Sep 29th 2012 | from the print edition economist
mag
“GIVE me control of a nation’s money supply,
and I care not who makes its laws.” So said Mayer Amschel Rothschild, founder of
the Rothschild banking dynasty. What would he make of Bitcoin, an online
currency with no issuing authority whatsoever? Despite being written off
following a speculative bubble and crash last year, the online cryptocurrency is
still going strong, not least thanks to its ability to circumnavigate the
law.
Bitcoin was devised in 2009 by a mysterious
figure known as Satoshi Nakomoto. It is the world’s first, and so far only,
decentralised online currency. Instead of a central bank, Bitcoins can be
issued by anyone with a powerful personal computer: it mints them by solving
extremely difficult mathematical problems. The problems are automatically
made harder to ensure that the overall supply of Bitcoins cannot grow too fast.
They are traded online, with transactions cryptographically
authenticated.
In this section
These curious capabilities make Bitcoins a
combination of a commodity and a fiat currency (creating the coins is referred
to as “mining” and they have value only because people accept them). But
boosters inflated a Bitcoin bubble. Shortly after the currency launched,
articles spread around the internet arguing that Bitcoins would protect wealth
from hyperinflation and that early adopters would make a fortune. The dollar
price of a Bitcoin currency unit climbed from a few cents in 2010 to a peak of
nearly $30 in June 2011 (see chart), according to data compiled by Mt Gox, a
popular online Bitcoin exchange. Inevitably, the currency then crashed back
down, bottoming out at $2 in November 2011.
But in the nine months since, Bitcoin has
recovered. One unit now costs $12, and the volume of transactions is
increasing. Though the price still
fluctuates against the dollar, it is less volatile than it was, which makes it a
better store of value. Its use as a means of exchange is also getting easier: an
increasing number of online retailers take the currency, and new smartphone apps
make Bitcoins almost as easy to use as cash. A proliferation of exchanges means
that it is relatively easy to swap Bitcoins for conventional
currencies.
Tony Gallippi, the boss of Bitpay, which
processes Bitcoin payments for retailers, says that his client list has
increased from around 100 in March to 1,100 now. These are mostly e-commerce
businesses, selling things like domain names and web hosting. But the list
also includes a taxi-driver in Chicago and a dentist in Finland. “Credit
cards weren’t designed for the internet,” he says. Bitcoin transactions cost
less and cannot be reversed in the way credit-card transactions can be. This is
important for firms selling to customers in countries known for credit-card
fraud, such as Russia or Belarus.
But another big reason for the currency’s
success is its role in dodgy online markets. Although tracing Bitcoin
transactions to real people is not impossible, the currency’s relative anonymity
and ease of use makes it a natural conduit for criminal funds. On the
website Silk Road, a sort of eBay for drugs hidden in a dark corner of the web
known as Tor, Bitcoins are the only means of transaction. Buyers
transfer their Bitcoins into an escrow account where they sit until receipt of
the goods is confirmed. Bitcoin transactions on Silk Road are now worth $1.9m
per month, estimates Nicolas Christin, a researcher at Carnegie Mellon
University.
This may explain why users put up with a big
drawback. Bitcoins tend not to be very secure, says Richard Booth, a consultant
at RSA, a cyber-security firm. As some users have found to their cost, hackers
can sometimes steal Bitcoins from users’ online vaults. In the latest raid, on
September 5th, hackers stole $250,000 in Bitcoins from Bitfloor, a large
American exchange, causing it to shut down its operation. But although the raid
caused a dip in the price of Bitcoins, it soon recovered. It turns out that a
currency can thrive even when no one is making laws for it.
The job market is
improving—but not for everyone.
In recent months,
employers have stepped up hiring, layoffs have slowed and the unemployment rate
has begun to fall more quickly. But the rosier picture hasn't been a boon to
everyone without a job. In February, 3.5% of the U.S. work force was unemployed
for more than six months, compared with 4.0% in February of 2010, a smaller
decline than in the overall jobless rate. The average unemployed worker has been
jobless for 40 weeks, a mark that has barely budged in the past six
months.
WSJ's Ben Casselman takes a look at challenges the
long-term unemployed are experiencing in finding jobs as the economy recovers.
Photo by John Moore/Getty Images
The diverging
fortunes of the long and short-term unemployed worry many economists because it
suggests the emergence of deeper, structural problems that could persist long
after the rest of the economy recovers. Rather than returning to work as the
economy recovers, as they have after past U.S. recessions, the long-term
unemployed could effectively break off from the normal job market, ultimately
forming an underclass of the more or less permanently
unemployed.
"It's really as
though you just take a certain number of workers and just chop them off, throw
them away and the rest of the economy behaves just fine," said Laurence Ball, an
economics professor at Johns Hopkins University. "I've been surprised that this
isn't viewed as more of a crisis."
Enlarge Image
Economists call
this grim prospect "hysteresis," a term borrowed from chemistry meaning
that the past affects the present. The concept, as it applies to the labor
market, has its roots in a 1986 paper by Olivier Blanchard, now chief economist
of the International Monetary Fund, and Lawrence Summers, the Harvard economist and former Treasury
secretary.
When they wrote
their paper, Messrs. Blanchard and Summers were thinking about Europe, which was
then mired in a 15-year struggle with long-term unemployment. The U.S., by
contrast, has little history with such problems. Even in the early 1980s, when
the U.S. unemployment rate got close to 11% at one point, the average length of
unemployment, at its peak, was just over 21 weeks, and fell quickly from there.
Most economists
believed the more flexible, business-friendly American labor market would
protect the U.S. from Europe's fate.
Now, however,
some economists are re-evaluating that assumption. In a paper released last week
Mr. Summers and University of California, Berkeley economist J. Bradford DeLong,
argue that the experiences of the past 2½ years "raise the possibility that the
United States is not, after all, largely immune" from the
phenomenon.
Economists
generally divide unemployment into two categories. Cyclical unemployment
stems from weakness in the overall economy, which pushes down demand for
goods and services, and therefore the need for the workers that provide them.
Structural unemployment reflects deeper problems, such as a mismatch
between the skills workers have and the ones employers need. Structural
unemployment, unlike cyclical, doesn't disappear when the economy
improves.
But some
economists argue that in the wake of a severe recession, the lines between
cyclical and structural unemployment can become blurred. Workers who lose their
jobs because of cyclical factors—a factory that lays off workers, a restaurant
that closes, an office that decides to go without a front-desk
receptionist—might stay out of work so long that they become effectively
unemployable. Their skills erode, they fall behind on the latest technologies
and industry trends, or they become stigmatized by employers who assume there
must be something wrong with anyone who's been unemployed so
long.
"Cyclical
unemployment, left untreated, so to speak, for a long time can become structural
unemployment as people lose skills, as they lose attachment to the labor force,
as their work networks dry up and so on," Federal Reserve Chairman Ben Bernanke
said at a news conference in November.
Few economists are
yet ready to declare that hysteresis has set in. Given the slow recovery,
finding a job hasn't been hard for just the long-term unemployed, it has been a
struggle for nearly everyone. Only as the job market improves will definitive
evidence emerge for or against a structural shift.
But Messrs.
DeLong and Summers point to worrying signs. Even as the unemployment rate has
fallen in recent months, the share of the adult population that is working—the
so-called employment-population ratio—has barely improved. That is likely due in
part to demographic shifts, as the baby boom generation begins to retire. But it
could also suggest that displaced workers aren't returning to the work force as
the economy improves.
It isn't clear
why, exactly, the U.S. economy is behaving differently this time. The severity
of the recession is certainly part of the explanation. So, most likely, is the
boom and bust of the construction industry, which left millions of workers,
mostly men, without the skills they need to find new jobs.
There may also
be longer-term trends at work. Steve Davis, an economist at the University of
Chicago's Booth School of Business, notes that the employment-population ratio
had been trending downward even before the recession, as had the rate at which
workers change jobs. Both could be signs that the U.S. labor market's
much-vaunted flexibility may be eroding.
There is little
agreement on the solution. Traditional economics suggests that structural
unemployment doesn't respond to the kind of stimulus measures—government
spending, tax cuts, reduced interest rates—that are the standard approach to
high cyclical unemployment. But some economists, including Mr. Bernanke, have
argued that policy makers should try to jump-start the economy so that the
unemployed find jobs before structural problems take root. Others argue that
extended unemployment benefits have contributed to the problem by encouraging
workers to delay looking for work, raising the risk that they will fall victim
to structural unemployment.
What nearly all
experts can agree on is this: For those hit hardest by the recession, time is
running out.
Lurking not far beneath the surface in the
uproar over the 1% versus the 99% is the notion that once an American makes it
to the top he or she is very likely to stay there.
But is that so?
New research from the U.S. Treasury’s Office of
Tax Analysis sheds new light on what has often been the subject of contentious
debate devoid of hard, reliable data. (One approach has been to look through
Forbes magazine’s annual listing of the 400 richest Americans to see how much
turnover there is over time.)
In a paper to be delivered at the
American Economics Association meetings in San
Diego Friday, Treasury
economists Gerald Auten, Geoffrey Gee and Nicholas Turner use detailed
tax-return data to report the following:
Most Americans whose income puts them in the
top 1% in a given year are in the top 1% the following year. About 68% of those
who were in the top 1% in 2009 were also there in 2010, for example. Over time,
many people do fall from the top tier of the income ladder. Still, over the
past 20 years, as much as one-third of all taxpayers who make it to the top 1%
remain there for each of the following five consecutive years. About 28% of
those who were in the top 1% in 2005 were there in each of the following five
years.
