Obsidian Wings

Just Tax

by publius

I have to admit that I don't like the idea of the government stepping in to dictate compensation levels, TARP funds or no TARP funds.  I'm certainly not morally opposed to it -- heck, many of these people deserve far worse.

The problem, though, is that I don't think the government is institutionally competent to figure this stuff out in a remotely fair and informed way.  It seems like the bluntest of blunt instruments.

Instead, I'd prefer to let people make what they make, and then raise taxes significantly on the very top earners.  For that reason, I'd prefer to see the anger from these ridiculous compensation levels (which were made possible by government intervention, mind you) channeled toward larger tax reform.  

The compensation limits proposed this week will be fleeting anyway -- the ultimate purpose is to keep us rubes at bay.  Raising tax rates on the very very top, by contrast, would be a more lasting reform -- one that would promote equality, reduce concentration of political power, etc.

And this is the point .....

.... Of calling the Democrats' stimulus package A Stimulus for Tomorrow (Part 11)

by von

Andrew Sullivan mentions a piece by Daniel Gross, which purportedly reminds "conservatives"* that it's too early to label the stimulus a failure because most of the money hasn't been spent yet.

Here is my hand.  Here is my forehead.  Here is my hand smacking my forehead.  (Ouch!)

Gross' article isn't a "reminder"; it's an admission that critics of the stimulus package were right.  A principle argument against the Democrats' stimulus package was that it was misdesigned and too back-heavy.  The Democrats designed a stimulus package that would have its greatest impact in 2010 and 2011 -- not 2009.  Consequently, as designed by the Democrats, money from the stimulus would not enter the economy when it was needed:  at the start of the recession, not at (what appears to be) the recession's end.  In my words -- and why be humble about this now since I have never been before -- the Democrats designed a "Stimulus for Tomorrow."  Not today.   

I suppose that I should take some comfort in the fact that defenders of the Democratic stimulus package are now acknowledging its central design flaw.  And I'm certainly impressed with the fluidity of David Gross' arguments.  It takes a deft hand to argue that critics of the stimulus package are currently wrong because they were previously right.  Or to label as "rash" the conclusion that a stimulus package that costs $787 billion isn't much of a stimulus package if it doesn't take effect until after the recession is (probably) over. 

Despite being impressed by Gross' writing, however, Gross' article isn't an answer to the critics.  It's an admission that the critics were right.

Prior installments of "A Stimulus for Tomorrow": Parts 1, 2, Hilzoy's response, 3, 4, 5, 6, 7, 8, 9, 10.

*Notably, "conservatives" were not the only critics of the stimulus package.  I'm a critic of the Democrat's stimulus package and, 'tho not a democrat, I'm also not a conservative. 

Round Two

(Also known as: A Stimulus for Tomorrow, Part 10)

by von

Everyone should have seen this coming .... well, everyone who reads these here Wings of Obsidian.  From Salon (citing Bloomberg and The New York Times):

Call it the the stimulus that dare not be named. Bloomberg reports that the Obama administration is considering "a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label."

On the table: A boost in transportation spending, extension of unemployment benefits, and a continuation of the first time homebuyer tax credit. The New York Times adds in a possible $3000 tax credit to businesses for new hires, and a proposal to "allow more businesses to deduct their net operating losses going back five years instead of the usual two."

    Some folks will claim that a second stimulus is needed because the recession has been much worse than anyone had predicted.  We have a technical term for this view:  bullshit.  It is absolutely true that the Obama Administration misjudged the depth of the current recession, and Geoff at Innocent Bystanders has the (updated) chart to prove it.  But a lot of folks outside the Administration were warning that the Democrats' stimulus plan didn't treat the recession seriously; instead, it was full of crappy half-measures, programs of dubious benefit (ahem, cash for clunkers), and payoffs to various Democratic interests.  And, then, moderate Senate Republicans somehow, against almost all odds, made the Democratic plan worse.  Under these circumstances, a bunch of folks thought that a son of stimulus was practically guarateed.  To choose a random example: me, circa February, 2009:

The current stimulus package is too small on the front end and too bloated and unfocused on the back end.  It wasn't a stimulus bill so much as a grab bag of goodies.  Of course we can't rule out another stimulus package, because we didn't do a proper stimulus package the first time. 

   President Obama's second take at a stimulus package also doesn't fill me with the warm fuzzies.  The trial balloon for stimulus number 2 consists of more complicated tweaks to the tax system and more transportation spending.  This new plan is still too unfocused.  For instance -- in the same vein as "cash for clunkers" -- giving limited tax credits for new hires could very well have counterproductive effects (why hire now if the government might pass a tax credit tomorrow?  do tax credits encourage employers to dump older, high-wage workers for new hires?)  These types of tweaks also impose high compliance costs.  And how many new roads does a "green" economy need, anyhow?  (Or is this going to be a version of Rep. Mica's high-speed rail plan?)

