I want to thank Ezra Klein for reminding me about this passage in Politico's postmortem on the failure of the supercommittee to reach an agreement. It's a description of the "wish lists" from each side:

House Republicans wanted to repeal Obama’s health care law, implement the controversial House GOP budget drafted by Rep. Paul Ryan (R-Wis.), save $700 billion by block granting Medicaid, cut $400 billion in mandatory spending, slash another $1.4 trillion in other health care mandatory spending, save $150 billion by slicing the federal workforce and put a $60 billion cap on tort reform.

Republicans were no more pleased to see what Democrats wanted: the president’s $447 billion jobs bill plus well over $1 trillion in new taxes.

Right. Toss in the extension of the Bush tax cuts, which Politico leaves out for some reason, and you've got $3.7 trillion in tax cuts in addition to repealing Obamacare, making massive cuts in domestic spending, and adopting Paul Ryan's scorched earth budget blueprint.

Democrats, by contrast, agreed up front to a $3 trillion deficit reduction package but wanted it divided into roughly two-thirds spending cuts and one-third tax increases. Plus a jobs bill since, you know, unemployment remains sky high.

Do these two lists sound roughly similar to you? Of course not. They aren't even from the same galaxy. The Republican list is a conservative wet dream. It's not even remotely a starting point for negotiation. By contrast, the Democratic list is a bog ordinary opening bid.

Ezra calls this an example of "asymmetrical polarization." That's a new term for me. I call it "negotiating with fanatics."

From the mailbag today:

I've been reading your prediction that Republicans will simply find a way to overturn any built-in cuts to defense spending. With Obama's veto threat, do you still see things the same way?

This is too hard to answer. The most obvious question, of course, is how resolute Obama will be. His past behavior certainly suggests a very strong preference for finding some kind of compromise position rather than digging in his heels, but then again, he doesn't usually make flat-out veto promises either. So maybe this time is different.

But I'm not sure it matters. Here's the only thing that's really important: the defense cuts don't kick in until 2013. In other words, not until after the 2012 election. And let's face it: all bets are off at that point. Maybe president Gingrich will be in charge then. Maybe Obama will win and cut a deal with the lame duck Congress, like he did last year. Maybe we'll be in the middle of a war with Ubeki-beki-beki-stan. Who knows? A year in politics is a long time to begin with, and a year plus a presidential election is like an eternity. Basically, after everyone has finished up wailing about the fecklessness of Congress and moved on to some other shiny new object — a process that should take no more than a week — the whole thing will be forgotten. When it's suddenly thrust back into the spotlight next December, we'll be living in a whole new world. Anything could happen.

Still, the smart money says that "anything" doesn't include very much in the way of cuts to the defense budget. There's just too much institutional and political pressure to keep money flowing to the Pentagon. No president in recent memory has stood up to it, and I doubt that Obama will be the first.

Via Matt Yglesias (writing from his new Moneybox home at Slate), I see that the Federal Reserve has, unsurprisingly, declined to adopt a policy of targeting nominal GDP growth:

A number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation.

Matt is unimpressed: "The claim that this would 'heighten uncertainty' seems to me to be just flat-out wrong." Of course it is. But that part of the statement is just window dressing anyway. The part that matters is in bold. Targeting higher NGDP levels would clearly involve tolerance for higher inflation, and there are lots of FOMC members who just aren't willing to go there, no matter how weak the economy is, how high unemployment is, or how big the risks from Europe are. Just as the Germans seem to be forever reliving the 20s, in the U.S. we are forever reliving the 70s. Inflation delenda est, baby.

