Bill Galston thinks the fiscal cliffsters need to STFU:

Public discussions encourage posturing and allow die-hards to strangle compromise in its cradle. If the leaders of the parties are serious about reaching an agreement (some of their troops are not), they’ll have to shift course and enter into private, face-to-face negotiations, during which they would agree to cease tattling to the press about the transgressions of the other side. President Obama and House Speaker John Boehner will have to take the lead, as they did in the famously abortive “grand bargain” talks of 2011.

OK, I'll grant that. I've been mocking John Boehner for making a public proposal so vague as to be almost useless ("revenue" doesn't mean a thing until you commit to specific policies for getting it), but obviously there's a limit to how far out in front of his skis he can get with the tea-party wing of his caucus ready to pounce on his every word. The problem with Galston's suggestion is that Boehner and Obama tried private talks last year during the debt ceiling negotiations, and it was a debacle. Oh wait:

It’s understandable why both of them might be reluctant to go down this path again. Last year’s talks produced intra-party conflicts among Republicans that Boehner found hard to manage. For his part, the president reportedly believes that it was a mistake to closet himself with the Speaker and that only constant public pressure can induce the Republicans to abandon extreme positions.

Galston thinks things are different this time, but I'm not so sure. The problem isn't on the Democratic side: Obama can probably round up the votes on his side of the aisle for any deal he makes. The question is whether things have changed for Boehner. Galston thinks they have: "Some of the early Tea Party fervor has cooled, and the House Republicans are more unified around Boehner’s leadership....Both Eric Cantor and Paul Ryan signed onto his latest proposal....He speaks for his party to a greater extent than heretofore."

Maybe. It's true that there are signs that Boehner has a firmer hold on things than he did last year. The problem is that Galston is asking Democrats to take on faith the notion that Boehner can deliver on a genuine compromise proposal even if Obama ratchets down the public pressure. I'd call that a very dangerous proposition. The uncomfortable truth that everyone in Washington is tiptoeing around is that neither Eric Cantor nor Paul Ryan has explicitly said he'd be willing to raise real revenue yet. All they've signed up for is "pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates." This looks for all the world like a proposal that would lower rates, get back to revenue neutrality by imposing a few minor limits on deductions, and then add $800 billion in "revenue" from the alleged growth-powering magic of tax cuts.

If you think I'm just being nitpicky, you'd better think again. These are the kinds of distinctions that killed the debt ceiling deal last year, and they're the kinds of distinctions that people like Ryan and Cantor live for. They aren't going to agree to a real revenue increase unless they're under intense pressure, and that's only going to happen if Obama goes public and stays public. There can be plenty of private talks at the same time, but they aren't enough. Obama needs to keep pressing his advantage if he wants to keep it. Sweet reason behind closed doors isn't going to get the job done, and Galston is being naive if he truly thinks differently.

Republican rising star Bobby Jindal has a quartet of bold, new ideas so fresh they'll practically moo if you try to eat them. Check them out:

  • A federal balanced budget amendment.
  • Place a cap on discretionary and mandatory federal spending.
  • A supermajority to increase taxes.
  • Term limits.

But that's not even the best part. The best part comes in the very next sentence: "Now that I’ve offended everyone in Washington...." Yeah, baby! See, Jindal's speaking truth to power, and power isn't going to be happy about it. But Jindal can take it, because fresh, bold, innovative thinking is what the new post-2012 Republican Party is all about, and they don't care who knows it.


From Senator Tom Coburn, on whether he'd rather raise revenue by increasing rates on the rich or by closing loopholes on the rich:

Actually, I would rather see the rates go up than do it the other way because it gives us a greater chance to reform the tax code and broaden the base in the future.

Coburn is a diehard conservative, but he's also been off the reservation on taxes for a while, so this isn't a huge surprise. Still, I think he's right, and I have a feeling that even some House Republicans might eventually agree with him if they think this through a bit.

There are two ways to come at this. First: which is simpler and easier, raising rates or closing loopholes? I'd say raising rates is easier, and if it's done now it will make it harder to raise them again in the future. This means that if Democrats want to soak the rich again, they'll have to do it via closing loopholes, which is a harder lift.

Second, there's Coburn's point. If you want to have any chance at all of broadening the base and lowering rates in the future, you can't close loopholes now. You need to leave them there as bargaining chips. Tax reform will be more likely if rates are higher (making them easier to lower) and loopholes are all still intact (giving you plenty of stuff to close in return for lowering rates).

