Just the Simple Truth

Have I mentioned my favorite part of Obama's speech yesterday? Here it is:

America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program — but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts — tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

Translation: Fuck you, Republicans.

And I'd say it's a well deserved flip of the bird. Republicans, as you can imagine, are less enthusiastic, and this bit of the speech undoubtedly accounts for most of the bile being tossed around on Fox and elsewhere today. But hey — sometimes the truth hurts. And all Obama did was speak the simple truth. In the past decade, Republicans slashed taxes, started two wars, approved a big unfunded entitlement, and presided over an economic collapse that cratered tax revenues and required massive government spending to counteract. That's pretty much 100% of our existing deficit problem right there. All we're doing now is trying to clean up the mess the GOP has left us.

Fair Shares and Tax Shares

Will Wilkinson wasn't impressed with President Obama's defense of progressive taxation yesterday:

It's rather less intuitive that fairness demands that the wealthy not only pay more in taxes, but pay a larger percentage of income. But let's accept that fairness does require it. Anyway, high-earners in America do pay higher rates. In 2008, the top 1% paid 38% of all federal income taxes, and the top 5% paid 58%. Indeed, America is the industrialised world's champion of income-tax progressivity! If any country's upper-crust pays its fair share, America's does.

Notice the bait and switch there? (If you don't, my blogging for the past eight years has been for nought.) First, there's the insistence on judging tax fairness solely by federal income taxes. But if you take a look at total tax burdens (federal/state/local), America's tax system is only very modestly progressive. Second, there's the switch from tax rates to tax shares. It's true that the top 1% pay a big share of all federal income taxes, and there's a good reason for that: it's because the top 1% earn a big share of all income.

For a better idea of what Obama was talking about, here's a handy chart that EPI sent around today. It shows average overall tax rates over time and the picture isn't very pretty. For the average schmoe (the bars on the right), tax rates have decreased only slightly. For the rich (the bars on the left), they've plummeted. And for the super-duper rich (the bars on the middle) they've gone down so much that on average they pay a lower tax rate than your average bank clerk.

So Will ought to be pretty happy. America's tax code is progressive, but it's not very progressive, and it's getting less progressive all the time. Given the explosion in wealth at the top over the past 30 years, asking them to go back to Clinton-era rates — which is all that Obama is proposing — hardly seems like a vast unfairness.

Chart of the Day: How to Get Parole

Via Andrew Sullivan, here's a peek into the criminal justice system that's either fascinating or appalling depending on your temperament. Ed Yong explains:

The graph above [...] summarises the results of 1,112 parole board hearings in Israeli prisons, over a ten month period. The vertical axis is the proportion of cases where the judges granted parole. The horizontal axis shows the order in which the cases were heard during the day. And the dotted lines, they represent the points where the judges went away for a morning snack and their lunch break.

The graph is dramatic. It shows that the odds that prisoners will be successfully paroled start off fairly high at around 65% and quickly plummet to nothing over a few hours (although, see footnote). After the judges have returned from their breaks, the odds abruptly climb back up to 65%, before resuming their downward slide. A prisoner’s fate could hinge upon the point in the day when their case is heard.

This is something to keep in mind if you ever end up doing a stretch in San Quentin: when you come up for parole, be sure to bribe the bailiff to get you an early-morning hearing. It's money well spent.

Itemizing Obama's Savings

So how much does President Obama's deficit reduction plan save? For some reason he's chosen a 12-year timeframe, and here's how things add up:

  • Domestic discretionary: $770 billion
  • Defense: $400 billion
  • Healthcare: $480 billion
  • Mandatory spending: $360 billion
  • Tax expenditures: $300 billion?
  • Bush tax cuts for the wealthy: $820 billion. (Note: this is based on estimated savings of $690 billion over 10 years.)
  • Lower interest costs: $1 trillion

Obama claims this adds up to "three dollars of spending cuts and interest savings for every one dollar from tax reform," but that's an odd way of looking at things. Who cares where the interest savings come from? (And that $1 trillion number looks dodgy anyway.) This is basically a 2:1 ratio of spending cuts to tax increases.

Which is unfortunate. It might be politically wise, but it probably ought to be more like 2:1 in the other direction. Eventually it will be once everyone wakes up and realizes we don't have any other choices left, but it's going to take a while and Obama apparently isn't going to be the guy to push us in that direction.

More on the Obama speech later, but my initial reaction is that there wasn't a lot new here. He's talked about limiting discretionary spending before. He's talked about letting the Bush tax cuts for the wealthy expire before. He's talked about cutting spending on prescription drugs before. The most specific new big ticket items were a plan to change the Medicare growth target from GDP + 1% to GDP + 0.5% and his promise to rein in tax expenditures (though the latter was pretty vague).

But this was new too:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.

That sure sounds like a very public ultimatum, doesn't it? So what happens next year if House Republicans flatly refuse to send him a bill that extends only the middle-class cuts? Then all the Bush tax cuts would expire.

