From Ezra Klein:

Eric Jackson, a former employee of PayPal and now the CEO of the online-investing platform CapLinked, worries that implementing the “Buffett rule” would hurt the pool of investment money available to tech start-ups. His logic on this point is unimpeachable: If the Buffett rule means taxing capital gains more like normal income, then it will, on the margin, hurt investment of all kinds, including investment in tech start-ups.

Hmmm. "On the margin" is doing a lot of heavy lifting here. I've never seen any compelling evidence that higher capital gains rates have more than a minuscule effect on investment. Changes in rates can have short-term effects as investors rush to sell assets before new rates takes effect, and high rates can also produce a modest "lock-in" effect, in which investors hold on to assets in order to avoid taxation.

But the long-term effects appear to be very small, and low rates have a serious drawback: they spur a huge amount of unproductive tax sheltering as wealthy taxpayers spend time trying to figure out how to redefine ordinary income as capital gains. This is not just useless, it's positively damaging. What's more, capital gains already get favorable tax treatment just by virtue of the fact that gains can accumulate year after year tax free. You only have to pay taxes when you sell, and the net effect of this is a low effective tax rate compared to income that you have to pay taxes on as it's earned.

My own take is that capital gains rates should, perhaps, be a bit lower than ordinary income rates, but only a bit. Maybe 30% or so, compared to 35% or 40% for ordinary income. I'd sure like to hear the case that a lower rate really has any significant long-term negative effects on investment or capital formation.

I haven't seen this anywhere else, but the Guardian is reporting that a UN vote on Palestinian statehood might get delayed after all:

The Palestinian leader, Mahmoud Abbas, is said to have told Barack Obama at a meeting on Wednesday evening that he would agree to delaying a security council vote by several weeks, although the Palestinians are maintaining the line in public that any delays will be "procedural not political".

....The Palestinians appeared to be pulling back from an immediate confrontation, having come under intense pressure from the Europeans as well as the Americans. Although [Nicolas] Sarkozy staked out a position sympathetic to the Palestinian cause in his UN speech, he has advised Abbas to hold off from the security council move.

Sarkozy wants to use the threat of a UN vote as a way of jumpstarting the peace process "without preconditions." But of course, there are always preconditions. After all, if there weren't there's a chance that negotiations might actually make some progress. And we can't have that, can we?

When Ron Suskind interviewed former White House communications director Anita Dunn for his book, Confidence Men, she told him that "if it weren't for the president," the Obama White House would have been in court for being a hostile workplace. But when the book appeared, those six words weren't part of the quote. I slammed Suskind for this yesterday, but today he explained what happened to the Washington Post's Erik Wemple:

Dunn, according to Suskind, was simply saying that her loyalty — and that of others — to the president prevented anyone from ever going legal with their issues....The quote was originally uttered in a long telephone conversation in April. Once he had a manuscript in hand, in the summer, Suskind called Dunn back and explained what he was prepared to publish. Dunn was the one who took issue with the preamble [this refers to the six words, I assume] — as it turns out, her husband was serving as White House counsel while she was communications director, and so she didn’t want to be making a comment about actionable conditions at the workplace given her husband’s role. So she petitioned Suskind to replace the preamble with the “looking back” treatment that’s now in print.

In general, I don't think there's any excuse for truncating a quote, regardless of whether you think it changes the meaning or not. But this is different: if it was Dunn herself who asked Suskind to truncate the quote, then he's blameless. Dunn herself apparently refuses to talk about this further, so we don't have her side of the story. But for now, it looks to me like Suskind is in the clear. He was actually helping out Dunn, who then had buyer's remorse when the quote appeared.

Just to complete the record, Wemple reports that when Suskind was researching the book he had already heard the "boys club" complaints about the White House (they've been widely reported before) and talked to another administration official about it:

Sympathetic to the women’s point of view, the official directed Suskind to speak with Dunn, who had left the White House for a consulting gig in town.