If you're a slave of Grover Norquist and hellbent on never raising revenue in any way at all, none of this matters. But if you're smart enough to pound sand, you know that raising revenue is inevitable eventually. And if it's going to happen eventually, Coburn is right: you're probably better off just giving in on the higher rates now. It makes further hikes less likely and makes conservative-friendly tax reform more likely. As a bonus, it also removes the stigma of defending the rich at all costs, even if it means depriving the middle class of a tax cut. That might not be so bad for the Republican Party's tattered image.

A recent study of Danish savers suggests that tax breaks for retirement accounts have almost no effect on the amount people sock away for their golden years. This doesn't surprise me, since I read Joel Slemrod and Jon Bakija's Taxing Ourselves a long time ago (highly recommended!), and they told me the same thing. Nearly every study, they said, agrees that "any response of the saving rate to the incentive effect of a higher after-tax rate of return is likely to be fairly small." As for IRAs, they act as "a reward, but not an inducement, for saving." Andrew Sprung puts this into personal terms:

My wife and I are savers....Since the late '90s I've had the kind of solo retirement accounts allowed to the self-employed....I am always acutely conscious that a large chunk of every allowable dollar that I fail to contribute goes to taxes — avoidably. So I come as close to maxing out as I can. I've always assumed that this a good thing — that this incentive is working as it should.

What dawned on me after reading about this study, which focused on Danish savers since reams of detailed data are available there, was that the incentive doesn't really shape how much I save — it just controls where I put it.

....About 90% of our savings, excluding home equity, is in retirement accounts. That's not good. Or rather, it's only "good" if you assume that it's in the natural order of things for retirement funds to be especially privileged....What the Danish study tells me is that all savings should be equal, and all citizens should be able to avail themselves of the same limited tax credits to save. And oh yes, we should be free to put those tax-protected savings into whatever investment vehicles we choose.

That makes sense. There's probably some incentive effect at work—though in 401(k)s it's most likely the employer match that's doing the heavy lifting—but for the most part these vehicles are used by people who'd be saving regardless. Virtually all of the benefit ends up going to the upper middle class and the wealthy, who generally don't need much of an incentive to build up savings.

I don't really have anything against tax-advantaged retirement plans. You won't see it becoming a hobbyhorse here. Still, it's worth knowing that this is a tax expenditure that costs a lot of money without really accomplishing much of anything.

A couple of days ago John Boehner unveiled his fiscal cliff proposal, which included $800 billion in tax revenue that he refused to provide any detail about. That gave everyone a good chuckle. But if you ignore Boehner's pro forma insistence that we should lower tax rates on the rich, the truth is that his figure is at least plausible. A cap on deductions of about $40,000 would probably do the job. That's a big political lift, but it's not impossible and it's not mysterious.

What is more mysterious is Boehner's contention that he can get $600 billion in health care cuts. (All numbers are savings over ten years.) There's no simple solution for that. Raising the Medicare eligibility age is a bad idea for a bunch of reasons, but even if we do it, it will only save about $100 billion. Where's the rest coming from? The answer won't come from any Paul Ryan-ish plan, which explicitly doesn't affect current and near-retirees and wouldn't begin saving money for many years.

This is the part of Boehner's plan that I'd really like to hear more about. The Simpson-Bowles proposal includes a long laundry list of small changes in health care policy that amount to about $80 billion per year, but it includes things like higher costs for military retirees (not likely); tort reform (obviously not going to happen in the next three weeks); cuts in medical education (probably not a good idea since we need more doctors over the next decade); and a strengthening of IPAB (the fabled "death panel" of the tea party's fevered imagination). Beyond that, there are a bunch of smallish benefit cuts that add up to a few tens of billions of dollars per year.

In other words, there's no easy answers here. You can punt, by simply declaring that Medicare growth will be limited to GDP + 1 percent and calling it a day, but that's a chimera. The truth is that cutting health care costs is really, really hard. Obamacare includes a bunch of provisions that will probably reduce the rate of growth, but they'll take years to kick in and no one knows for sure how well they'll work. Alternatively, you can just flatly cut benefits, but Republicans have (to be charitable about it) taken a fairly erratic set of positions about that.