Five years is a good chunk of time, but a
relatively small slice of a lifetime. So, the Treasury economists looked at
income data of 30,000 taxpayers who were between the ages of 35 and 38 in 1987,
and then managed to find nearly all of them (about 87%) 20 years later before
they had reached the usual retirement age.
Of those who were in the top 1% in 1987,
could be found in 2007 and had some income in the later year, 24% were in the
top 1% in 2007 and another 37% were on slightly lower rungs but still in the top
5%.
Among those who were between 15 and 18 in
1987 and showed up as dependents of taxpayers in the top 1%, about 14% were in
the top 1% as adults in 2007 and another 20% didn’t make it to the tip top but
were still in the top 5%.
Is that a lot or a little? “We leave it to the
reader to look at the results and decide,” the Treasury economists conclude
cautiously.
http://www.nationalaffairs.com/publications/detail/regaining-americas-balance
The history of the rise and fall of powerful nations
offers a lesson that Americans today must not ignore: Great powers are rarely
brought down by outside adversaries; they destroy themselves from within.
Very often, they do it by falling victim to economic imbalances and the decay
of once-vibrant governing institutions that prove unable to adapt to changing
circumstances.
The pattern has repeated itself with remarkable
regularity. In examples as disparate as the demise of the Roman Empire,
the decline of imperial Spain, the fall of the Ottoman Empire, and Britain's
loss of global power, we find a common story: As political
institutions fail to keep up with economic changes, elites respond by
concentrating political power, increasing public spending, and eventually taking
on an unbearable burden of debt that brings down the entire system. If
America's global economic power comes to an end in our lifetime, it will surely
result from a loss of fiscal balance that forces the nation down this well-worn
path. The subtle signals we have already received — a minor credit warning from Moody's, acrimonious
political fights over the debt ceiling — confirm that trouble is
coming.
Indeed, it is now perfectly clear that our
political system is struggling to contend with an economic and fiscal reality
for which it was not designed. That reality is above all a function of our
ballooning entitlements and of the peculiar political incentives and forces that
have grown up around those entitlements. The structure and rules of our politics
create a situation in which it is in the interest of both major parties to let
these problems get worse rather than to take the steps required to address
them.
This is a depressing fact, but it also suggests
the shape of a solution. If we are to prevent the entitlement state from leading
us into a fiscal catastrophe, we will need to change the rules of our fiscal
politics — especially the rules of federal
budgeting.
THE GREAT IMBALANCE
America today faces a financial imbalance that
threatens our economic strength and position of global leadership. At its core,
the threat is a function of a breakdown in long-term fiscal discipline. Under
President Obama, the budget deficit has grown to more than $1 trillion every
year, with more than $3 trillion in expenditures funded by about $2 trillion
in tax revenues and the remainder by debt. That deficit now amounts to
more than 7% of our annual gross domestic product, and the consensus is that
such spending is not sustainable. Indeed, the only reason the United States has
gotten away with funding a runaway national debt at relatively low interest
rates is that some key competitors, especially in Europe, are in even greater
fiscal trouble.
While this problem has drawn much public
attention over the past four years, it has been far longer in the making.
To be sure, the Obama administration has worsened the nation's fiscal
situation. But the country faces longer-term structural budget problems that
have been growing for decades — problems that our federal budget process has simply
failed to address.
Politicians like to focus on federal
discretionary spending when they talk about those budget troubles, because
discretionary spending presents some relatively easy targets for cutting. Many
on the right argue that reducing foreign aid or subsidies to public broadcasting
will meaningfully help our budget situation; many on the left claim that cutting
tax breaks to corporations or slashing the defense budget can save us. But they
are all wrong. The growth in our debt is not being driven by these comparatively
small programs.
What we are facing is an entitlement
crisis. It has been growing for
decades, and it is reaching a truly catastrophic scale. Consider that four
decades ago, in 1973, the federal government spent 17.6% of the nation's
GDP. Of that amount, 3.7% of GDP went to Social Security spending, 1.1% was
for health-entitlement spending (Medicare and Medicaid), and 9.9% was
discretionary spending (including defense), according to the Congressional
Budget Office. In contrast, the federal government in 2013 is projected to
spend 21% of the nation's GDP, not counting interest. Of that spending, 5.1%
of GDP will go to Social Security, 5.6% will be health-entitlement spending, and
7.8% will be discretionary spending. This means that, as a percentage of the
economy, federal discretionary spending has actually declined over the past
40 years while entitlement spending (especially health-entitlement spending) has
increased dramatically. And the CBO projects that this pattern will continue
in the coming decades.
On this much, nearly everyone agrees. But there
is no similar agreement about how to bridge the fiscal gap. And the difference
on that front is not so much between liberals and conservatives as between those
who seek the right mathematical formula and those who seek the right budgeting
rules.
Recent years have seen several proposals to
close the fiscal gap. Some of these plans have been part of the formal budget
process, like the House Republican budgets of the past few years. Some have come
from government efforts, like the Simpson-Bowles commission created in 2010 by
President Obama. Others have come from private sources, like the Bipartisan
Policy Center's Domenici-Rivlin task force. There have been dozens of similar
plans proposed since the early 1980s, when Ronald Reagan put a spotlight on the
coming federal fiscal imbalance. Many of these proposals would likely have
addressed the basic problem, but none of them has been enacted. This should
suggest that the problem is not that we lack a plan with just the right
mix of policies, but rather that we lack a process by which a viable
solution could actually become law. Put simply, our runaway budget deficits
are not a math problem. They are fundamentally a political
problem.
Some in Washington do seem to recognize the
true nature of the challenge they face. Perhaps the most significant recent
effort to address the fiscal imbalance was the creation of a congressional
"supercommittee" in the course of the 2011 debt-ceiling deal between Congress
and the president. The supercommittee — formally known as the Joint Select Committee on Deficit
Reduction — consisted of 12 members of Congress (three members from
each party in each chamber) and was charged with developing a plan to reduce the
deficit by at least $1.5 trillion over ten years. Its recommendations were
granted an exemption from the usual rules of debate in both houses of Congress:
They would have been given a straightforward up-or-down vote, without amendment
and without the possibility of a Senate filibuster.
The supercommittee failed. A few days before
the group was required to announce its recommendations, the members instead
announced that they had reached an impasse. But the very fact that the committee
was created — that the president and congressional leaders
acknowledged that addressing our fiscal imbalance required changing the rules of
the legislative process — was an important step forward. It offered reason to hope
that the nation's leaders finally understand why our fiscal woes have gone
unaddressed: not because of a failure to find the right budget formula, but
because of a failure of governance.
When politicians and journalists acknowledge
that problem, however, they usually do so in the context of criticizing American
democracy itself, or of complaining that there are just too many obstacles to
enacting legislation. But that critique is not quite right. After all, even
as our mounting fiscal crisis has gone unaddressed in recent years, Congress
has nevertheless managed to pass a great deal of major legislation. During
the terms of George W. Bush and Barack Obama, politicians in Washington have
enacted, among other laws, a large education reform, a huge re-organization
of our domestic-security agencies, a reform of corporate-governance rules, a new
Medicare benefit, a massive response to the financial crisis (including several
stimulus bills, an unprecedented bank rescue, and a bailout of auto companies),
a huge health-care reform, and a major overhaul of our financial regulations.
The system we have, in other words, can do a lot. It is well designed to balance
interests, to channel public desires, to focus political energy, and to enable
responsive government.
But there is one big thing it cannot do:
It cannot govern the entitlement state. A system that worked well
for two centuries is now failing precisely because it is being asked to run a
fundamentally different type of government — one that exists largely to provide material benefits to
individuals. This is where the
source of our dilemma lies, and it is where any new budget rules must be
focused.
GOVERNING THE ENTITLEMENT STATE
The unprecedented nature of the problem
confronting policymakers is readily illustrated by a look at America's debt. The
figure below traces the national debt as a percentage of GDP since 1790. It
demonstrates that, until about the 1970s, our debt spiked only during wartime
(and the grave economic catastrophe of the Great Depression) and tended to
decline or to hover at very low rates in peacetime. The spikes on the chart
conform plainly to the War of 1812, the Civil War, and the two world wars, with
an additional spike in the early 1930s resulting from government spending to
combat the Depression.
But the spike in borrowing and debt that began
in the 1970s and persists to this day is not explainable with reference to any
external shock or economic calamity. It has continued almost unabated through
good economic times and bad. According to the Congressional Budget Office, it
will continue to grow far worse in the coming years — eclipsing even the enormous debt spike during the Second
World War.
What is the crisis that explains this extended
period of intense borrowing? It is the crisis of the welfare state. In the
United States, the introduction of Medicare in 1965 and structural reforms to
Social Security in 1972 bound the federal government to significant expenditures
extending into the distant future, beyond the horizon of political consequences.
This created the political dynamic that has enabled unprecedented
spending — yielding a four-decade period of growing fiscal
imbalance that is now becoming truly disastrous.
The catastrophe has been building slowly. When
Social Security was signed into law early in Franklin Roosevelt's presidency, it
was a modest program to fight destitution among the elderly, and it worked. No
longer do we see many senior citizens who are homeless on the streets. And the
income supplement was relatively small: The first monthly payment, to retiree
Ida Fuller in 1940, was in the amount of $22.54.
Today, however, Social Security is a major
retirement pension, with average payouts of more than $1,200 per beneficiary per
month. Demographics are driving the system toward bankruptcy. More than 50
million people, one-sixth of the population, receive Social Security
checks. This number is much larger than the system's designers
anticipated, and the increasing longevity of retirees is accelerating the
program's fiscal decline. Moreover, roughly one-fifth of recipients are
not even retirees: They qualify under Social Security's disability
benefit, which has grown far more dramatically than trends in observed workplace
disability.