That’s the context that helps explain why Dunn was so forthcoming to Suskind: She would lend an authoritative and on-the-record voice to a lot of stuff he’d picked up. The author hastens to note that neither Dunn nor the anonymous White House official who made the referral was committing an act of insubordination. These officials were pleased that the president had taken steps to right the gender imbalance. “They felt that the president did step in here, and it was a management-teaching moment for him,” says Suskind.

So Dunn and others did feel the White House was a pretty hostile workplace for women, but they were also pleased that Obama addressed the problem once they brought it up with him. Unless Dunn decides to comment further, that's where things stand.

I've been reading all day about the $16 muffins the Department of Justice served at one of its conferences, and I finally got curious about this. Is it really true? So I went to the DOJ Inspector General's website, got the report, and searched for "muffin." The following paragraph looks fairly impenetrable, but go ahead and plow through it anyway:

Considering the EOIR reported that at least 534 people received refreshments at its 2009 Legal Training Conference in Washington, D.C., it spent an average of $14.74 per attendee per day on food and beverages—just above the $14.72 JMD limit for refreshments. We credit the EOIR for implementing the following controls to reduce food and beverage costs: (1) it provided just refreshments and not full meals, (2) it ordered fewer refreshments than the total number of reported attendees, and (3) it received 15 gallons of coffee, 30 gallons of iced tea, and 200 pieces of fruit for free. However, many individual food and beverage items listed on conference invoices and paid by the EOIR were very costly. The EOIR spent $4,200 on 250 muffins and $2,880 on 300 cookies and brownies. By itemizing these costs, we determined that, with service and gratuity, muffins cost over $16 each and cookies and brownies cost almost $10 each.

So did DOJ really pay $16 for muffins? Of course not. In fact, it's obvious that someone quite carefully calculated the amount they were allowed to spend and then gave the hotel a budget. The hotel agreed, but for some reason decided to divide up the charges into just a few categories instead of writing a detailed invoice for every single piece of food they provided. 

This is unremarkable. In fact, I'm here to tell you that this happens All. The. Time. I've been involved in what feels like a thousand conferences of this kind, and I'd be shocked if it happened any other way. Hell, I'm surprised DOJ even got that much of a breakdown. Far more commonly, your event person negotiates what kind of refreshments you'll get, and the invoice ends up looking something like this:

Refreshment table (bev/morn/aft) — 5 days....................$39,500

None of this is to say that DOJ didn't overspend on its conferences. In fact, it sounds like they did—though in some cases this was just an artifact of applying overhead costs to the food instead of accounting for it separately. But the $16 muffin? That's a myth. It'll never die now that it's been delivered to posterity thanks to some enthusiast in the OIG who broke out a calculator and mistakenly assumed they could calculate actual costs this way, but it's still a myth.

Threatening the Fed

Did the Republican leadership do anything wrong by sending Ben Bernanke an ominous letter warning him not to intervene in the economy? Atrios thinks not:

I don't agree with the substance, but I don't think there's anything wrong with Republicans sending the Fed a sternly worded letter. If you believe that central bank independence is important, then you don't want the president being able to boss the Fed chairman around and similarly you wouldn't want Congress trying to goad the Fed into one action or another through legislation. But there's nothing wrong with policymakers expressing their opinions about what the Fed is doing.

But there are opinions and then there are opinions. The Economist thinks this week's GOP assault is different in several ways from ones in the past:

One is that politicians, especially those from Texas, have historically wanted easier policy from the Fed....The second difference is that past critics had a point: Mr Volcker’s tight monetary policy did tank the economy. This time, the hysteria over inflation has no obvious factual basis....Third, and most important, historically the Fed’s antagonists came from the fringes of their (usually Democratic) party. Now Republican leaders and presidential candidates are flouting the idea of central-bank independence. That has troubling implications.

On reflection, I think I probably overreacted last night. I'm not as sanguine about the concerted Republican attack on the Fed as Atrios is, partly because it now has the flavor of official threats from the Republican leadership and partly because it's so obviously aimed at trying to prevent any kind of effort to improve the economy. That's pretty unprecedented and pretty indefensible.

