't make it through the lame duck it's dead forever. Despite the fact that both military leaders and a wide swath of foreign policy mavens of all stripes support it, it has zero chance of getting the 14 Republican votes it would need for approval in the new Senate. So it's now or never.

And, as Kyl also undoubtedly knows, it puts Obama in a touchy position. The military might support New START, and foreign policy types might support it, but guess who doesn't give a rat's ass about it? The American public. So even if Kyl eventually supports passage, by forcing Obama to spend more time on it he's forcing Obama to spend more time on yet another worthwhile but non-crowd pleasing policy. And it's time spent on a policy that's not related to jobs. Which means that if it fails, the Beltway punditocracy will rise up in a huge collective moan about Obama once again squandering his political capital when he should be focused like a laser on jobs, jobs, jobs.

So it's a smart move on Kyl's part. Cynical, but smart.

Republicans and the Fed

| Tue Nov. 16, 2010 10:30 AM PST

Felix Salmon ponders the political brawl surrounding the Fed's quantitative easing program:

For reasons I don’t fully understand, the debate over QE2 has divided along party-political lines, with the Republicans lining up against it and the Democrats attacking them....Interestingly, this is one of those old-fashioned technocrat vs technocrat policy debates, in contrast to the technocrat vs populist debates which seem to have taken over far too much airtime of late. But it’s just as shrill.

....Bernanke, then, has every reason to want to reduce the volume on this debate: the mere existence of the debate itself can easily counteract any good which comes from QE2. One way of doing that would be to admit that QE2 is an untried experiment: while QE1 worked as a weapon in the crisis-fighting arsenal, QE2 is being asked to do something quite different. So the Fed should define much more clearly than it has done until now what exactly QE2 is designed to achieve, and what criteria might be used to determine whether it is succeeding or failing. And if it’s showing signs of failing, then the Fed should also be explicit about how and when it might be unwound.

I'm not a monetary economist, and the technical arguments about the mechanics of QE2 and what it will accomplish are impossible for me to evaluate properly. However, one thing does seem to be fairly clear: despite the scary sounding $600 billion number, the actual impact of QE2 is almost certain to be fairly small. With interest rates already so low, there's simply not enough money involved to move markets substantially.

In other words, regardless of whether you think QE2 is good policy, it's next to impossible to understand the increasingly hysterical Republican reaction to it. Unless, of course, you consider the context: Republicans aren't just mounting a campaign against the Fed. They're equally dedicated to championing a damaging economic argument about regulatory uncertainty that doesn't withstand a moment's scrutiny; they've already rejected several compromise opportunities to extend the Bush tax cuts unless a permanent extension of the high-end cuts was included; and they're apparently planning to play a high-stakes game of chicken over raising the debt ceiling in a few months.

None of these things bespeaks a genuine concern with the economy. Instead, they suggest a party that's simply jockeying for political advantage and figures that maximum chaos is in its best interest. It also explains why QE2 has divided along party-political lines: it hasn't. Only Republicans are wholeheartedly on one side. Democratic reaction has been both varied and fairly subdued.

QE2 is vanishingly unlikely to either succeed or fail strongly enough for either side to make a bulletproof argument about whether it worked, and in any case benchmarks aren't really what Republicans are after. They just want the economic argument to be focused solely on taxes, taxes, and taxes. The more noise the Drudge/Rush/Fox axis can generate over everything else — in other words, the more they can argue that nothing else works — the better their tax argument looks.

Quote of the Day: Bombs for Peace

| Tue Nov. 16, 2010 9:56 AM PST

From Matt Steinglass, commenting on President Obama's offer to sell Israel F-35 fighter jets in return for a 3-month settlement freeze in the West Bank:

Paying for peace negotiations in fighter planes is a bit like paying for carbon offsets in Hummers.

Voltaire would have been proud.

Banking on GM

| Tue Nov. 16, 2010 9:34 AM PST

The LA Times reports on this year's big coming out party on Wall Street:

General Motors Co. is set to reemerge as a public company this week in one of the year's hottest initial public stock offerings, but many American taxpayers who helped rescue the company won't be going along for the ride.

That's because most Americans won't have access to the new shares of the Detroit automaker....Some experts said an opportunity to reward average Americans is being wasted, even though the Treasury Department said two months ago that individuals would have "ample opportunity" to participate in the IPO. "Wall Street thumbed its nose at" individual investors, said David Menlow, president of research firm Ipofinancial.com. "We continue to help Wall Street out, and Wall Street seldom feels the need to say thank you."

I guess being a zillionaire investment banker means never having to say you're sorry.

Generally speaking, of course, this is no surprise. Retail investors almost never get a piece of the action in hot IPO deals. That's reserved for other bankers, rich clients, and friends and family. U.S. taxpayers might properly consider themselves "family" in this case, but Wall Street very decidedly doesn't.

Personally, I probably wouldn't recommend that retail investors get involved in a deal like this. But who cares what I recommend? The Obama administration should show a bit more common sense here. Taxpayers paid for the GM bailout, and if taxpayers want to gamble a bit of their pin money on GM's recovery then they probably ought to have first crack at it, not the Wall Street titans for whom this is just another few blips on their computer screen. Obama has been almost obsessive about demonstrating that the government isn't controlling the companies it bailed out, but for this he should have made an exception. The little guys should have come first.