The fiscal consequences of these trends are
dire. Social Security's trustees reported in 2012 that the so-called "trust
funds" through which the program is financed — basically accounting conventions that theoretically set
aside payroll-tax dollars for Social Security while actually spending the money
on other programs — will be empty in 2033.
The structural problems are even deeper for
Medicare and Medicaid. Medicare provides health insurance for roughly 50 million
Americans, mostly over the age of 65.
Medicaid is a joint federal-state program that offers similar insurance to
low-income people and now supports more than 60 million beneficiaries. Unlike
Social Security — which simply transfers cash from the young to the
old — these programs provide a service that is itself getting
more expensive, in no small part because of these ill-designed entitlement
structures. Both programs displace private health insurance; they also
generate perverse incentives within the insurance market by shielding consumers
from costs and providers from real prices. Medicare recipients can demand
substantial medical care without ever having to pay the bills, leading to
overconsumption and needlessly rising demand for care. That explains the
spiraling costs, but it's not the entire story. As the late Milton Friedman
explained in 2001, this dynamic also hurts patients by elevating the bureaucracy
over doctors in the course of rationing care.
What these three programs together illustrate
is a failure by policy-makers to think ahead. Over the decades, elected
officials promised increased future benefits to reap immediate political
payoffs. The real costs of these entitlements were placed safely beyond the
politicians' career horizons; even today, lawmakers who seek to reform the
entitlement state face severe political consequences. The bill for this
reckless, unsustainable behavior is coming due, and yet the political incentives
all still encourage policymakers to abide a perfectly avoidable fiscal
catastrophe.
Why do the normal political motivations and
institutional mechanisms of our constitutional system not enable a solution to
this obvious fiscal imbalance? To grasp the answer, we must begin by
recognizing that our politicians are acting rationally. And to illustrate
the point, we can look at a famous example from game theory: the prisoners'
dilemma.
Originating in the work of RAND Corporation
scholars in the 1950s, the prisoners' dilemma gets its name from a thought
experiment involving two suspects arrested and questioned by the police
regarding a crime they are accused of having committed together. Lacking much
evidence, the police separate the suspects and present both of them with the
same offer: If neither suspect confesses, both serve one month in jail. If both
suspects confess, they both serve three months in jail. But if one suspect
confesses and agrees to testify against his partner while the other does not,
the betraying suspect will go free while the betrayed suspect receives the full
one-year sentence. What should the prisoners do?
At first, it seems irrational for either to
confess. After all, if both hold firm, both will serve short sentences. But when
one considers all the potential outcomes of their situation, and assumes that
each prisoner's prime concern is reducing his own punishment, it turns out that
each prisoner is actually better off confessing and betraying the
other — regardless of what the other prisoner chooses to
do.
American politics today is presented with a
similar dilemma. There are two paths toward reducing deficits and debts of the
magnitude we face: raising taxes or cutting spending. A balanced compromise would involve some amount of
both, but the two political parties face strong electoral incentives to do
neither. If Republicans push for reduced spending, they are criticized for
taking away the benefits people rely on. If Democrats push for raising taxes,
they are decried for swiping workers' hard-earned dollars. Both solutions are
seen as taking money away from voters, and are thus fraught with political
peril.
Consider the matrix above, in which both
Republicans and Democrats in Congress have two policy choices. Republicans
always promise lower taxes, so their choice is whether to cut or maintain
spending levels. Democrats, in contrast, want to keep spending high, so their
choice is whether to raise taxes or keep them low.
A close look at the matrix shows that it
is politically rational for the Republicans to maintain today's
unsustainable levels of spending when faced with either behavior from Democrats.
And, campaign rhetoric aside, that is what they tend to do. Republicans have
learned that whenever they actually legislate spending cuts, they are attacked
by their opponents and tend to lose elections. They are not keen to do the
fiscally responsible thing when the price is giving up
power.
Likewise, whether Republicans cut or
maintain spending, Democrats are politically better off if they allow taxes to
stay low. This explains why, despite President Obama's rhetoric about raising
taxes, he and other Democrats have generally refrained from actually doing so,
especially at the levels needed to pay for their spending. That the expiration
of the Bush tax cuts was postponed until after the 2012 election was not a
coincidence.
To be sure, politicians in both parties make
noises about good economic choices (from their perspectives) that balance the
budget, but their actual behavior is what matters. President George W. Bush
oversaw the expansion of spending on entitlements, as well as on defense,
education, and other discretionary programs. President Obama serially preserved
Bush's tax cuts. Politicians know what is best for the country in the long term,
but they have no easy way to change their behavior now during a period of
polarization in which the institutions and incentives are set up for
imbalance.
This amounts to an institutional
failure. For most of the
nation's history, the rules of the budget game worked. Today, however, they no
longer function. Politically rational behavior is now fiscally perverse.
Addressing this institutional failure thus requires changing the rules of
game. The only remedy to our political prisoners' dilemma, therefore, is to
change those rules so that they in fact rule out structural fiscal
imbalance — by imposing painful penalties on lawmakers for failing
to budget responsibly.
CHANGING THE RULES
Legislative efforts to rule out fiscal
imbalance have been tried before, but have proved too weak to succeed. Given
this track record, it is worth briefly examining these attempts to learn what
not to do when designing new rules for the budgeting
game.
The earliest efforts were the so-called
"Gramm-Rudman-Hollings" budget rules, enacted through two statutes, the
first in 1985 and the second (after a partially successful Supreme Court
challenge) in 1987. These rules established caps on federal spending, enforced
through automatic cuts — called sequestration cuts — that would take effect when the caps were breached. The
caps were based on fixed deficit targets, but those lasted only a few years, as
Congress found them too difficult to abide by.
They were replaced in 1990 with "pay as you
go," or PAYGO, budgeting rules. Under
such requirements, every new dollar of spending must be funded directly by a new
dollar of taxation or cuts to spending elsewhere. The idea was that Congress
would essentially be unable to take on new borrowing, except in a few exempted
categories. But by the late '90s, Congress had found creative ways around the
rules; ultimately, the PAYGO system broke down and was allowed to expire in
2002. Aspects of the system have since been brought back, but these partial
remedies, too, have proved thoroughly ineffective at restraining deficit
spending.
These kinds of rule changes essentially
tried to outlaw the logic of hyper-partisan budgeting in the age of the
entitlement state. And they failed — not only because their various constraints were not
binding, but also because they neglected to take account of why our
policy-makers have not behaved responsibly. The basic dynamics of our politics
are not going away; successful rule changes must therefore take account of those
dynamics, rather than pretending they can be eliminated by fiat. Politicians
need to face much more persuasive incentives to achieve fiscal
balance.
Ultimately, implementing reforms to address
our self-destructive fiscal habits will require Americans — and their representatives in both
parties — to recognize the congressional prisoners' dilemma and
agree to change the rules. This means that those new rules cannot be divisive:
They cannot prescribe a particular policy of spending or tax changes as a remedy
and expect that one-sided fix to be enough. Rather, they must focus on
developing a budget process that is politically viable and that brings the
country toward a lower and more stable debt-to-GDP ratio. Both Congress and the president will face greater
disincentives to continue the fiscal imbalance if its true costs are made more
visible and its consequences are made more immediately onerous. If we can break
the prisoners' dilemma and fix the politics of our fiscal imbalance, the
economics will take care of itself.
Four kinds of rule changes would advance
this cause. First,
Congress should change the rules that define how taxes and expenditures are
"scored" for budgeting purposes by the Congressional Budget Office. Today,
fiscal changes are modeled by CBO in static terms with no consideration of
the effects of different policies on economic output. For instance, in
providing Congress with an official estimate of the effects of a tax cut or
increase, CBO does not try to estimate how the change would influence people's
willingness to work long hours, and therefore influence their earnings
potential. In another example, the extension of unemployment insurance to 99
weeks — adopted in stages over the past few years — is acknowledged by most economists to have caused higher
unemployment rates. And yet these kinds of dynamic behavioral effects are not
considered in CBO's macroeconomic modeling.
CBO should thus be required to offer
estimates of dynamic effects using broadly accepted economics
methods — whether as part of its standard scoring of legislation,
or appended to such scores as additional budget scenarios. Moreover, the
agency's semi-annual economic and budget projections should be required to
include forecasts over long horizons. Today's artificial five- or ten-year
horizons are easily manipulated by legislators eager to hide the costs of
legislation in the more distant future; a budget window of several decades would
allow for much more honest estimates. And CBO reports should include an
accounting of entitlement programs' expected future liabilities and annual
changes in accrued liabilities, not just current costs. That is, when costs or
numbers of beneficiaries are expected to rise down the road, such changes should
be acknowledged and accounted for now. As things are arranged today, Congress
can feign ignorance when, year after year, the Social Security trustees issue
their annual report announcing that the program is more costly than they had
expected in the previous year's projection.
Second, Congress should fundamentally reform its budget
process. For one thing, the budget passed by Congress each year should be
an actual piece of legislation — not just a resolution — so that the president has to sign or veto it. If that
change were implemented, the president would have to engage the details of the
budget process seriously, rather than
put on the irresponsible charade that now passes for an administration budget
proposal. The budgets proposed by the Obama administration in recent years, for
example, have garnered zero votes in the Senate.
Congress could also give real teeth to efforts
to slow the growth of spending by changing the so-called "baseline rule" that
automatically adjusts the starting point of the next budget cycle to reflect
expected future increases in cost. The rule is effectively an automatic
spending increase each year to keep up with inflation, population growth, and
other variables. Eliminating baseline budgeting and instead writing a new
budget from scratch each year would mean that all increases in discretionary
spending would have to be scored as such, raising the visibility of spending
increases to the public. It would also be wise to put all types of
spending — mandatory "entitlements" as well as discretionary
outlays — on equal footing and subject to an annual constraint, so
that entitlements could no longer continue to grow
automatically.