But even granting that, Atrios is right: if politicians have opinions about monetary policy, there's no reason they shouldn't spout them. It's when things go beyond mere spouting that they can get dangerous. On that score, the Republican letter may be defensible, but it's still not something to be shrugged off as just politics as usual. Boehner & Co. show every sign of wanting to push the envelope much harder than before on this.

Megan McArdle is, unsurprisingly, less enthusiastic about the "Buffett Rule" than I am. But I admit that she brings up a good point: what exactly is the Buffett Rule? Generally speaking, it's the idea that millionaires shouldn't be able to use loopholes and avoidance strategies to end up paying lower tax rates than middle-class families. This suggests something like what the Alternative Minimum Tax used to be: a minimum tax rate that kicks in for high earners if their net tax rate falls below a certain percentage of their gross income.

But that doesn't appear to be what President Obama is proposing. Rather, here's what his economic plan says:

To begin the national conversation about tax reform, the President is offering a detailed set of specific tax loophole closers and measures to broaden the tax base that, together with the expiration of the high-income tax cuts, would be more than sufficient to hit the $1.5 trillion target for tax reform and cut inefficient expenditures as well as move the tax system closer to observing the Buffett Rule. These measures include: cutting tax preferences for high-income households; eliminating special tax breaks for oil and gas companies; closing the carried interest loophole for investment fund managers; and eliminating benefits for those who buy corporate jets.

OK then. The idea isn't to set up some kind of firm tax cutoff, it's to move the tax system "closer" to observing the Buffett Rule. That may be a little less gratifying than a flat number, but it actually makes things easier to judge. In essence, Obama wants to go back to the rules of the pre-Bush era plus two other things: cap itemized deductions at 28% for high earners and abolish the carried interest loophole.

Unfortunately, there's one thing missing here: as part of the rollback of the Bush tax cuts, does Obama also want to roll back the cuts to the capital gains tax rate? The plan doesn't say so, so I assume the answer is no. (There would be no point in eliminating the carried-interest rule, for example, if capital gains rates were the same as rates on ordinary income.)

So I'm not sure what to make of this. These changes would, indeed, move the tax code "closer" to observing the Buffett Rule, but not much closer. It's the low capital gains rate that really makes the difference at high income levels. Obama's plan would reduce the number of high earners who pay very low rates, but it probably wouldn't reduce it very much.

On the other hand, because this isn't some kind of brand new proposal, it is easier to decide if you like it. I've long been in favor of returning to Clinton-era rates on high earners, and I've long been in favor of eliminating the carried interest rule — though I'd probably eliminate it for everyone, not just Wall Street types. The value of capping deductions is a little less clear, but probably OK. (Though I'm open to contrary arguments.) Overall, then, I'm in favor of it.

Anyway, it appears that we're not going to get the Buffett Rule. We're going to get some Buffett-esque Guidelines. Sort of. But at least it's a good start.

Via Brad Plumer, a new OECD report concludes that the rising number of patents over the past decade is a bit of a mirage:

The quality of patent filings has fallen dramatically over the past two decades. The rush to protect even minor improvements in products or services is overburdening patent offices. This slows the time to market for true innovations and reduces the potential for breakthrough inventions, according to a new OECD report....Patents from inventors in the United States, Germany and Japan are the most highly cited, which suggests they are true innovations being used by many firms in their products to generate further innovations.

Brad points out that patent trolling has increased in the United States over the same time period. So we appear to be dominating the world at both ends of the spectrum: we have the best patents and the worst ones. On average, though, even ours have getting noticeably worse over the past decade. I blame it on software patents.

Ezra Klein remarks today on the fact that critics of President Obama's deficit plan claim that much of his savings are "fake." That is, they're savings that were going to happen anyway, so his plan doesn't really change anything:

But that means that more than a trillion dollars of our projected deficit is “fake.” That money can’t be real on one side of the ledger and fake on the other. In general, this mostly speaks to the flaws of talking about deficits in terms of dollar figures rather than debt-to-GDP ratios.