Both Paul Krugman and Tyler Cowen recommend a new paper from Hyun Song Shin called "Global Banking Glut and Loan Risk Premium." If both of those guys say a paper is important, then it's probably pretty important. So I took a look. I'll confess up front that I had a hard time plowing through it, which means my summary might be off base a bit here and there, but here we go anyway. Roughly speaking, Shin says the following things:

  • Credit expands when banks lever up their balance sheets by piling up lots of debt.
  • Thanks to Basel II, European banks levered up even more than U.S. banks.
  • Some of this was intra-European debt, but lots of it was U.S. debt denominated in dollars. In total, European banks had about $5 trillion in claims on U.S. counterparties in the peak year of 2007, much of it via purchase of private label subprime securitizations.
  • In other words, the European segment of the shadow banking system was indirectly providing about $5 trillion in credit to U.S. borrowers. This was about as much as U.S. banks provided directly.
  • The mechanism for this indirect flow was simple. Starting in 1999, U.S. money began flowing in large quantities to the U.S. subsidiaries of European banks, then across the Atlantic to their home offices in Europe, and from there back to borrowers in the U.S.
  • Conclusion: the European banking sector provides about as much credit to the U.S. as the American banking sector does. So when the European banking sector deleverages, as it must, it will have a very substantial effect on credit conditions in the U.S. In Shin's bland phrasing, "The European crisis carries the hallmarks of a classic 'twin crisis' that combines a banking crisis with an asset market decline that amplifies banking distress....The global flow of funds perspective suggests that the European crisis of 2011 and the associated deleveraging of the European global banks will have far reaching implications not only for the eurozone, but also for credit supply conditions in the United States and capital flows to the emerging economies."

Translated, this means that as sovereign debt woes get worse, bank woes get worse too. And as bank woes get worse, sovereign debt woes get worse. The result is a vicious circle that produces a big credit contraction, and since European banks have become so important as funding sources to the U.S., it means a big credit contraction in the U.S as well.

Tyler's comment: "If true we are doomed." On a separate note, Shin also points out that after the euro was introduced in 2000, cross-border claims within Europe skyrocketed. Unfortunately, banks themselves mostly stayed pretty local:

The introduction of the euro meant that “money” (i.e. bank liabilities) was free-flowing across borders in the eurozone, but the asset side remained stubbornly local and immobile. It is this contrast between the free-flowing liabilities but localized assets of European banks’ balance sheets that has been a key contributing factor in the European crisis.

In other words, wholesale funding flowed easily to wherever it would get the best return, but banks mostly kept their loan books local. This produced big property bubbles in Ireland and Spain and big current account imbalances across the entire continent. There's no easy way for this to unwind, and unfortunately, even the moderately difficult ways appear to be out of bounds to the eurozone's policymakers. If we really are doomed, it's partly because of bad policymaking during the aughts, but it's also because of disastrous policymaking right now. I wish I thought that Shin was wrong about this, but I suspect he's not.

This is pretty funny. From ThinkProgress, it's Mitt Romney, in his own words, according to the Romney standard of accuracy. Enjoy.

Okay, this isn't actually raw data. In fact, it's very, very cooked and calculated data. But just so you know, Peter Diamond and Emmanuel Saez have tried to calculate the tax rate on the rich that would maximize revenue to the government. Paul Krugman summarizes:

In the first part of the paper, D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners—full stop. Why? Because if you're trying to maximize any sort of aggregate welfare measure, it's clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the maximum amount—not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes.

Now, this doesn't imply a 100% tax rate, because there are going to be behavioral responses—high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%.

Actually, Krugman is being conservative here. If you assume a broad base and no deductions, Diamond and Saez peg the revenue maximizing rate for top earners at 76 percent. That's for federal income tax only. (See page 173 here.)

You can decide for yourself if you think top marginal rates should be that high. After all, revenue maximization isn't our only social goal. Roughly speaking, though, this is a calculation of the peak of the famous Laffer Curve. (For top earners, anyway.) Above 76 percent, you really can generate higher revenues by lowering tax rates. Below that, higher rates generate higher revenue, just like you'd think.

Note that this is a result that both liberals and conservatives ought to take some satisfaction in. For liberals, it's confirmation that current tax rates are far, far below the Laffer maximum. We can raise marginal rates from 35 to 40 percent with only minor deadweight losses. For conservatives, it's justification for the 1981 Reagan tax cuts. When top rates were at 70 percent, reductions may not have literally paid for themselves, but they probably lowered revenue fairly modestly. We really were pretty close to the Laffer maximum in the '60s and '70s.

