Kevin Drum - April 2011

Are Roth IRAs a Time Bomb?

| Mon Apr. 11, 2011 12:06 PM EDT

Everybody loves Roth IRAs. I'm pretty sure Marian and I max out our Roth contributions every year, and why not? Withdrawals are 100% tax free. What's not to like?

Well, for one, the fact that withdrawals are 100% tax free. Down the road this means lots of savings income free of taxes and a significant loss of revenue for the federal government. That's why Gerald Scorse took to the pages of the LA Times this weekend to say that it's time to retire the Roth IRA. Megan McArdle thinks this is a harbinger:

I'm less excited about Roth IRAs than most people who write about personal finance, and that's because over the years, I expect we're going to see a lot more op-eds like Scorse's. When I look at the budget problems we face, I'm skeptical that Congress is going to live up to its promise to keep its hands off that money. At the very least, I'd bet that high earners are going to see some sort of surtax on their Roth withdrawals.

Of course, I think this is true of non-Roth retirement savings as well. Ultimately, Congress is going to be faced with penalizing people who didn't save adequately for retirement by cutting their benefits, or penalizing people who did save, by raising taxes on their savings. For a lot of reasons, I expect them to err on the side of penalizing savings. This may have some very ill effects on capital formation in the US — but by the time they're making this decision, everything they do is going to have some very ill effects on something.

For what it's worth, I think Roth IRA's are safe. Congress fiddles with ordinary tax rates all the time, and it's well understood that just because a particular rate stands at one level today is no guarantee that it won't be higher or lower in the future. But Roth IRAs are different: these come with an absolute promise that they won't be taxed, and I don't expect Congress to renege on that. I'm pretty sure they've never reneged on a similar promise in the past, and Roth IRAs are so widely held that the political backlash would be huge if they tried.

In any case, Scorse doesn't recommend this. All he says is that Congress should halt new contributions to Roth IRAs or, at a bare minimum, stop expanding the Roth IRA program. He doesn't suggest taxing withdrawals from existing IRAs.

As for retirement savings, I'm not sure why this is any kind of crisis, either now or in the future. Social Security is the main vehicle by which the federal government gets involved in retirements, and it's in good shape. It can remain in good shape forever with fairly minor tweaks to revenue and benefit levels, and I expect those tweaks to be made eventually. There's no reason Uncle Sam has to stick his hands into your Roth IRA in order to accomplish this.

As for the rest of our long-term deficit problem, who knows? The federal government is obviously going to have to raise more money in the future, but I'd be very surprised if higher taxes on savings vehicles were a major part of how this happens — and certainly not taxation of Roth withdrawals, which would break a clear promise and provide very little additional revenue. I'd guess instead that over time we're going to raise another 5-7% of GDP via higher taxes on ordinary income, elimination of some tax expenditures, higher rates on dividends and capital gains, and possibly even a VAT.

In the meantime, though, Scorse is probably right: Congress and the president should resist the temptation to expand Roth IRAs. As long as they're fairly smallish savings vehicles for middle class families, they aren't doing much harm and they're probably safe from congressional meddling. It's probably best to keep them that way.

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Why Did Obama Cave?

| Mon Apr. 11, 2011 12:42 AM EDT

I've been sick all weekend, and my brain is still a little bit fuzzy. Still, I've been trying to figure something out: what does President Obama really think about the deficit? Did he cave in to Republicans because he didn't have much choice, or does he really think that cutting the budget is a good idea? I'll get to that in a bit, but first, here's Ryan Avent making the case that the budget deal was, substantively speaking, a bad idea:

I think it's worth remembering a few important things. First, the federal government did not need to cut spending in this fiscal year. There is no immediate fiscal crisis; on the contrary, yields on American government debt remain extraordinarily low. Second, macroeconomically speaking, now is a bad time to be cutting spending. The economy remains very weak, state and local governments are already trimming back public spending and placing a big drag on economic activity, and there's plenty of contractionary developments in the pipeline already, from the impending end of QE2 to the impact of rising oil prices....Third, had America actually been facing a crisis or had it simply been an opportune moment to trim back state spending, this was just about the worst way to go about cutting. The cuts don't touch on the real sources of the long-term budget problem.