This is the part of the plan to watch. For all the bluster, a deal on taxes is eminently possible. Discretionary cuts of $300 billion are also possible, especially if you agree to split them between defense and domestic cuts. Even a $300 billion deal on Social Security is possible.

But $600 billion in medium-term health care savings? It's not impossible, but it's pretty damn close.

A few days ago I quoted a negotiator for the shipping companies at the port of LA saying that clerical workers there had been offered a deal that would raise average annual pay "to $195,000 from $165,000, 11 weeks' paid vacation and a generous pension increase." That's a lot! Today the port strike is over, and the LA Times provides a more accurate picture of pay for these workers:

The workers don't have ordinary clerk and secretarial jobs. They are logistics experts who process a massive flow of information on the content of ships' cargo containers and their destinations. The clerical workers, among the highest-paid in the country, are responsible for booking cargo, filing customs documentation, and monitoring and tracking cargo movements.

According to union officials and the Harbor Employers Assn., the average hourly rate for clerical workers is $40.50 an hour — which amounts to about $84,000 a year. In comparison, the median annual wage for cargo and freight agents was $37,150 in May 2010, according to the most recent data from the Bureau of Labor Statistics.

As talks dragged on, employers offered to raise the union workers' total compensation package. The employers had said total compensation currently averages $165,000, but that amount includes healthcare, pension contributions, time off and other benefits in addition to salary.

That's still a lot, and obviously these folks have a pretty rich benefits package if it's about equal to base pay. But since I wrote about this earlier, I just wanted to follow up with the straight dope now that we have it. You can decide for yourself what you think about it.

Chris Matthews spent an entire segment yesterday on Hardball going ballistic over the notion that financial markets will implode if we don't reach an agreement on the fiscal cliff by December 31. Is that true? Neil Irwin says Wall Street is taking the whole thing in stride:

The markets’ sense of confidence — or, arguably, complacency — is rooted in two strains of thought.

One is that all the tough talk from the negotiators is mere posturing, nothing more than a signal to their allies that they are taking a stand in advance of real dealmaking closer to the deadline. Investors and executives have repeatedly seen brinkmanship out of Washington — including over raising the cap on government borrowing in the summer of 2011 — conclude with an agreement at the last possible moment.

....Another argument for why there is no need for huge concern is that a short-term voyage off the cliff would do no lasting damage to the economy. Even if there is no deal on Dec. 31, Treasury Secretary Timothy F. Geithner could order that income tax withholding tables not be adjusted to reflect higher tax rates on Jan. 1, which would mean that Americans would not immediately see smaller paychecks. The government could adjust the timing of payments to defense contractors and others to take the sting out of automatic budget cuts in the initial days of 2013

These aren't competing theories. They're complementary, and they're both true. Negotiations like these really do usually go down to the wire, so lots of huffing and puffing at this stage is hardly something to get too worried about. At the same time, January 1 isn't some magical date carved on an ancient Mayan stone. Going over the cliff for a few days or weeks won't do much harm, and politically it might be better to do a deal in January, after tax rates have reverted to their pre-Bush levels, than before. If we're still nowhere near a deal by the end of January, I'll start getting worried. Until then, I'm with Wall Street: there's no need for panic yet.

Chris Frates reports that Republicans are frustrated that everyone is misinterpreting their opposition to raising tax rates on the wealthy. So on Monday, a group of K Street's "top GOP communicators" got together to discuss how they can change the narrative that they're the ones getting in the way of a fiscal cliff deal:

"How can we fight back against that and how can we make that point and how can we message that we're the party of small business owners and we're not defending the rich?" asked a meeting participant.

It's sort of fascinating to read this kind of thing. The obvious problem Republicans have is that their single-minded opposition to raising tax rates on the rich is, in fact, employed in defense of the rich. Even the fabled low-information voter knows this perfectly well, and mounting a messaging campaign to convince the public that Republicans are actually defending small businesses is an exercise in futility. It will just convince people that Republicans are unusually shameless hucksters who think their constituents can't distinguish fecal matter from shoe polish.

But reading stories like this, I wonder if the GOP brain trust understands this? Have they drunk their own Kool-Aid so deeply that they truly think they're not defending the rich? Or is stuff like this purely for public consumption, and they just haven't figured out yet that it has no chance of working? It's a mystery.