Third, Congress should formally set long-term targets for a
well-defined debt-to-GDP ratio that includes both the explicit debt and the
implicit liabilities in our entitlement programs. Explicit debts are those
associated with outstanding government securities — money the government has actually borrowed in the open
market. Implicit liabilities are, for the most part, future promises to pay
Social Security and Medicare benefits minus expected future payroll taxes. For
example, Americans apparently have the bad habit of living longer than the
architects of Social Security expected. According to the program's trustees,
changing demographics are the dominant reason why the Social Security trust
funds were estimated in 2012 to be exhausted three years earlier than had been
estimated in 2011. Failure to achieve newly established debt-to-GDP targets
(with exceptions for serious economic downturns or major wars) would require
congressional action — automatic pay cuts for federal workers, say, or
across-the-board sequestration. Sequestration has, of course, failed before. But
connected to the other budget-rule changes proposed here, it could enable the
new budget process to be directed toward specific targets, and therefore make ad
hoc revisions of the rules more politically difficult.
Finally, we should change the basic rules of the budgetary game
to leave no room for entitlements to balloon while Congress stands by. One way
to do so is through the passage of a realistic balanced-budget amendment to the
Constitution. Recent attempts to pass such amendments have not involved
particularly plausible versions of the idea: For example, the proposed
amendments that nearly passed in the 1980s, in 1995, and in November 2011
involved requirements for "within year" balance. This means that federal
expenditures in 2019 must equal revenues in 2019, a problematic constraint when
tax revenues fluctuate with the business cycle, often by 10% or more. Abiding by
that rule every year would push Congress to attempt to fine-tune the economy,
and in ways that would inevitably amplify booms and busts.
There are better models for crafting
balanced-budget amendments. One new approach has been proposed by Congressman
Justin Amash (a Republican from Michigan) and has won some bipartisan support.
His plan would essentially involve balancing the budget over the years of a
business cycle. For instance, the proposal's rule constraining annual
outlays (including changes in accrued net liabilities in entitlement programs,
as noted above) to a level no greater than the average annual tax revenue of the
previous three fiscal years would be far easier for Congress to adhere to.
Congress could, with a three-fourths vote, override that constraint during wars
or deep recessions. And instead of loading the amendment with additional
mandates — like supermajority votes to raise taxes, supermajority
votes to raise the debt, and so on — Amash's plan offers a simple, neutral rule with much
broader appeal to lawmakers.
The main objection to such a "clean" amendment
is that it could be used to force tax increases. But while a balanced-budget
amendment would change the rules of the budget game, it would not fundamentally
change the dynamics of public preferences. Significant tax increases would
remain unpopular; meanwhile, a rule requiring balance would create enormous
pressure for meaningful entitlement and spending reform that could help address
the nation's fiscal imbalance.
Each of these rule changes would address some
of the key drivers of our fiscal imbalance, and each would do so by taking not
only economics but politics seriously — by helping to establish a structure in which the problem
could be solved by rational democratic
decision-makers.
KEEPING AMERICA STRONG
The clash over raising the debt limit that
gripped Washington during the summer of 2011 was just the beginning, not the
end, of our fiscal woes. The debate over the supercommittee and the House's
rejection of a balanced-budget amendment during the fall of 2011 were likewise
just the beginning, not the end, of the necessary battle over institutional
reform.
We cannot know how even the early stages of
this fight will unfold, but we can see where continued fiscal imbalance will
ultimately lead. All great nations fall. And as economic historian Douglass North reminds
us, they almost always fall when political institutions reveal their "inherent
instability."
But history also shows us that adaptation is
possible. Decline can be averted, at least for a time, by leaders who are
able to see their way out of the trap of imbalance — out of the prisoners' dilemmas created by old rules that
no longer suit a new set of circumstances.
We are in such a trap today. Everybody knows
that our current fiscal practices are unsustainable. The question is whether our
leaders will figure out in time just how we can escape that trap by rebalancing
the rules of how we budget, tax, and spend.
Glenn Hubbard is the dean of Columbia
Business School and was chairman of the Council of Economic Advisers under
President George W. Bush. Tim Kane is the chief economist of the Hudson
Institute and (with Hubbard) co-author of Balance,
forthcoming from Simon and Schuster.
If the price of
milk zooms up shortly after Jan. 1, the increase will come courtesy of a venal
and feckless U.S. Congress.
No grocery store would hire a clerk who
insisted on adding up a customer's purchases with an ancient abacus. Yet a
similarly archaic standard is about to be inflicted on the nation's taxpayers
and consumers.
Current farm programs—which consist of
massive subsides, price supports and various marketing restrictions—were enacted
in 2008 and expire on Dec. 31. That should be cause for rejoicing, except that
the system is rigged against consumers and taxpayers.
Enlarge Image
Associated Press
Instead of Americans enjoying a bounty after
the clock runs out, federal farm policy will automatically revert to a
farm bill drawn up in 1949. That will compel the Department of Agriculture to
roughly double the price supports for dairy and other farm products thanks to a
mystical doctrine called "parity."
The doctrine was concocted by Department
of Agriculture economists in the 1920s to "prove" that farmers were entitled to
higher prices than the market provided. The official parity calculation was
based on the ratio of farm prices to nonfarm prices between 1910 and 1914, the
most prosperous non-wartime years for farmers in American
history.
If the market price of milk, for example,
fell below parity, the Department of Agriculture intervened in markets in
various ways to provide a price floor to benefit dairy producers. This
mechanism has been in place for generations, gouging taxpayers and consumers,
long after full-time farmers became far wealthier than average
Americans.
In recent decades parity was disregarded as the
primary gauge for most subsidy programs, as even farm-state congressmen conceded
it was a nonsensical standard, given the profound changes in the economy since
1914. Yet parity remains on the statute books. And so, if Congress fails to
act, the price of milk and other dairy products will soar. Consumers and much of
the food industry will get creamed.
Milk now sells for an average $3.53 per
gallon nationwide, according to the Bureau of Labor Statistics consumer price
data. Once parity kicks in the price could quickly soar to $7 a
gallon, according to Secretary of
Agriculture Tom Vilsack. The USDA could burn through billions of tax dollars
buying up dairy products that are unwanted at exorbitant
prices.
Farmers will enjoy a brief windfall until
consumer demand plummets for their product. Any resulting chaos in the
marketplace will almost certainly produce demands for new bailouts of
farmers.
The dairy
lobby has long been one of Washington's most tenacious. By the 1980s, federal
dairy policy cost the average American family enough to buy its own
cow. The fact that in the 1980s
high dairy prices reportedly contributed to calcium shortages among low-income
Americans never registered on Capitol Hill.
The ultimate absurdity of the "dairy
cliff" is that there is no need for federal intervention in dairy markets. The
supply and demand for the vast majority of food products made in America
function just fine without government price controls. The worst disruptions have
perennially occurred for a handful of items such as sugar and corn, as well as
dairy products, which are under political protection. Politicians have long
exploited these disruptions to help drum up donations to their re-election
campaigns.
There is no chance that farm-state congressmen
will draw the lesson from the "dairy cliff" that they are unfit to rule American
farmers, retailers and consumers. This looming debacle is further proof that the
only way to reform farm programs is to abolish them.
Mr. Bovard is the author of several
books including a new e-book memoir, "Public Policy Hooligan."
Facing the "fiscal
cliff," perhaps the president and Congress should start thinking in terms of the
"foreclosure crisis." All lenders, whether a local home-loan bank or the Chinese
government, expect to be repaid either from the borrower's income or, if that is
insufficient, from the sale of assets. Where does that leave the U.S.
government?
It seems unlikely that Washington could repay
its debts by raising more tax revenue. After all, Chris Cox and
Bill Archer reported in these pages that the Treasury could not cover the $8
trillion required to avoid going deeper into debt even if the IRS confiscated
all taxable corporate income and all the adjusted gross income of taxpayers
reporting more than $66,000.
So what federal assets could be sold to meet
debt payments? Consider the one-third of America held in federal
lands. The Bureau of Land Management administers a whopping 253
million acres. Private grazing land goes for at least $1,000 per acre. If you
add to that the oil, gas and mineral potential, that land ought to fetch at
least $2,000 per acre, or $500 billion in total.
Throw in the 193
million acres held by the U.S. Forest Service. Timber lands alone could average
$2,000 per acre. Factor in the Forest Service's oil, gas, minerals and
recreational lands, and the average acre could reasonably go for $3,000, or $570
billion total.
That is already more than a trillion dollars
from asset sales.
Then there is the Outer Continental Shelf,
land under the ocean within 200 miles of the coast, which is known to have huge
oil and gas reserves. In 2008, the Congressional Budget Office projected federal
revenues from these lands to be $10.5 billion. Using a 5% discount rate, the
present value would easily exceed $200 billion.
Then there are the crown jewels: national
parks. Disney
DIS -0.65%
might pay many billions for the 2.2 million acres of Yellowstone. Throw in
Yosemite, the Grand Canyon and the Everglades, and we might be talking another
trillion.
Why stop there?
Uncle Sam possesses any number of other assets with substantial market value,
including patents at the Pentagon and national artifacts held by the Library of
Congress and in museums. A Smithsonian yard sale would really pull 'em
in.