This is pretty much the conventional wisdom among left-of-center economists, and my guess is that Obama agrees. But if so, why did he agree to the Republican cuts? He might have felt like he was over a barrel and had no choice, but that still wouldn't explain why he talked about the deal so enthusiastically after it was done. There has to be more.

But what? My best guess is also the most boring one: He actually thinks the cuts are a good idea. Macroeconomically they don't make sense, but as a signal they might be pretty powerful. Here's how.

Most center-left types think that our first best economic policy option is more spending now, while the economy is still weak, combined with much less spending in the future, when the long-term deficit threatens to spiral out of control. But Obama probably figures, correctly, that the deal he cut during the lame duck session last year was the last stimulus he was going to get. More spending just isn't in the cards. So what's the second best policy option?

Well, the biggest problem with the first best option has always been that it's not credible. You need some way of signaling the market that you're serious about long-term deficit reduction, and there's really no way to do that as long as you're spending gobs of money in the present. That might be a risk you're willing to take as long as stimulus spending is feasible (since the substantive gain of the stimulus outweighs the drawback of lost credibility on long-term cuts), but it's not worth taking once further spending is out of the question. At that point, the long-term signal becomes your most important policy goal. So my guess is that (1) Obama is serious about wanting to rein in the long-term deficit, (2) he thinks the cuts in this year's budget are a good way of signaling his seriousness, and (3) he also thinks that a few tens of billions of dollars in lost spending will have such a minor macroeconomic effect that it's a small price to pay.

Now, I'd also guess that the last few months of economic data have persuaded Obama that the economy is rebounding, which makes the risk of cutting current-year spending even less. I'm not so sure about that, myself, but there's no question that economic signals are mixed right now. We're obviously headed for a slow recovery at best, but probably a recovery nonetheless.

So, anyway, that's it: my best shot at reading Obama's mind. I suspect Obama really is a long-term deficit hawk and figures that the current budget battle, though not really of his choosing, can be turned to his advantage. He's agreed to cuts but has also shown that he'll fight against crazy cuts, and he thinks that will help him take the high ground when he unveils his own long-term deficit program on Wednesday. This isn't how the events of the past week look to us liberals, of course, but I'll bet it's approximately what they look like to independents. And as we've all learned over the past couple of years, Obama doesn't really care much about how liberals view events.

Front page image: Zhang Jun/Xinhua/ZUMAPRESS.com

Friday Cat Blogging - 8 April 2011

| Fri Apr. 8, 2011 3:04 PM EDT

Yesterday was play-with-string day. The string itself is out of the frame in both these pictures, but on the left Domino is waiting for the string to come back within reach of her paws, and on the right Inkblot is watching the string dangle above his head. What are you going to do for playtime this weekend?

I also have a lovely outdoor shot of Inkblot that I guess I'll save for next week. For this week, though, these two seemed like a nice matched pair.

Paying for What We Get

| Fri Apr. 8, 2011 1:40 PM EDT

Andrew Sullivan writes today that healthcare costs are skyrocketing and there are basically two ways to rein them in:

If we want to reduce this giant suck from the rest of the working economy, there are two options: have a government body decide which treatments can be afforded and which cannot; or have patients ration themselves by price....My own view is that central government diktat on these things is more likely to provoke anger and even more heated debates and paralysis than now.

I think half of this is right, but the other half betrays a fundamental (though common) misconception about how politics actually works. First the misconception.