Let's get serious.  The best way to create new jobs (and keep the jobs that exist) is a payroll tax cut.  It's a proposal that has been on the table from the beginning.  If you cut the payroll tax on both the employer and employee sides, you provide employers with an incentive to both keep and hire workers (because the tax consequences of hiring and retaining workers are smaller) and you provide workers with more money to spend or save (either of which is helpful behavior in light of the dual consumption/credit crunch).

Yes, even a temporary payroll tax cut is costly.  But what new program offered by the Obama Administration hasn't been costly?  Let's get it right this time. 

Prior installments:  A Stimulus for Tomorrow, Parts 1, 2, Hilzoy's response, 3, 4, 5, 6, 7, 8, and 9.

There Is Still Good In Him. I've Felt It.

by publius

Richard Posner just wrote one of those "read the whole thing" essays in TNR.  And it's the clearest and most persuasive theoretical grounding of recent Democratic economic policies that I've seen.

It's dense in a few places, but he generally lays out pretty clearly the logic of things like the fiscal stimulus, policies that increase wages, and public investment.  The essay doesn't say so explicitly, but it also illustrates the fundamental errors of Mark Sanford-style "tighten your belt" macroeconomics.

The logic of Posner's essay also strikes at the very heart of trickle-down economics.  I know that economists don't take trickle-down to be a rigorous theory or anything.  But I think the basic idea has a lingering hold on the minds of elected officials.  At the least, it helps justify in people's minds why concentrations of wealth (estate tax) and income (tax cuts for rich) are good policy rather than things that should trigger pitchforked mobs.

Posner's essay, by contrast, spells out the basic Keynesian idea that "trickle-up" is a much sounder policy.  And, as it turns out, this type of trickle-up, multiplier-seeking policy approach is exactly what the stimulus adopts.  The essay also illustrates (by describing Keynes in plain English) why the various federal banking interventions were important -- namely, to produce the stability needed to stop people from hoarding.

Anyway, if you're an "interested amateur" like me, you'll enjoy it.

[UPDATE 2:35 PM:  I should have made this more clear -- so thanks to Adam in the comments.  Posner is one of the most important Chicago School figures of the 20th Century.  Currently a federal judge, he was law-and-econish before it was cool.  Accordingly, this essay is roughly equivalent to Glenn Beck embracing ACORN because "they help poor people."  Or maybe Mr. Burns opening a public hospital.  Or the Kagan family joining MoveOn.]

Regulating Wall Street

by publius

I won't pretend to claim expertise in the debate about whether the feds should regulate bankers' compensation.  But the devil, it seems, is in the details.  I could easily imagine rules that are excessive intrusions -- but I could just as easily imagine acceptable ones too.

Regardless, though, the underlying theory of imposing new rules makes perfect sense.

Markets don't handle externalities all that well.  For instance, factories that spit out mercury into lakes don't bear those costs in a truly "free" market -- we the drinking public do.  Regulations and dread tort law are the ways to force factories to internalize those costs. Without regulations, it would be completely rational for factories to dump mercury if it makes production more efficient.

That's essentially how Wall Street compensation structures should be thought of -- as pollutants spilling out, poisoning the general public.  The incentives for short-term gains with no regard for the long term hurt a lot of people.  And so it's completely justifiable to push those costs back on Wall Street.

No one's really even considering limiting compensation amounts.  (And frankly, I think that concentrations of wealth aren't much better than mercury in the water).  The proposals, as I understand them, are about channeling incentives in a more constructive direction. 

The ultimate rules may go too far, but this basic idea is a sound one.

The Fruit of Nelsonism

by publius

As you'll recall, we passed a stimulus bill earlier this year.  The original proposal was already too small.  But then a group of centrist Senators led by Ben Nelson and Susan Collins demanded additional significant cuts to aid for states.  They ultimately cut about $25 billion from the original proposal, most of which cut the "flexible" money that states could use on anything.  (Ed Kilgore explains the details).

These cuts had no discernable policy basis, but were simply political and ideological posturing.  It's one thing to oppose the stimulus.  But once you agree to spend 700 billion, there's no justifiable policy reason to oppose this additional amount, particularly given how stimulative state aid is (especially in terms of keeping people employed).

And now the NYT shows the inevitable effect of not spending more on state aid.  In short, state cutbacks are limiting the effects of the stimulus:

The layoffs at New Flyer are a vivid illustration of the way that some of the economic impact of the $787 billion federal stimulus law is being diluted by the actions state and local governments are taking to weather the recession.

Let's hope this lesson is learned on health care.  The goal must be to get the policy right.  If limiting spending hurts the overall policy, then we need to spend more (e.g., subsidies in a world of mandates).