But surely politicians would not resort to
selling national treasures to cover debt—or would they? Over the summer,
Greece's government prepared to sell public property to raise more than $40
billion. Selling assets is what companies or governments facing bankruptcy must
do. Witness Kodak's
EKDKQ -1.08%
current effort to avoid bankruptcy by selling off its patents for $500 million.
Instead of selling public properties,
Washington politicians could start better managing their land portfolio. They
could increase revenues by charging more realistic prices for visiting the
national parks. Currently gate fees at Yellowstone are a mere $25 for a
seven-day visit. A $1 increase in the fee for each visitor to a national park
would more than offset the $218 million budget reduction the U.S. Park Service
will face if automatic spending cuts go into effect at the end of the year.
Congress could also lease more lands for commodity production, such as the
Arctic National Wildlife Refuge, which the Congressional Research Service
estimates would bring in $191 billon over 30 years.
The U.S. government is no different from a
homeowner facing foreclosure. Either it earns more money, adjusts its spending
habits or gives up its assets. Washington has few options for raising more
revenue without disrupting long-run growth, and no one wants to see America's
public treasures sold. Besides, all those sales would likely bring in only a few
trillion—not enough to keep creditors at bay for long.
That leaves only one alternative: Go on a
fiscal diet.
Mr. Anderson is president of the
Property and Environmental Research Center in Bozeman, Mont., and a senior
fellow at Stanford's Hoover Institution. Mr. Johnsen is a law professor at
George Mason University.
As the year draws to a close, we dug up our
10 favorite economic charts that ran in the Wall Street Journal this year. The
jobs market continued to dominate our graphics, but there are also looks at
consumer spending, student loans and the euro crisis. Click on any image for
full-size version.
What Drives the U.S.
Economy?
A look at what the
largest and smallest parts of the economy have been, going back to 1949.
Original article.
Beyond the Basics
Where Americans have been spending their money from
1901 to the present. Original article.
Perpetual Motion
A snapshot of people moving in and out of the U.S.
labor force. Original article.
Are You Better
Off?
A look back at the
economic performance of the U.S. during presidents’ first terms. Original article.
Duration of Unemployment
Benefits
How many weeks of
unemployment benefits does each state offer? Original article. View a slideshow of past durations.
Longest Stretches of
Unemployment
The highest
unemployment rate in the nation is a dubious honor, which states were on top
going back to 1976? Original article.
How Big Deficits Became the
Norm
The numbers behind the
U.S.’s deficits. Original article.
College Lending
Spree
Outstanding debt in
student loans outpaces all other nonhousing consumer debt. Original article.
Drought Effects
Though the cost of corn is highly volatile, overall
food prices don’t move as much. Original article.
Germany’s Role
Germany’s performance compared to the rest of the
euro zone. Original article.
Unemployment in the U. S., at 7.7%,
remains high. Unemployment in North Dakota, at 3.1%, is about as close to zero
as a state ever gets. Perhaps
it should come as no surprise that people are moving there in
droves.
North Dakota’s population grew by 2.17% between
July 2011 and July 2012, making it the fastest growing U. S. state, according to
new Census Bureau data released today.
The rapid growth is a big turnaround for
North Dakota, which was just the 37th-fastest growing state between 2000 and
2010. But by last year, its growth had picked up to make it the sixth fastest.
This year, it wasn’t even close; no other state grew by even
2%.
It’s no mystery what changed. An oil boom in
the Western part of the state has turned North Dakota into the nation’s
second-largest producer of crude, after Texas, and led to a surge in demand for
workers — not just for drillers, but also truck drivers, construction workers,
burger-flippers and pretty much every other kind of job, skilled and
unskilled.
As word of hiring frenzy spread, job seekers
began heading to North Dakota in search of work. The state’s rate of natural
population growth, change based on births and deaths alone, is right about the
national average. But its rate of net migration is the nation’s highest by
far at 16.8 new entrants per 1,000 residents. The vast majority of the new
residents came from inside the U. S.
All those new residents have brought with them
lots of economic activity. Personal income
in North Dakota grew 1.4% in the third quarter compared to the second — the
country’s fastest rate of growth. (South Dakota, which hasn’t seen oil boom,
some personal income fall 1.6% in the second quarter.) Major investors are
betting they’ll stay, too; private equity firm KKR & Co.
recently announced a major new housing development in North
Dakota.
Still, while the growth rates are high, the
absolute numbers aren’t. North Dakota is the nation’s third smallest
state, after Wyoming and Vermont, with fewer than 700,000 residents.
California, the biggest state by population, grew a meager 0.9% from
2011 to 2012 but added more than 357,000 new residents. Texas, which had the
second fastest growth rate (not counting the District of Columbia), grew by more
than 427,000 people, the equivalent of more than 60% of North Dakota’s
population.
For the country, then, the bigger story may not
be tiny North Dakota’s sudden surge but rather the gradual recovery of the much
larger states shattered by the housing bust, argues Kenneth M. Johnson, a
demographer at the University of New Hampshire.
Mr. Johnson notes that Nevada, which lost
8,000 residents to outward domestic migration in 2010-2011, attracted 13,900
more residents from elsewhere in the U. S. than it lost in 2011-2012. Other
formerly fast-growing states such as Arizona and Florida have also begun to
recover, although they aren’t growing anywhere close to as quickly as they
did during the housing boom. California’s rate of outward migration slowed
slightly.
For
the U. S. as a whole, the road to recovery likely requires more such gradual
improvement, not a North Dakota-style population boom
From the City Journal
Worry over America's recent economic
stagnation, however justified, shouldn't obscure the fact that the
American economy remains Number One in the world. The United
States holds 4.5 percent of the world's population but produces a staggering 22
percent of the world's output—a fraction that has remained fairly stable for two
decades, despite growing competition from emerging countries. Not only is
the American economy the biggest in absolute terms, with a GDP twice the size of
China's; it's also near the top in per-capita income, currently a bit over
$48,000 per year. Only a few small countries blessed with abundant natural
resources or a concentration of financial services, such as Norway and
Luxembourg, can claim higher averages.
America's predominance isn't new; indeed,
it has existed since the early nineteenth century. But where did it come from?
And is it in danger of disappearing?
By the 1830s, the late British economist
Angus Maddison showed, American per-capita income was already the highest in the
world. One might suppose that the
nation could thank its geographical size and abundance of natural resources for
its remarkable wealth. Yet other countries in the nineteenth century—Brazil is a
good example—had profuse resources and vast territories but failed to turn them
to comparable economic advantage.
A major reason that they failed to
compete was their lack of strong intellectual property
rights. The U.S.
Constitution, by contrast, was the first in history to protect intellectual
property rights: it empowered Congress "to promote the Progress of
Science and useful Arts, by securing for limited Times to Authors and Inventors
the exclusive Right to their respective Writings and Discoveries." As Thomas
Jefferson, who became the first commissioner of the patent office, observed, the
absence of accumulated wealth in the new nation meant that its most important
economic resource was innovation—and America's laws encouraged that innovation
from the outset. Over two centuries later, the United States has more
patents in force—1.8 million—than any other nation (Japan, with 1.2 million,
holds second place). America is also the leader in "triadic patents" (that is,
those filed in the United States, Europe, and Asia) registered every year—with
13,715 in 2009, the most recent year for which statistics are available, ahead
of Japan's 13,322 and Germany's 5,764.
Another reason for early American prosperity
was that the scarcity of population in a vast territory had pushed labor
costs up from the very beginning of the colonial era. By the early nineteenth
century, American wages were significantly higher than those in Europe. This
meant that landowners, to make a profit, needed high levels of productivity—and
that, in turn, meant the mechanization of agriculture, which got under way in
America before it did overseas.
The replacement of labor with capital
investment helped usher in the American industrial revolution, as the first
industrial entrepreneurs took advantage of engineering advances developed in the
fields. The southern states made a great economic as well as moral error in
deciding to keep exploiting slaves instead of hiring well-paid workers and
embracing new engineering technologies. The South started to catch up with the
rest of the nation economically only after turning fully to advanced engineering
in the 1960s as a response to rising labor costs.
The enormous American territory and the freedom
that people had to move and work across it—guilds were nonexistent in the
new country—also encouraged an advanced division of labor, which is
essential to high productivity, as Adam Smith argued in The Wealth of Nations.
And Americans' mobility had a second benefit: by allowing entrepreneurs and
workers to shift from location to location and find the best uses of their
talents, it reduced prices, following David Ricardo's law of comparative
advantage. Today, globalization has the same effect, making prices drop
by assigning the production of goods to countries that are relatively efficient
at making them. But in nineteenth-century America, the effect was concentrated
within a single large nation. Both the extended division of labor and the law of
comparative advantage reduced prices to a level lower than any seen before,
despite America's high wages.
Democracy, too, encouraged ever-cheaper
products. In Europe, an entrepreneur could thrive by serving a limited number of
wealthy aristocrats—or even just one, provided that he was a king or a prince.
Not so in the democratic United States, where entrepreneurs had to satisfy the
needs of a large number of clients who compared prices among various
vendors. America's leading
entrepreneurs haven't always been the greatest innovators, but they have been
the greatest cheapeners and tinkerers. Henry Ford didn't invent the automobile,
but he figured out how to make it less expensive—a mass product for a democratic
market, at first American and then global.
The ultimate American economic invention was
standardization, which further reduced production costs. Standardization evolved in America because consumers
there tended to share a taste for the same products and services. Companies
consequently began providing similarly priced goods and services of the same
general quality to citizens constantly on the move across the American
expanse. Not only did Coca-Cola,
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Hilton hotels, and McDonald's
MCD -0.15%
become successful companies; they became forces for stability in a remarkably
mobile society.