It's true that national healthcare systems usually rely on some kind of expert panel that decides what procedures will be covered and how much doctors will be reimbursed for them. But in a democracy, these panels are merely advisory. The real battles happen in national legislatures, either directly (i.e., overturning the panels on specific issues) or in fights over funding levels, which is what constrains the decisions of the panels in the first place. And those battles in national legislatures are, obviously, mirrors of what the public itself wants. If they want higher funding and more procedures covered, then over time that's what happens. If not, it doesn't.

So it's not really the panels that ultimately decide these things, nor is it central government diktat. It's the voters. But what Andrew is right about is that these decisions are likely to provoke a lot of anger and endlessly heated debates. The problem is that he says this as if it's a bad thing. It's not. This is how healthcare costs get reined in. In a national healthcare system, taxpayers who are footing the bill have to make decisions continuously about how much they're willing to pay for healthcare. They're guided in this by the opinions of experts, but in the end, it's their money and they decide. And unlike in our jury-rigged employer-based healthcare system, where costs are largely invisible, this decision is explicit: tax rates are directly tied to how much healthcare the system provides. The British, for example, are fairly stingy and end up with waiting lists. The French are more generous and don't. That's because the taxpayers of both countries have made their own decisions about how much healthcare they're willing to fund.

The fact that these debates are angry and heated is unsurprising, but it's also healthy. These tradeoffs should be explicit and difficult. The big difference here isn't in whether healthcare is rationed, but in how the rationing is done. Patients are rationing themselves in both systems, but a system that rations via taxes is relatively friendly to the poor while a system that rations on price is friendlier to the wealthy. Knowing that, you can take your pick.

Map of the Day: High Frequency Trading Locations

| Fri Apr. 8, 2011 12:48 PM EDT

Via Tyler Cowen, A. D. Wissner-Gross and C. E. Freer investigate where you should open a high-frequency trading facility given that light-speed propagation delays are a key factor in arbitraging trades between two exchanges. After much fiddling with partial differential equations, they come up with this map, which shows "Optimal intermediate trading node locations (small circles) for all pairs of 52 major securities exchanges (large circles)....from 2008 data reported by the World Federation of Exchanges." I call dibs on the location just north of Greenland.

The GOP Yanks the Football Away Again

| Fri Apr. 8, 2011 12:33 PM EDT

This is quite a budget showdown we're having, isn't it? The original Republican proposal asked for $32 billion in cuts, and after considerable grumbling Democrats eventually accepted that. But by that time Republicans had moved on, proposing $38 billion in cuts. Democrats are now willing to accept that, but Republicans have upped the ante again: they want $39 billion in cuts plus a bunch of extraneous riders to defund Planned Parenthood and hand out a slew of environmental exemptions to favored industries.

So what's next? Democrats cave in again and Republicans turn down them down unless they accept $50 billion in cuts and Obama goes on national TV to apologize for the New Deal? Yeesh.

Now, tell me again which party is eagerly hoping for a government shutdown and which one just wants to cut a deal?

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Taxes, Cost Controls, and Medicare

| Fri Apr. 8, 2011 11:56 AM EDT

Speaking of fiscal reality, Austin Frakt reminds us that the federal budget, including Medicare, is actually in pretty good shape if we follow current law. Here's the CBO's projection of the primary budget (i.e., excluding interest payments):

Are Democrats willing to raise taxes in order to fund Medicare? Austin: "I do recall quite a vociferous debate over just this issue. Did Americans fail to notice that the health reform law spends a lot of money and includes a lot of tax increases? If so, that’s not just a Democratic messaging problem, but a Republican one too, and a general media failure. What more would it take to communicate this?"

Now, this CBO projection is one that assumes we follow current law. That is, we let the Bush tax cuts expire, we stop passing the doc fix, estate taxes revert to their 2009 levels, and we actually allow both the cost control mechanisms and tax increases of PPACA to take effect. As it happens, the estate tax has already been changed to rates slightly below the 2009 levels, but that has a pretty minor effect on things. The only one of these items that's both significant and hard to imagine staying in place is the end of the doc fix. This means the budget isn't quite as balanced as this chart suggests.