Today, Republicans blocked ratification of the United Nations Convention on the Rights of Persons with Disabilities, a treaty negotiated by George W. Bush that basically codifies U.S. law as a model for the rest of the world. "It's a treaty to change the world to be more like America," John Kerry pleaded during the Senate's debate, but that cut no ice with its detractors. Dan Drezner comments:

I've blogged on occasion about the development of a sovereigntist lobby that reflexively opposes all treaties because they erode U.S. sovereignty. For these people, any infringement on American sovereignty is a death blow to freedom, regardless of the benefits from joining.

Well, yeah....except I'm not so sure about the idea that this is something that's developed recently. Movement conservatives have been paranoid about treaties at least since FDR's treachery capitulation treason agreement with Stalin at Yalta, and for all I know, maybe even long before that. Hell, the Bricker Amendment, which would have dramatically restricted the ability of presidents to negotiate treaties at all, only failed by one vote in 1954, back when memories of Yalta were fresh. Just for laughs, let's compare and contrast 1954 with 2012. Here is Senator Walter George on the Bricker Amendment:

I do not want a president of the U.S. to conclude an executive agreement which will make it unlawful for me to kill a cat in the back alley of my lot at night, and I do not want the President of the U.S. to make a treaty with India which would preclude me from butchering a cow in my own pasture.

Does that sound eerily, tea party-ishly familiar? It should. Here is Senator Jim Inhofe on UNCRPD:

Unelected bureaucratic bodies would implement the treaty and pass so-called recommendations that would be forced upon the United Nations and the U.S....This would especially affect those parents who home-school their children....The unelected foreign bureaucrats, not parents, would decide what is in the best interests of the disabled child, even in the home.

Movement conservatives tend to tolerate trade treaties, but that's about it. They went ballistic over the Panama Canal treaty. They screamed blue murder over the Law of the Sea treaty. They opposed establishment of the International Criminal Court. They've fought pretty much every arms control treaty ever. They don't like treaties, they've never liked treaties, and if there's nothing obviously wrong with one they'll invent a bunch of bizarre conspiracy theories in order to get themselves worked into a frenzy about it. Dan says opposition to UNCRPD is "dumber than a bag of hammers," and it is. But that's par for the course. The more things change, the more they stay the same.

Is high-frequency trading a net negative or a net positive? Obviously, if HFTs make money, they're making it from other investors. That's a negative. On the other hand, they provide market liquidity, which is a positive. So how do things net out?

John Carney suggests a natural experiment that tells us. Back in August of 2007, quant hedge funds took a bath when markets started moving in weird ways. But that was only at the micro level, where quants make their bets. Overall, the S&P 500 went up and down pretty normally during the week the quants were losing their shirts:

Tellingly, the S&P rose on the days that were supposedly the worst for the quants. The reason why that is significant is that we've since learned that one of the things that made the situation so bad for the quants was a sudden loss of market liquidity.

And what caused the loss of liquidity? Well, it appears that one big factor was the flight of high-frequency traders from the market. The algos of the quants just didn't work well when the HFTs refused to provide liquidity.

The point here, however, is not about the quants versus the HFTs. It's about what a rising market in the absence of HFTs may indicate. If high-frequency traders are a net benefit to investors, their exit should cause valuations of stocks to fall. If stocks rise while they exit, this at least suggests they may be a net cost.

Carney takes this as tentative evidence that HFTs are a net negative. But I'd add two other points. First: the problem with HFTs is that they produce liquidity precisely when nobody needs it (i.e., normal times) and withdraw it precisely when everyone does need it (panicky times). But this isn't liquidity at all. Almost by definition, a market is only truly liquid if you can buy and sell even when times are tough. After all, even crappy markets have pretty good liquidity during good times. The faux liquidity that HFTs provides is the worst kind of liquidity in the world: you're better off having limited liquidity all the time than having it suddenly cut off just at the time when it's most important.

Second: nobody really understands how HFTs work. Even the HFT gurus don't really understand it. That's why the quants got blindsided, and that's what makes HFTs so dangerous. They're almost certainly introducing a lot of extra tail risk, and they're doing it primarily by spamming the financial system.

Put all this together, and allowing HFTs to continue their merry little algobot wars is just monumentally stupid. A tiny financial transaction tax would put an end to it, and would probably improve the operation of the rest of the financial industry too, all while raising a bit of much-needed money. Fiscal cliffsters, take note.