[UPDATE 11:35:  Dean Baker and Rivka Deutsch wrote a paper on this very topic back in May 2009 (pdf).

August Unemployment Data

by von

The August unemployment rate is up to 9.7%.  Geoff at Innocent Bystanders has produced a new chart (right).  The deviation between what Team Obama thought its policies would do to the unemployment rate and what those policies are actually doing is growing.

Could Part 10 of the "Stimulus for Tomorrow" series be far behind?  (Parts 1, 2, Hilzoy's response, 3, 4, 5, 6, 7, 8, and 9.)

I'd say yes.  But let's enjoy the weekend first.

Government Worked

by publius

Deborah Solomon reports in the WSJ that the federal stimulus bill that zero House Republicans voted for, and that 2.5 Republican Senators voted for, is working:

Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.

Granted, the article debates which programs have had the most impact.  But the general consensus is that federal intervention (i.e., "big government") is helping pull us out of the recession. 

The Democrats took a lot of heat for doing the right thing earlier this year.  They should use news like this in a relentlessly offensive way.  It's time to attack the people who wanted to stand by and do nothing while the economy was collapsing. 

And it's not about revenge at all.  It's about policy.  The hope is that people who are empirically wrong will be politically discredited.  That's the only way to keep them from messing up the economy the next time around.

The Failure of State Government

by publius

The state budget situation is getting uglier by the day.  It’s pretty much a full-blown crisis at this point – and that’s including the federal stimulus aid that was shamefully cut by the Senate “centrists.”

The budget crisis is not, however, some sort of freakish one-time event.  It’s a recurring problem that points to a larger institutional failure of our state government system.  Simply put, states don't work because they are chronically underfunded.  And to me, this failure is rooted in tax policy.  Our state governments are simply (1) unwilling and (2) unable to collect a sufficient amount of tax revenues for their residents’ needs.

First, the “unwillingness.”  The politics of tax policy are stuck in a very harmful place at the moment.  The sustained conservative assault on taxes has been extremely successful, and has thoroughly penetrated our political consciousness.  And here’s where it’s left us:  The GOP won’t even consider raising taxes on anything.  And the Democrats barely have the courage to raise taxes even on the very well-to-do.

And look, taxes suck.  No one likes paying them – including me.  But that said, society has a set of needs that people expect government services to meet (e.g., education, senior health care, security).  Many Americans are (rightly) unwilling to give up those services, but they simultaneously punish efforts to pay for them. 

At some point, the politics on this issue has to change – that is, we must come to terms with our need to raise more tax revenues.  A conservative might respond, “no, we need to get spending in check.”  But that’s not really the problem.  Just look around at the states’ specific problems.  Their budgets are already cut to the bone.  And it's hurting our most basic institutions and services. 

But even assuming the politics improved, states would still be structurally “unable” to provide sufficient revenues.  States are stuck in a classic collective action problem in that they compete for both residents and businesses.  As a result, I’m not sure we can realistically expect states to provide what Americans need even if the politics got better.

The larger implication is that we should rely less on state governments to provide basic services (or at least to fund them).  On social issues, I’m all for states’ rights and localism.  But federalism just doesn’t make much sense on the economic and regulatory fronts.  States are structurally unable to provide the revenues required, and there’s no real reason to think this dynamic will improve.

I’m not sure what the ultimate policy implication would be.  Maybe the federal government should set some sort of “floor” tax rate that states could then go above, but not below.  But in any event, it seems that the more we depend on the federal government to establish overall tax rates, the better. 

Federalism in the economic realm just doesn’t work.

Good News

by hilzoy

From MSNBC:

"Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one's collapse can create systemwide tremors that imperil the finances of millions of Americans.

With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.

Looking to avoid such a costly intervention, President Barack Obama's regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose. (...)

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.

They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals -- and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies. (...)

For those that qualify for top tier designation, the administration proposes a system that would dismantle them quickly if they get into financial trouble. Right now, the government has authority to step in and take down troubled banks, but not the conglomerates that pose greater risks to the economy. That lack of authority prevented the government from dissolving Bear Stearns Cos., Lehman Brothers and AIG in an orderly manner.

Under the administration's plan, the Treasury could decide to take a company swiftly through a bankruptcy-like process, appointing the Federal Deposit Insurance Corp. as a conservator or receiver. The FDIC currently now only has the authority to take over troubled banks."

This is really, really good news, if true. Lots of smaller banks have been, as Atrios says, EATED by the FDIC recently, and while I'm sure it hasn't been pleasant for them, it also hasn't had anything like the impact of, say, the demise of Lehman Bros. Having a quick procedure in place to deal with them, plus the additional capital requirements that will help smooth the process, is crucial.And making it less attractive to be big enough to pose systemic risk is also a very, very good thing.

I expect banks to be vehemently opposed to this. But this time, we should not let them win. One good long look down into the abyss has been more than enough.