From Barack Obama, in Mitt Romney's latest ad:

If we keep talking about the economy, we're going to lose.

What Obama actually said, campaigning against John McCain on October 16, 2008:

Senator McCain's campaign actually said, and I quote, "if we keep talking about the economy, we're going to lose."

Just out of curiosity: How flat-out, knowingly false does something have to be before the press is willing to just call it a lie? We're about to find out!

From an LA Times editorial this morning:

Engaging in self-caricature, the Republicans insisted on no new taxes, a posture they modified slightly to propose $250 billion in new revenues, some offset by their other proposals, including making the Bush-era tax cuts permanent. Democrats, meanwhile, irresponsibly resisted meaningful cuts in domestic programs. Hobbled by their dogmatic opposition to taxes, the Republicans were arguably more intransigent. But both parties deserve blame for the anticlimactic outcome of the committee's work. The super committee was supposed to cut through the partisan pettiness that prevented a deal as part of the process to raise the federal debt ceiling. Instead, "super" proved to be SOP.

Can we please cut out this brand of horseshit? The facts: Democrats initially proposed a plan that, among other things, included $500 billion in Medicare and Medicaid savings and several hundred billion dollars in Social Security savings via a new inflation formula. Republicans responded with a package that was pure spending and benefit cuts. They followed that with a plan that included $300 billion in tax increases paired with an extension of the Bush tax cuts, which was very plainly a net tax decrease that exploded the deficit rather than reducing it. Democrats responded with a revised plan that included new revenues plus substantial cuts to Medicare, Medicaid, Social Security, and other domestic programs. In other words, Democrats were willing to propose cuts in domestic programs. It was exactly the same dynamic that played out during the debt ceiling debacle, with Obama persistently offering up big plans that included significant entitlement cuts and Republicans flatly rejecting them because they also included new revenues.

Look: Democrats are no angels. They're politicians, and they're driven by the same grubby political motives that animate all politicians. But Republicans are "arguably" more intransigent? "Both parties deserve blame"? Come on. What exactly would Democrats have to have done in order to avoid this lazy formulation? How much compromise were they supposed to offer in the sure knowledge that every single one of their offers would be rejected out of hand if it included even a dime of tax increases?

This is ridiculous. When is the American media going to ditch its obsession with looking neutral at all costs and simply tell its audience the actual truth? Tomorrow would be a good time to start.

It's hard to keep up with conservatives. One day the center of liberal treachery is the NAFTA superhighway, the next it's the Tides Foundation. Fast forward a few months and Agenda 21 is ruining the country, then a few weeks later it's the Fed. Trying to keep score at home is exhausting. Luckily, we have Newt Gingrich to clue us into the next conservative jihad:

The Congressional Budget Office is a reactionary socialist institution which does not believe in economic growth, does not believe in innovation, and does not believe in data that it has not internally generated.

The Congressional Budget Office! That's the shadowy cabal behind the decline of America! It's been the budget wonks all along!

So what's their sin? Beats me. At a guess, though, it's their general unwillingness to apply "dynamic scoring" to the fantasy-based budget plans concocted by Republicans. You know, the ones where a gazillion dollar tax cut supercharges the economy and generates ponies and surpluses as far as the eye can see. But the stodgy old CBO won't hear of it. They'll account for deadweight losses and other well-grounded economic effects that offset revenue losses from tax cuts a little bit, but that's all. No magic and no free lunches.

So Newt, the great conservative philosopher king, is mad at them. But there's not really any point in pretending to take this seriously. It just deserves a solid dose of mockery. So that's what it gets from Dan Drezner's Twitter feed. Enjoy.

Just a quick note: Every pundit who laments the fact that President Obama didn't "do more" to get some kind of budget agreement through the supercommittee should be required to:

  • Explain exactly what Obama should have done.
  • Explain whether they think Republicans would ever, under any circumstances, have accepted a deal with a net tax increase.
  • If yes, provide details.
  • If no, explain why their hypothetical deal is any better, or more politically feasible, than the default trigger deal.

That's not so much to ask, is it? I should warn everyone ahead of time, though, that I mainly want answers to these questions so that I can laugh at you.