Immigration has been another component of
American economic dynamism, for evident quantitative reasons: national GDP grows
when total population and productivity increase simultaneously. But this effect
has worked particularly well in the United States because its immigrants have
tended to be young, energetic, and open to American
values. Immigration is a
self-selecting process: those who find the courage to leave behind
their roots, traditions, and family often have an entrepreneurial spirit.
(Indeed, prior to the emergence of the modern welfare state, it was tough to
survive in America without such a spirit.) The newcomers, from Irish workingmen
in the nineteenth century to Russian scientists in the twentieth, have
continually reenergized the economy with their skills and
knowledge.
They have also added a wild variety to
American life, which helps explain why American culture—highbrow or lowbrow,
sophisticated or pop—has dominated the world. In the cultural arena, at least, the
globalization of the modern world is actually its Americanization.
Roughly 80 percent of the movies seen in the world every year, for instance,
are produced in the United States. This surely has something to do with the
fact that, from the first days of the film industry, Hollywood's producers and
directors hailed from all parts of the globe, intuitively knowing what kind of
movies would appeal not just to Americans but to people across the
planet.
The entrenched rule of law, the absence
of guilds, the unfettered competition, the democratic mass market, the
immigration effect— Europeans took little notice of these striking American
developments or of the expansion of the American economy generally. Not until the St. Louis World's Fair in 1904,
which brought European business delegations to the United States for the first
time, did Europeans understand how far American entrepreneurs had leaped ahead
of them. According to Nobel laureate Douglass North, the fair marked a
turning point; from then on, the American economy was widely recognized as
the global leader in per-capita income and overall output.
The American drive for innovation intensified
with the growing cooperation of venture capital, business, and academia in the
twentieth century. The defining moment occurred in the 1950s, when
Frederick Terman, a dean of engineering at Stanford University, launched the
first "industrial park"—a low-rent space where start-up firms could cluster and
grow. Built on Stanford's campus, it remains in existence; many consider it the
origin of Silicon Valley. The collaborative "Stanford model" has been a
trademark of what New York University economist Paul Romer calls the New
Growth, in which the association of capital, labor, and ideas produces
economic development. New York City, hoping to spur New Growth, has just
awarded Cornell University the right to open an applied-science campus on
Roosevelt Island in the East River.
In America, the three-sided nature of
modern capitalism—capital, labor, ideas—has given the economy a sharp
competitive edge. Other countries
have tried to replicate the Stanford model, but they have little to show for it
so far, partly because the best American universities have unique advantages
in funding and in top research faculty and students. The failure to
reproduce the model elsewhere has encouraged widespread infringement of American
intellectual property, especially by China (see "Patently American," Autumn
2011). But piracy, a short-term fix at best, doesn't foster
innovation.
Another ingredient in America's recent
prosperity is the Federal Reserve's success at maintaining a stable, predictable
currency. Thanks to its relative
independence from the government, the Fed—except during its brief Keynesian
periods, such as the late seventies and the current stimulus era—has been
able to protect the dollar from politically expedient inflationary pressure.
That has encouraged Americans to invest in production. In parts of Europe, by
contrast, a long history of inflation taught residents to grab short-term
returns by speculating in money markets. Indeed, private investment is always
lower in inflationary countries than in noninflationary ones; think of
struggling pre-euro Italy versus booming pre-euro
Germany.
The American economy has also been spared
the aggressions that anticapitalist ideologues, both fascist and Marxist,
unleashed in Europe. True, Washington has diverged from free-market
principles at times, usually by imposing high tariffs on goods at the request of
industrial lobbies. But the normal, publicly accepted form of American
production has always been free-market capitalism. American investors and
entrepreneurs, unlike their European counterparts, have never lived with the
fear that the state would nationalize their investments or
factories.
The overall level of taxation has remained
lower in the United States than in Europe, and this has benefited growth as
well. Americans and Europeans spend approximately the same percentage of their
incomes on personal consumption, housing, education, health, and retirement. In
European countries, though, these expenditures are often funded through taxes;
in the United States, they're more frequently paid for by consumers making free
choices. The European redistributionist model leads to a more egalitarian
society, while the American model is based on the individual's assumed capacity
to make decisions that are right for him. The proper balance between equality
and freedom remains the subject of debate between liberals and free-market
conservatives. But free choice does appear to be more economically efficient: as
economists like Nobel laureate Gary Becker have shown, individual
investments tend to be made more rationally than collective, government-directed
investments. And when public expenditure grows, it may reduce the share of
private investment and diminish what another Nobel economist, Columbia
University's Edmund Phelps, calls the dynamism of an
economy.
Does this claim apply even to long-term
investments traditionally made by the government, such as infrastructure? Was
the Eisenhower administration's decision to fund an interstate highway network a
more rational investment than the creation of such a network through private
funding would have been? No one can know for sure. In statist France, it's
worth noting, the freeway system is privately run, funded by tolls, and in
better condition than its American counterpart. In any case, to argue
that more public spending would accelerate American economic growth is to ignore
the fact that all major European nations have higher levels of public spending
than the United States does—and that all are poorer.
A final reason for American prosperity
involves what Joseph Schumpeter called "creative destruction."
As he explained the concept in
his 1942 book Capitalism, Socialism and Democracy, for economic progress to
occur, obsolete activities and technologies must disappear (the destruction),
and capital must shift from old uses to more productive ones (the creation).
Government efforts to save or bail out companies that stick with outmoded
products, services, or management methods protect the existing order at the
expense of innovation, growth, and future jobs. European governments resist
creative destruction by means of extensive labor regulations, which economists
blame for the fact that over the long term, unemployment has been higher in
Europe than in the United States.
Slower growth rates don't account for this difference: in fact, the European
economy has at times grown faster than the American one. Of course, endorsing
creative destruction doesn't mean abandoning workers displaced by this harsh
process—and the American safety net, while much criticized in Europe and far
from perfect, has provided extended unemployment insurance for millions seeking
work.
Fixing an ailing economy can be difficult in
a democracy. Politicians running for office, pundits, and incumbent
administrations will always be tempted to promote quick fixes, which aren't
really fixes at all. Indeed, as history shows, many popular responses to
economic crises—closing borders to immigration and free trade, hiking taxes, or
printing money excessively and driving up inflation—can do incredible damage to
long-term growth.
In the current sluggish economic
environment, the remarkable history of American dynamism is thus more
instructive than ever. America's economic might is rooted in an entrepreneurial
culture and a passion for innovation and risk-taking, traits nourished by the
nation's commitment to the rule of law, property rights, and a predictable set
of tax and regulatory policies. Policymakers have lost sight of these
fundamental principles in recent years. The next era of American prosperity will
be hastened when they return to them.
Mr. Sorman, a City Journal contributing
editor and French public intellectual, is the author of Economics Does Not Lie:
A Defense of the Free Market in a Time of Crisis.
December 10, 2012
As the fiscal cliff dominates discussions in
Washington, lawmakers are looking for new sources of revenues in an effort to
reach a bipartisan agreement to reduce the deficit, says Scott A. Hodge of the
Tax Foundation.
However, some avenues of raising revenue are
better than others. Organization for Economic Cooperation and Development
economists have created a hierarchy that includes revenue raisers ranked from
least harmful to most harmful in terms of long-term economic growth. Here is how
they are ranked:
This list is determined by which factors are
most mobile and sensitive to high tax rates. For example, capital is very mobile
and likely to shift because it is sensitive to high tax rates, whereas land is
not mobile and therefore not as sensitive to tax
rates.
Source: Scott A. Hodge, "Raising Revenue: The Least Worst Options," Tax Foundation, December 5,
2012.
Previous Article / Next Article
.
Then French
President Nicolas Sarkozy warned last spring that François Hollande's "mindless
demagoguery" and eye-watering tax hikes would send millionaires running for the
border. "It could be a filmmaker, an actor, a writer, an entrepreneur," Mr.
Sarkozy told a French radio station at the time. "They will not
stay!"
Enlarge Image
European Pressphoto Agency
French actor Gérard Depardieu
Voters either
didn't believe him or didn't care. President Hollande's various tax hikes are
now set to come into effect and, voilà, there go the
wealthy.
The latest rich
Frenchman to make for the hills—or rather, the lowlands—is movie star Gérard
Depardieu, who has recently become a resident of Belgium. Specifically,
Estaimpuis, a small town less than half a mile from the French border. Per
Estaimpuis Mayor Daniel Senesael: "He adores the canal, he adores the Burgundian
castle, he adores the small butcheries, the cute little shops, the small corner
cafe." No doubt.
France has no
shortage of its own small, cute or Burgundy-related attractions. But Belgium
has a few bonus points to attract the likes of Mr. Depardieu (estimated net
worth: $120 million). Notably, Belgium has no capital-gains taxes on sales of
shares and stock, while in France the Hollande-era effective rate comes to
34.5%, versus 19% previously. Belgium also lacks any "wealth tax," which under
Mr. Hollande kicks in next year at 0.5% on assets over €800,000. Finally,
Belgium's top marginal income-tax rate, at 53.7%, is positively Reaganesque
compared to the new 75% rate that Mr. Hollande is imposing on incomes over €1
million.
Mr. Depardieu's
exit follows that of Bernard Arnault, CEO of LVMH and France's richest man,
who applied for Belgian citizenship last August. Several other lesser-known
French celebrities and businessmen have also headed for Belgium, Switzerland or
the U.S. in recent months—though officially, never for tax reasons. Maybe
they're just sick of castles.
President Obama argues that the election gave
him a mandate to raise taxes on high earners, and the White House indicates that
he won't compromise on this issue as the so-called fiscal cliff
approaches.
But tax rates are already high—much
higher than is commonly understood—and increasing them will likely further
depress the economy, especially by affecting the number of hours Americans work.