Question: is Obama laying down a marker in hopes of getting a bill that extends only the middle-class cuts? Or is he laying down a marker knowing that Republicans will refuse to budge and therefore the entire Bush tax cut package will expire? Hmmm.

Should We Gut Medicare Like a Trout?

Ezra Klein point us to the latest Gallup poll on Medicare, and he's gobsmacked that among Republicans the most popular position is that Medicare shouldn't be touched at all. They don't think we should even try to control costs, let alone gut it the way Paul Ryan is proposing. But I think I'd highlight something else:

A pretty large majority wants either no changes or only minor changes, and this is true of all three subgroups. This doesn't surprise me, but I'd like to see a followup that paired each option with the taxes it would require. In other words, your options would be:

  • Major changes & taxes about the same as today
  • Minor changes & higher taxes
  • No cost control & and significantly higher taxes

I'm willing to bet that the results would be roughly the same, with perhaps a chunk of the "no cost control" folks moving into the minor changes column.

But I might be wrong, so it would be worth finding out. These kinds of questions, after all, are pretty useless if they're not tied to anything else. I mean, who wouldn't be in favor of leaving everything the way it is if they don't understand that it might cost them more?

Spy Games

What's behind the recent Pakistani demand that the CIA essentially shut down its entire operation in the country? The proximate cause is the shooting of two Pakistani citizens by a CIA employee last January. But as Joe Klein summarizes things, there's a bit more to it:

It seems there may be a covert war going on between the CIA and Pakistan's Inter-Services Intelligence Directorate. The key event appeared, at first, to be a road rage incident (of which there are zillions in Pakistan, believe me). A US "embassy employee" shot and killed two Pakistanis who were allegedly trying to rob him. Except the "employee" — Raymond Davis — turns out to have been a likely CIA employee and the "victims" may well have been ISI operatives. The rumor is that Davis was trying to penetrate Lashkar-e-Taiba, the terrorist group that pulled off the Mumbai massacre and is not-so-loosely affiliated with the ISI.

If these rumors are true — and they seem entirely plausible — the root cause of Pakistan's move against the CIA may be anger that we're getting close to the root of Pakistan's operating hypocrisy: attempting to play our ally — and receiving $6 billion in aid — while funding the Afghan Taliban and supporting terrorist groups like Lashkar-e-Taiba.

I'm not sure how seriously to take something reported as "rumor," but this does indeed have an aura of plausibility. For now, though, I'm just passing it along.

Playing Chicken With the Debt Ceiling

Matt Yglesias notes that John Boehner has been asking his Wall Street pals about whether they think it's OK for him to play a high-stakes game of chicken with the debt ceiling, and the loud-and-clear answer has been "no no no no no":

Then the question becomes “do a majority of members of congress favor raising the debt ceiling?” And the fact of the matter is that the answer is yes. Boehner isn’t even asking Wall Street whether or not raising the ceiling is a good idea. He takes it for granted that it’s a good idea. He’s just asking them how much screwing around he can get away with. And they’re telling him that they don’t like screwing around. Of course these are rich people, so they’ll tolerate some screwing around if it’s done in pursuit of lower taxes on rich people. But at the end of the day if the White House simply refuses to get sucked into a negotiation, the debt ceiling will be raised.

I think the political dynamics are a little more complicated than this because (a) the Wall Street guys are almost certainly overstating the market's reaction to a small amount of screwing around (they usually do, after all), and (b) Boehner has lots of public support for playing chicken. Still, it's basically right because the debt ceiling is a different animal than a government shutdown. Government shutdowns, after all, are fundamentally fights over the federal budget: if you can't agree on a budget, the government shuts down. So blame is hard to assess because both sides have budget proposals and neither proposal is obviously the one causing the shutdown. It's just a straight-up political fight, with neither side really sure who's going to win the PR battle. 

The debt ceiling fight is different: it's not obviously tied to anything in particular, which means the side that starts festooning it with extraneous pet issues is pretty obviously the side that's preventing a debt ceiling increase. So if Boehner and the tea partiers look genuinely willing to let the United States default on its debt unless they get a bunch of goodies in return, there's not much question who gets the blame. Republicans do.

So yes: the president can safely demand a clean bill and be pretty sure that he'll win the PR battle. All the VSPs will be on his side, the public will almost certainly come around as the consequences of playing chicken are laid out in graphic detail, and Boehner will end up feeling a level of heat that he just can't stand up to. This time, Obama holds the winning hand as long as he's willing to play it.

Getting Real About the Deficit

The more I think about the budget deal Obama agreed to last week, the less apocalyptic it seems to me. It's true that, macroeconomically speaking, this is the wrong time to be cutting spending, but let's face it: $38 billion in spending just isn't that big a deal at a macro level. It may have a negative effect, but it's a pretty small negative effect.

