The Republican Plan

This is from the LA Times this morning:

Kudos to the Times copy desk for writing an unusually clear and accurate headline.

Defunding the Left

Battles over competing priorities are the meat and drink of politics. Conservatives want to defund Planned Parenthood, liberals want to cut defense spending. But Republican strategists have long understood that there's a deeper level to politics, one where the goal isn't merely to fight the opposition's agenda, but to actively undermine the infrastructure and funding that allow the opposing party to exist at all. In the past, the GOP has focused on three primary defunding strategies: Killing off private sector unions, packing minority voters into gerrymandered districts, and championing tort reform as a way of eating into the earnings of defense attorneys:

You can think of this triumvirate—unions, minority redistricting, and tort reform—as Defunding 1.0. And most of it hasn't stopped: Republicans are still battling private-sector unions and pressing for tort reform. But private-sector unions have mostly been beaten, and tort reform has turned out to be a tough nut to crack. So the GOP has moved on to Defunding 2.0, with a brand new trio of pet projects.

This is from my short piece on defunding the left from the upcoming issue of the magazine. To find out what Defunding 2.0 is all about, you know what to do. Just click the link.

Americans Hate Everyone

So here's the latest Gallup poll, asking people whether various groups have "too much power." The funny thing about it is that Americans apparently think that everyone has too much power:

Churches and the military manage to escape the "too much power" box largely thanks to support from huge numbers of Republicans. Labor unions and the federal government go the opposite way, but Democrats don't support them enough to keep their overall numbers from being pretty dismal. Lobbyists, banks, and corporations come in for mostly bipartisan abuse.

Roughly speaking, I'd say that this poll doesn't tell us much aside from the fact that American political beliefs are fairly incoherent. But we knew that already. Beyond that, an awful lot of Americans apparently feel that they themselves have no voice to speak of, which must mean that everybody else has too much. And they might be right.

And to put a timely political spin on this, the lousy showing of the federal government goes a long way toward explaining why Obama "lost" the battle with John Boehner and the tea party over spending cuts. Without taking sides on whether Obama himself deserves any of the blame for this, the fact is that it's pretty much impossible to win a political battle when the public is on the other side. And this poll makes it pretty clear that a big plurality of Americans are in favor of defanging the federal government.

Of course, they're largely in favor of this only when proposed spending cuts are aimed rather vaguely at "discretionary programs" or some such. Boehner won this round because the actual reductions on the table were never made concrete. (In fact, they're still trying to figure out exactly which line items are going to be cut.) However, when it comes to something big and well known, like Medicare, this dynamic shifts in the opposite direction and Boehner will almost certainly be on the losing side of public opinion if he tries to push for big cuts. Political strategy matters in all this, but public opinion matters even more. That's the main reason Boehner won this round and it's the main reason he'll lose the next one if he overreaches.

From House Speaker John Boehner, staking out an early position on the upcoming fight to raise the nation's debt ceiling:

The president says I want you to send me a clean bill. Well guess what, Mr. President, not a chance you’re going to get a clean bill. There will not be an increase in the debt limit without something really, really big attached to it.

This is hardly a surprise. We've been talking for months about how there's going to be a big battle over the debt ceiling, and obviously big battles have to be fought over something. Boehner is just being a little more bellicose about this than usual.

So what's the "really, really big" thing that Boehner has in mind? Maybe I'm being obtuse, but I'm at a bit of a loss over this. I don't think Boehner can get away with demanding concessions on side issues like Planned Parenthood or EPA regs. He lost on that already, and his position won't be any better in a couple of months. As for straight budget issues, what's the point? The House is working on a budget right now and it will land on the president's desk soon enough. That's the place for a fight over FY2012 outlays.

So what else is there? Some kind of deal on slashing Medicare? Maybe, but I'd be pretty surprised if Boehner really wanted to tie the Republican Party to big Medicare cuts in an extremely public battle like this. Permanent extension of the Bush tax cuts? Something else?

I know that I'm demonstrating a lack of imagination here, but I'm hard-pressed to see what kind of big things Boehner can really attach to a debt ceiling bill. Help me out.

Are Roth IRAs a Time Bomb?

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.

Why Did Obama Cave?

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

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

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.

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

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?