Taking into account all taxes on earnings and
consumer spending—including federal, state and local income taxes, Social
Security and Medicare payroll taxes, excise taxes, and state and local sales
taxes—Edward Prescott has shown (especially in the Quarterly Review of the
Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal
effective tax rate is around 40%. This means that if the average worker earns
$100 from additional output, he will be able to consume only an additional $60.
Research by others (including Lee Ohanian,
Andrea Raffo and Richard Rogerson in the Journal of Monetary Economics, 2008,
and Edward Prescott in the American Economic Review, 2002) indicates that
raising tax rates further will significantly reduce U.S. economic activity and
by implication will increase tax revenues only a little.
Enlarge Image
David Klein
High tax rates—on both labor income and
consumption—reduce the incentive to work by making consumption more expensive
relative to leisure, for example. The
incentive to produce goods for the market is particularly depressed when tax
revenue is returned to households either as government transfers or
transfers-in-kind—such as public schooling, police and fire protection, food
stamps, and health care—that substitute for private consumption.
In the 1950s, when European tax rates were
low, many Western Europeans, including the French and the Germans, worked more
hours per capita than did Americans. Over time, tax rates that affect earnings
and consumption rose substantially in much of Western Europe. Over the decades,
these have accounted for much of the nearly 30% decline in work hours in
several European countries—to 1,000 hours per adult per year today from around
1,400 in the 1950s.
Changes in tax rates are also important in
accounting for the increase in the number of hours worked in the
Netherlands in the late 1980s, following the enactment of lower marginal
income-tax rates.
In Japan, the tax rate on earnings and
consumption is about the same as it is in the U.S., and the average Japanese
worker in 2007 (the last nonrecession year) worked 1,363 hours—or about the same
as the 1,336 worked by the average American.
All this has major implications for the U.S.
Consider California, which just enacted higher rates of income and sales tax.
The top California income-tax rate will be 13.3%, and the top sales-tax rate
in some areas may rise as high as 10%. Combine these state taxes with a top
combined federal rate of 44%, plus federal excise taxes, and the combined
marginal tax rate for the highest California earners is likely to be around
60%—as high as in France, Germany and Italy.
Higher labor-income and consumption taxes
also have consequences for entrepreneurship and risk-taking. A key factor
driving U.S. economic growth has been the remarkable impact of entrepreneurs
such as Bill Gates
of Microsoft,
MSFT +1.39% Steve Jobs of Apple, Fred Smith
of FedEx
FDX -0.31% and others who took substantial risk to implement new
ideas, directly and indirectly creating new economic sectors and millions of new
jobs.
Entrepreneurship is much lower in Europe,
suggesting that high tax rates and poorly designed regulation discourage new
business creation. The Economist reports that between 1976 and 2007 only one
continental European startup, Norway's Renewable Energy Corporation, achieved a
level of success comparable to that of Microsoft, Apple and other U.S. giants
making the Financial Times Index of the world's 500 largest companies.
U.S. growth is currently weak, and
overall output is 13.5% lower than what it would be had we continued on
the pre-2008 trend.
The economy now faces two serious risks:
the risk of higher marginal tax rates that will depress the number of hours of
work, and the risk of continuing policies such as Dodd-Frank, bailouts, and
subsidies to specific industries and technologies that depress productivity
growth by protecting inefficient producers and restricting the flow of resources
to the most productive users.
If these two risks are realized, the U.S. will
face a much more serious problem than a 2013 recession. It will face a permanent
and growing decline in relative living standards.
These risks loom as the level of U.S. economic
activity gradually moves closer to that of the 1930s, when for a decade
during the Great Depression output per working-age person declined by nearly 25%
relative to trend. The last two quarters of GDP growth—1.3% and
2.7%—have been below trend, which means the U.S. economy is continuing to sink
relative to its historical trend.
We have lost more than three years of growth
since 2007, and our underachievement will continue unless pro-productivity
policies are adopted and marginal tax rates are stabilized or lowered to prevent
a decrease in work effort across the board. That means lifting crushing
regulatory burdens such as those imposed by Dodd-Frank, and it means reforming
immigration policies so that we can substantially increase our base of
entrepreneurs by attracting the best and brightest creators from other
countries.
Economic growth requires new ideas and new
businesses, which in turn require a large group of talented young workers who
are willing to take on the considerable risk of starting a business. This
requires undoing the impediments that stand in the way of creating new economic
activity—and increasing the after-tax returns to succeeding.
Mr. Prescott, co-winner of the 2004
Nobel Prize in Economics, is director of the Center for the Advanced Study in
Economic Efficiency at Arizona State University. Mr. Ohanian, the associate
director of the center, is a professor of economics at UCLA and a senior fellow
at Stanford University's Hoover Institution.
A
version of this article appeared Dec. 11, 2012, on page A19 in some U.S.
editions of The Wall Street Journal, with the headline: Taxes Are Much Higher
Than You Think.
The dairy industry is trying to solve a vexing puzzle:
how to revive milk sales. Per-capita U.S. milk consumption, which peaked
around World War II, has fallen almost 30% since 1975, even as sales of yogurt,
cheese and other dairy products have risen. Ian Berry has details on The News
Hub. Photo: Bozell Public Relations/AP.
In an age of vitamin waters and energy drinks,
the decadeslong decline in U.S. milk consumption has accelerated, worrying dairy
farmers, milk processors and grocery chains.
The industry "is coming to recognize this as a
crisis," says Tom Gallagher, CEO of Dairy Management Inc., a farmer-funded trade
group that promotes milk products. "We cannot simply assume that we will always
have a market."
Per-capita U.S. milk consumption, which peaked
around World War II, has fallen almost 30% since 1975, even as sales of yogurt,
cheese and other dairy products have risen, according to U.S. Department of
Agriculture statistics. The reasons include the rise in popularity of bottled
waters and the concern of some consumers that milk is high in calories.
Another factor, according to the USDA, is
that children, who tend to be heavy milk drinkers, account for a smaller share
of the U.S. population than they once did.
To revive sales, milk companies and retailers
are pushing smaller, more-convenient packages and health-oriented varieties,
including protein-enhanced milk aimed at fitness buffs.
Take a look at some of the images used to
promote milk over the years.
Mary Evans/Onslow Auctions Limited/Everett
Collection
A
poster issued by the National Milk Publicity Council.
The dairy industry is also retooling its
marketing to tout the authenticity of cow's milk and to deride fast-growing
alternatives like soy and almond milk as "imitation milk."
The decline's recent acceleration is due in
part to increases in milk's retail price, a result of the soaring costs for
grains fed to dairy cows, according to industry officials. But the depth of this
year's slide has surprised some food-industry executives because retail milk
prices have risen only slightly this year after surging 9.2% last year,
according to federal data.
Americans drank an average of 20.2
gallons of milk last year, a decline of 3.3% from the previous year and the
biggest year-over-year slide since a 2.8% drop in 1993, according to the
USDA.
So far this year, sales volume at U.S. food
retailers for all types of liquid milk, including nondairy varieties, has fallen
2.9% from a year earlier, and total dollar sales have slipped 2.2%, according to
Chicago-based market-research firm SymphonyIRI Group Inc. Sales volume for the
biggest milk category—skim and low-fat milk—has dropped 4%.
Organic milk sales are growing but account
for only about 4% of retail sales, according to Dairy
Management.
The protracted slide is troubling for
retailers, which have long sold milk at the back of the store to lure shoppers
through the aisles, often as a loss leader. "Milk is an extremely important
category for us," says Alan Faust, director of dairy and frozen products at
Kroger Co.,
KR -0.60%
the second-biggest U.S. food retailer by sales after Wal-Mart Stores
Inc. WMT -0.19%
Kroger CEO David Dillon said in a recent
interview that consumers may no longer consider milk as healthful as they once
did. So Kroger, which runs its own dairies, plans to start selling a milk brand
called CARBMaster next month that contains 20% more protein and lower sugar
content than conventional milk.
Enlarge Image
Shamrock Farms Co., an Arizona-based milk
producer, recently began selling a "muscle builder" version of its high-protein
milk, Rockin' Refuel, in partnership with retailer General Nutrition Centers Inc. GNC -1.43% With the
product, which combines chocolate milk and added protein, Shamrock is attempting
to lure consumers who buy nondairy drinks such as CytoSport Inc.'s Muscle Milk,
says Shamrock's marketing director, Sandy Kelly.
The milk industry is also trying to target busy
families with new packaging sizes and styles. Shamrock, for instance, came up
with eight-ounce, easy-to-grip bottles of calcium-enriched milk that are sold at
Subway and Arby's restaurants and targeted at children.
Meanwhile, Dean Foods
Inc., DF -0.76%
the largest U.S. dairy producer, last year introduced a low-sugar chocolate milk
for kids called TruMoo, and it sells lactose-free milk in grocery
stores.
But in a sign of how shifts in consumer
preferences are shaking up the industry, Dean Foods earlier this year spun off
its fast-growing WhiteWave division, which makes Horizon Organic milk and Silk
soy products.
The move was designed to get investors to pay
more for shares in a business unit with higher profit margins and faster growth
prospects than conventional milk.
In its marketing, the dairy-milk industry is
seeking to take some steam out of the plant-based alternatives by tweaking its
two-decade-old "Got Milk?" campaign and other advertising efforts.
Visitors to the GotMilk.com website, run by the
California Milk Processor Board, have been greeted since May with a series of
interactive games that explore the "science of imitation milk," a parody of soy,
almond, rice and other nondairy milk products.
And early next year, the industry said it plans
to expand use of the "real" seal that some dairy producers affix to milk cartons
and other dairy products.