So let's put the macro-level considerations aside for a moment and just look at the cuts from a pure budgetary perspective. There are a couple of things we can say. First, domestic discretionary spending has gone up about 4-5% a year in real terms over the past decade (and a bit faster than that in the past few years), and it's difficult even for a hardcore liberal to pretend that this level of growth leaves no room for even modest cuts. Second, given the amount of smoke and mirrors in last week's budget agreement, the level of actual spending reductions it contains is probably no more than about $20 billion. Maybe not even that much. This is just not Armageddon, and pretending otherwise doesn't do much except wreck our credibility with the public on fiscal issues.

But that's all short-term stuff, and it's small potatoes from either side of the aisle. What about the longer-term deficit? What should Obama propose in his speech tomorrow? Politically, it's appealing to say that he should propose nothing. He should just say no to the Republican proposal to gut Medicare and leave it at that.

And politically maybe that really would be the wisest course. But we liberals have been saying for years that discretionary spending isn't really a long-term problem. Healthcare is. And that's right: if you want to address the long-term federal deficit, you have to address Medicare. Republicans got their discretionary pound of flesh in this round of budgeting, and they'll probably get a bit more in the years to come. But Medicare is still the real problem.

So if I had my druthers, I guess it would be for Obama to make some genuinely courageous proposals, not the kind of faux courageous proposals that we've gotten from Paul Ryan. That means making it clear that PPACA already does a lot to rein in Medicare costs, but more needs to be done. It means letting all the Bush tax cuts expire, not just the cuts for the rich. It means adding further cost controls. It means adopting some conservative ideas about cost sharing. It means scheduling a steady increase in Medicare payroll taxes over the next couple of decades, maybe a tenth of a percentage point a year from 2020 to 2040. It means acknowledging both that Medicare costs can't keep rising at their current rate forever and that as America ages Medicare is going to require a bigger chunk of tax money.

Personally, I'd like to see the long-term deficit get addressed. I'm not quite sure how that's going to happen as long as Republicans stick to their blood oath never to raise taxes, but I'd like to see Obama make the choice clear. My guess is that if the price of keeping Medicare intact is a return to Clinton-era tax rates, a modest future increase in the payroll tax, and some moderate but real cost controls, the American public will buy it. That's just not a big price to pay. But they won't pay it unless someone lays out the stakes clearly.

As for Social Security — well, I've all but given up on that. I continue to think that a deal on Social Security is eminently possible and would be good both for Social Security itself and the liberal project writ large. My argument is here. But nobody on the left seems to be buying this at the moment. It's a shame.

This is all pie in the sky until a few more Republicans have the guts to stand up to Grover Norquist and acknowledge demographic and fiscal reality. In the meantime, Democrats don't really have a serious negotiating partner. But then, the Republican proposals are pie in the sky too, and taken together this means that serious progress isn't likely until 2013 or later. While we're waiting for conservatives to grow up and return to the real world, though, we liberals shouldn't just stonewall long-term deficit issues, tempting though that is. Instead, we ought to be crystal clear that we really do take the long-term deficit seriously, and we ought to be crystal clear about what our competing vision is for addressing it. Then, when the time comes, we won't be caught flatfooted. That would be a nice change.

Smoke and Mirrors Watch

Here's AP reporter Andrew Taylor digging into the $38 billion in spending cuts that Republicans agreed to and finding that an awful lot of it is smoke and mirrors:

Instead, the cuts that actually will make it into law are far tamer, including [...] $2.5 billion from the most recent renewal of highway programs that can't be spent because of restrictions set by other legislation. Another $3.5 billion comes from unused spending authority from a program providing health care to children of lower-income families.

....The spending measure reaps $350 million by cutting a one-year program enacted in 2009 for dairy farmers then suffering from low milk prices. Another $650 million comes by not repeating a one-time infusion into highway programs passed that same year. And just last Friday, Congress approved Obama's $1 billion request for high-speed rail grants — crediting themselves with $1.5 billion in savings relative to last year.

About $10 billion of the cuts comes from targeting appropriations accounts previously used by lawmakers for so-called earmarks....Republicans had already engineered a ban on earmarks when taking back the House this year.

Republicans also claimed $5 billion in savings by capping payments from a fund awarding compensation to crime victims. Under an arcane bookkeeping rule — used for years by appropriators — placing a cap on spending from the Justice Department crime victims fund allows lawmakers to claim the entire contents of the fund as budget savings. The savings are awarded year after year.

And this report from CBS News notes two other phantom cuts: $1.7 billion left over from the 2010 census and $2.2 billion in subsidies for health insurance co-ops that are going to be funded anyway via the healthcare reform bill. This stuff alone adds up to $27.4 billion, all of it money that wouldn't have been spent anyway. I suppose you can argue that some of it might have gotten reallocated if it hadn't been removed legislatively, but I doubt that the tea party true believers are in a mood to buy that. If these reports are correct, the bill contains only about $11 billion in hard cuts. Basically, it looks as if the tea partiers may have gotten snookered by their own side.