Still, even if we modify physician payments, we're in decent shape as long as we have the discipline to let current law take its course, including both its tax increases and its cost controls. Toss in a compromise Social Security fix and we'd be in better long-term shape yet. So what's wrong with this picture?

More detail here from Ezra Klein in word form rather than chart form.

Facing Fiscal Reality

| Fri Apr. 8, 2011 11:16 AM EDT

David Brooks seems to have backed down a bit on his man-crush toward Paul Ryan, but still thinks he's performed a valuable service:

The Democrats are on defense because they are unwilling to ask voters to confront the implications of their choices. Democrats seem to believe that most Americans want to preserve the 20th-century welfare state programs. But they are unwilling to ask voters to pay for them, and they are unwilling to describe the tax increases that would be required to cover their exploding future costs.

Raising taxes on the rich will not do it. There aren’t enough rich people to generate the tens of trillions of dollars required to pay for Medicare, let alone all the other programs. Democrats, thus, face a fundamental choice. They can either reverse President Obama’s no-new-middle-class-taxes pledge, or they can learn to live with Paul Ryan’s version of government.

Until they find a way to pay for the programs they support, they will not be serious players in this game. They will have no credible plans and will be in an angry but permanent retreat.

Look, I won't pretend there's nothing to this. Still, unless I've been living for the past 30 years in that alternate universe where Spock sports a Van Dyke, I'm pretty sure I know which party has been unwilling to raise taxes. And the name of that party doesn't start with a D. What's more, I think Ron Brownstein has the more salient analysis anyway:

The sweeping budget blueprint that House Budget Committee Chairman Paul Ryan, R-Wis., released this week marked the fifth time since 1980 that Republicans have followed an electoral breakthrough by attempting to restructure Medicare or Social Security.

[A bit of history follows]

....From this trail of wreckage, one lesson is clear: Restructuring entitlements without bipartisan support is a high-wire proposition....It’s even tougher to limit entitlements without bipartisan consensus....Ryan, discounting that history, has aimed his plan squarely at Republicans. Even though federal revenue, as a share of the economy, is at its lowest level since 1950, Ryan would attack the debt solely with spending reductions.

After five tries with Ryan's scorched-earth approach, I just don't see the supposedly bracing value of trying it yet again. We already know it won't work, we already know it's purely a base-pandering approach, and we already know that its most likely result isn't to force Democrats to the table, but to make compromise even harder. That strikes me as cowardly and partisan, not brave and farsighted.

So fine: if we want to solve Medicare's long-term problems, we're going to need a combination of smarter policies, reduced spending, and increased taxes. This is the admission that Brooks wants, and I'm happy to own up to it. But the truth is that liberal wonks have been owning up to this for years, and Democratic members of Congress are generally willing to own up to it as well — as long as they have some support from Republicans too. Does anyone really doubt that?

But of course they never get that support. It's Republicans, not Democrats, who tremble like small children before the terrifying gaze of Grover Norquist and are consistently unwilling to face fiscal realities. As soon as a few of them work up the courage to start tearing up those tax jihad pledges that Norquist has bullied them into signing over the years, then maybe we can talk. Until then, it's pretty clear which party is standing in the way of finding real solutions.

Stalemate in Libya?

| Fri Apr. 8, 2011 3:01 AM EDT

So how are things going in Libya? One thing is becoming even more obvious than before: the rebel "army" is small, poorly trained, poorly armed, and unlikely to win on its own. According to C.J. Chivers of the New York Times:

Prone to panic, they often answer to little more than their mood, which changes in a flash. When their morale spikes upward, their attacks tend to be painfully and bloodily frontal — little more than racing columns down the highway, through a gantlet of the Qaddafi forces’ rocket and mortar fire, face forward into the loyalists’ machine guns.