The red, teardrop-shaped seal is aimed at
distinguishing dairy milk from plant-based products, says Tom Balmer, executive
vice president of the National Milk Producers Federation, which manages the
program.
The dairy industry may have a difficult time
winning back consumers like Dan Anderson, a college literature professor who
consumes milk only with breakfast cereal. "The last time I was a heavy milk
drinker, I was six years old," Mr. Anderson, 47 years old, said as he shopped at
a Jewel-Osco store in the Chicago suburbs. "What would you drink it with?
Spaghetti?"
Write to Ian Berry at ian.berry@dowjones.com and Kelsey Gee at kelsey.gee@dowjones.com
December 10, 2012 http://finance.townhall.com/columnists/politicalcalculations/2012/12/10/the_flat_tax_the_us_effectively_already_has
Harvard economist Greg Mankiw offered a unique
observation following the release of
the findings of a CBO study on the effective marginal tax
rates that many Americans really pay on
their incomes, after taking into account any government assistance they might
receive and the income levels at which their welfare benefits phase out:
The Congressional Budget Office has a new
study of effective
federal marginal tax rates for low and moderate income workers (those below 450
percent of the poverty line). The study looks at the effects of income taxes,
payroll taxes, and SNAP (the program formerly known as Food Stamps). The bottom
line is that the average household now faces an effective marginal tax rate of
30 percent. In 2014, after various temporary tax provisions have expired and
the newly passed health insurance subsidies go into effect, the average
effective marginal tax rate will rise to 35 percent.
Here's a chart from the CBO's report
illustrating Mankiw's observation for the effective marginal tax rates that
applied in 2012:
In 2012, the federal government's poverty
guidelines would put the federal
poverty level (FPL) at $11,170 for a single person household, at $15,130 for a
two-person household, $19,090 for a three person household and at $23,050 for a
four-person household. These values would correspond to 100% of the federal
poverty level indicated in the CBO's chart above.
But what can we do with Mankiw's observation?
Mankiw offered the following idea:
What struck me is how close these marginal tax rates are
to the marginal tax rates at the top of the income distribution. This means that
we could repeal all these taxes and transfer programs, replace them with a flat
tax along with a universal lump-sum grant, and achieve approximately the same
overall degree of progressivity.
So what if we did just that? How might you fare
under that kind of tax code? And how much money would the U.S. government
collect if we adopted a flat income tax like the one that would seem to be in
effect in practice, if not in law?
Let's find out! In our tool right here, enter the flat tax income tax rate that you might like
to see as well as the amount of a universal lump sum grant that might apply per
person. Then enter the unique data that might apply for your household and we'll
do the rest, calculating what the data you input would mean for you and for the
U.S. Treasury's coffers, outputting the data in the tables below the tool...
For estimating how much money the U.S. federal
government would collect in income taxes, we based our calculations upon the
distribution of income for U.S.
households in 2010. As such, the amount
of tax collections estimated in our tool represents how much income taxes that
the federal government might collect following a deep recession in the United
States.
Our default data of a 30% flat income tax rate
and a universal lump sum grant (or tax credit) of $4,300 per person works out to
nearly match the U.S. federal government's actual total tax collections in 2010,
which represented about 6.2% of the nation's Gross Domestic Product (GDP) for
that year.
To achieve the same results as 2010 with a 35%
flat income tax rate, the amount of the individual tax credit must be increased
to $5,500.
Putting those results into statistical context,
since the end of World War II, the federal government's tax collections from
personal income taxes has steadily averaged 8.0% of
GDP, with a standard deviation of
0.8% of GDP. Personal income tax collections of just 6.2% of GDP as were
collected in 2010 fall more than two standard deviations below the federal
government's average level of income tax collections, which is something we
would only expect to have happened in just under 2 of the 65+ years since 1945.
What that means is that the the U.S. federal
government's current income tax rates are more than capable of collecting higher
amounts of taxes in a healthier economy. That many in the federal government are
so actively pursuing higher effective marginal income tax rates today is really
an indication that they don't believe the economy is going to be getting
healthier any time soon!
Congressional Budget Office. Effective Marginal
Tax Rates for Low- and Moderate-Income Workers. [PDF document]. November 2012.
http://blogs.wsj.com/economics/2012/11/25/how-long-can-you-collect-unemployment-benefits/
When job losses skyrocketed in 2008, Congress
passed emergency measures to supplement state-level unemployment insurance
programs, which generally offer six months of benefits. At their peak, the
federally backed programs extended benefits to up to 99 weeks in some — though
never all — states. (Read related article.)
Congress has repeatedly extended the benefits
amid persistently high joblessness, but the programs have also grown more
restrictive over time. Many states no longer qualify for the most generous
programs, which are pegged to states’ unemployment rates, and Congress has also
cut back the maximum weeks available even to the states that do
qualify.
New York now offers the longest-lasting
benefits, at 83 weeks, and no other state qualifies for more than 73 weeks. In
several states, benefits now run out after less than a year. All of the main
federal programs are due to expire at the end of the year unless Congress acts
to extend them.
The following maps show the maximum duration of
benefits in each state by year. View them as a slideshow here:
In the debate
over the fiscal cliff, and beyond the politics, the president and Congress
should be asking the following question: Between the choices of tax increases
and spending cuts, which measures will hurt the economy the
most?
Over at
EconLog, George Mason University’s Garett Jones provides the
answer: Tax
increases. He looks at an IMF
paper, often used by anti-spending cuts advocates to say that spending cuts hurt
the economy, to show that actually fiscal adjustment based mostly on tax
increases will hurt the economy the most. Here is Jones:
Quick
summary of the method: The economists looked
at 173 “fiscal consolidations” in rich countries, times when governments decided
to reduce the long-run deficit. They then checked to see whether
consolidations based mostly on tax hikes turned out better or worse than ones
based on spending cuts (Inside baseball: They followed a version of
the Romer and
Romer event study methodology, but applied it to exogenous-looking
fiscal tightening instead of exogenous-looking monetary tightening). . .
.
Both GDP
and consumer spending tell the same story: Spending cuts are the less painful
path to fiscal rectitude. When countries tried to get right with the bond
markets, this IMF study found that nations that mostly raised taxes
suffered about twice as much as nations that mostly cut spending.
This is
consistent with a new paper called “The Design of Fiscal
Adjustments,” by Harvard economists
Alberto Alesina and Silvia Ardagna. Building up on their previous work, they
provide even more evidence that fiscal consolidations based mostly on the
spending side result in smaller recessions, or none at all, when compared to
tax-based adjustments. Additionally, they find that private investment tends to
react more positively to spending-based adjustments. Thus, they argue that
spending cuts are more sustainable and effective in reducing debt and raising
economic growth; expansionary fiscal consolidation is possible.
Jones continues:
The authors
give a possible (I said possible) explanation of the results:
Central banks play nice when governments cut spending, loosening up monetary
policy. They’re not as nice when governments raise taxes. I’m sure somebody
out there will say that the Federal Reserve and the ECB have run out of ammo so
we can ignore Figure 9. To those people I say QE3 and sovereign bond
purchases. Central banks
still do stuff and they do more when things look bad: In 2012, you can just read
the newspaper and you’ll see. Plus, possible. We might
want to meditate on Figure 9 out here in the reality-based community, since both
the U.S. and Europe will be spending some time this fall wrestling with how to
get our fiscal houses in order. A benevolent social planner would like to
take the least-cost path to solvency, a path probably based on spending cuts and
loose money.
Basically,
spending-based fiscal adjustment accompanied by the “right polices” (easy
monetary policy, liberalization of goods and labor markets, and other structural
reforms) tend to be less recessionary or even have a positive impact on
growth. (See this piece by
economists Alberto
Alesina and Francesco
Giavazzi.)
Congress and
the president should keep these findings in mind when drafting a “fiscal cliff”
deal: Raising taxes will hurt the economy much more than spending cuts.
And we know that spending cuts are the way to go if the goal is
to reduce our debt (I have mentioned before that economists have found
that successful
debt-reduction packages are made
of spending cuts rather than a mix
of spending cuts and tax increases.)
In light of
these findings, I find it interesting to see that the president is pushing
measures that we know will hurt the economy. That makes me wonder whether the
president thinks that:
I would be
interested in all our readers’ thoughts on this.
On the issue of
who will get blamed if taxes go up, you should read this other fantastic
piece of Garrett
Jones’s. But more interestingly, he gives an interesting perspective on the
question of who gives in during tax negotiations involving tax increase on the
rich. He writes:
Fortunately,
recent history gives us an N=1 piece of data on who blinks first when tax cuts
for the rich are on the line: Democrats. You’ll recall
that we actually faced a similar tax standoff in 2010, and I’m sure Google can
prove that plenty of left of center bloggers told the President that he didn’t
need to give in to the GOP’s demands because of some theory of human
rationality. But all the same, the President gave in. [Insert
obligatory reference to Dixit and Nalebuff's excellent treatment of
brinksmanship here.]
And remember,
President Obama didn’t even face a GOP-controlled House at that point. One
can detail the differences between 2010 and 2012 but I doubt the differences net
out to much.
Why did
President Obama cave in 2010? Why might he cave today? What does he
(probably) see that the progressive blogosphere (probably) does not?
His predictions
for this set of negotiations:
My
prediction: The outcome of the
fiscal cliff battle will be reasonably far from President Obama, Majority Leader
Reid, and Minority Leader Pelosi’s bliss points. More formally, it will be
outside their Pareto set. Boehner–a willing
compromiser–will ultimately be able
to say he kept tax rates on the rich from going all the way back up to
Clinton-era levels.
The whole thing
is here.
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