The real question for the president’s plan — or any plan — is whether it stabilizes the debt-to-GDP ratio at an acceptable level. If so, then it’s good enough. If not, then it’s not. That’s what the market cares about, and that’s what we should care about. According to the White House’s projections, their plan will leave debt-to-GDP at slightly above 70 percent in 2012.

Good point. The savings are either real or they're fake, and if they're fake they shouldn't be counted to begin with. Of course, that would mean that our existing deficit situation is less dire than it appears, and that would be inconvenient for the Chicken Littles.

In the end, Ezra is right: who cares? Either the budget gets into primary balance (i.e., not counting interest payments) in a suitable time frame or it doesn't. If it does, everything is fine and it really doesn't matter much which baseline you used to calculate things. And as you can see on the right, the Obama administration projects that their plan will reduce the country's debt-to-GDP ratio consistently from 2014 forward. You may or may not believe that this is actually going to happen, but that's a political judgment. If Congress actually enacts the president's plan, then our debt load will start to go down, and it will go down regardless of whether any of his proposed savings are "fake" or "real."

The New York Times writes today about the education of Jerry Brown:

10 months after his return here, a time when Mr. Brown might have hoped to move beyond struggling with the budget crisis that has dragged down this state, his associates say he appears bewildered and stunned by how much Sacramento has changed since he first served. Mr. Brown has told friends he was unprepared for the extent, in his view, to which Republicans have not made sufficient efforts to accommodate him on critical issues, like putting on the ballot measures to extend taxes to avoid budget cuts.

In one case, Mr. Brown told a friend, he said he felt like “we weren’t even on the same playing field” in negotiating face to face with a Republican lawmaker who would not accept his assertion that most money in the California education budget did not go to administrative costs. Mr. Brown said he finally just stood up and left the meeting.

....“He is aghast,” said Jodie Evans, a longtime associate who had recently had dinner with Mr. Brown in Oakland. “He reports on some of the conversations, like he couldn’t believe the narrowness or lack of comprehending by public officials. He said, ‘Some of my old tools aren’t going to work.’ ”

I confess that I just don't get this. Jerry Brown is a smart guy. He was born and raised in California. He's a professional politician. And yet he didn't truly realize what had happened to the California Republican Party until he took office earlier this year? Seriously? I just don't understand that. How obvious did they have to make it? Smoke signals? Billboards? What?

Martin Wolf writes today about the crisis in the eurozone. I'm not sure he'd put things quite this way, but here's my shortened version:

  1. Greece cannot pay its debts. Period. It has no choice but to default.
  2. Once it defaults, it will be unable to borrow and it will be forced to cut spending even more than it has already. This will damage its economy further, which in turn will reduce tax revenues, which will require further spending cuts, which will damage its economy further, et cetera without end.
  3. This is obviously unacceptable. The only answer for Greece would be to exit the euro and devalue its currency. As painful as this would be, it would almost certainly be regarded as preferable to years or decades of economic collapse.
  4. But Greek exit from the euro would cause staggering damage to the rest of Europe and its banking system — far, far more damage than they'd suffer from merely increasing their bailout of Greece. See Wolf's column for more on this. It must be avoided at all costs.
  5. Thus, the only option left is for Europe to prop up Greece for years. For all practical purposes, this doesn't mean loaning Greece money, it means giving Greece money. Lots of it.

Europe has not yet truly faced up to the fact that #5 is really their only option. It's infuriating, the public hates it, and Europe's political leaders want no part of it. But as Wolf says, "The eurozone then cannot stay where it is, cannot undo what it has done and finds it traumatic to go forward. But the very notion of exit is destabilising. They made it; and they must now make it work." Like Wolf, I don't think they have any choice. The only question is how far past the 11th hour they'll go before finally accepting this.