So what does this mean? Muammar Qaddafi's capabilities are pretty limited too, which means we might well be looking at an indefinite de facto partition of the country, with Qaddafi controlling Tripoli and the west and rebels controlling Benghazi and the east. Tara Bahrampour of the Washington Post confirms this:

For the United States and other Western powers, the rebel efforts to build the rudiments of a nation in eastern Libya reflect the reality of a military stalemate — one in which NATO could be ensnared for months or more. “We don’t like it, we don’t want it, but this scenario might happen,” said Fathi Baja, the rebels’ head of international affairs.

So how does this play out? There's still a chance that Qaddafi will crumble. Libya's loss of oil revenue will continue to squeeze him. The mercenaries fighting for him might decide to leave for better opportunities elsewhere. His supporters might continue to defect as Western sanctions keep biting. But what if he holds on anyway and the rebels are just flatly unable to dislodge him? Fred Kaplan says the events in the broader Middle East are yet another demonstration of the post-Cold War limits of American power:

We find ourselves in the unusual situation—unprecedented in the lifetime of nearly every American breathing today—of watching from the sidelines as world-historical transformations unfold....The fate of all these uprisings is certainly a matter of U.S. interests—arguably, in the case of Egypt and Yemen, our vital interests. Yet there's little we can do to direct their paths.

The one exception, he says, is Libya. But that may be the exception that proves the rule. How likely is it, after all, that either the United States or its allies will be willing to accept a long, dull stalemate like this? In a sense, it would be even worse than the kind of grinding, inconclusive war we're fighting in Afghanistan, where we can at least concoct stories about progress and eventual victory. But if Libya settles down into a partition with essentially no fighting at all, no such stories will be possible. We either accept the partition or we don't.

How likely is it that we will? There's not a lot of precedent to go on here, but it doesn't seem like the kind of thing the American (or French or British) public would accept for long. Sure, nobody would be dying, so there probably wouldn't be huge public protests, but we'd still be committing ourselves to an expensive, indefinite military operation with no goal except to protect the partition of a country nobody really cares much about in the first place.

So what are the alternatives? There are two: either a negotiated settlement of some kind or a decision that the war has to end and Qaddafi has to go. That would mean a Kosovo-style air campaign against Tripoli, kept up until Qaddafi finally either surrendered or was killed.

This is what makes some kind of negotiated settlement so important. Without it, the most likely end point isn't partition and stalemate, it's a broadening of the war. How many stalemates can a single president have on his plate at once, after all?

Front page image: Maurizio Gambarini/DPA/Zuma

Shutdown Fun and Games

| Thu Apr. 7, 2011 3:12 PM EDT

Jason Kuznicki's husband works at NASA. That is, he'll work at NASA until the government shuts down, anyway. When that happens, the results might be a wee bit different than what the tea partiers expect:

Now look. If my husband (1) lost his job because of (2) substantial budget cuts and he (3) had to find work in the private aerospace sector, I’d probably just have to shut the hell up — provided of course that we had (4) already cut the truly odious government spending first.

In a case like that, I’d be brushing up on Stoic virtue. There wouldn’t be much else to do. But that’s not what’s happening. Not even close.

Instead, my husband likely (1) keeps his job, but not his pay, because of (2) empty posturing over trivial budget cuts and he (3) can’t legally work anywhere in the private aerospace sector. Meanwhile the government is (4) spending a whole lot more money on some very odious things, like an illegal war.

Oh yeah, and my husband can’t even volunteer at NASA, which he almost certainly would do, because he’d really like to get some research to the publisher before a deadline. That, too, is against the law.

By my lights, this is wrong on every single dimension. I know you’d love it if the chickens were coming home to roost, but they’re not. Not for me anyway. For Republicans? Well... take it up with them. I haven’t voted Republican in many years, and I don’t see myself starting anytime soon.

Shutting down the government sure is fun, isn't it?