Minor Thoughts from me to you

From Keith Hennessey:

Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.

Keith argues that infrastructure spending isn't useless but it does face a lot of problems that prevent it from quickly creating jobs. It's not a great "investment in America".

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Michael Solon, writing in the Wall Street Journal:

Why? A more progressive tax code now leverages the negative impact of slow economic growth. The share of all individual income taxes paid by the top 1% has risen to 41.8% in 2008 from 17.4% in 1980—but almost two-thirds of the income from the top 1% comes from nonwage income, including capital gains, dividends and proprietor's profits.

Individual income taxes as well as corporate taxes are now far more rooted in the shifting sands of volatile business income and capital profits rather than in the terra firma of wage income that stabilizes payroll taxes. From 1960 to 2000, payroll taxes were never lower than in the previous year, individual income taxes dipped only twice, and corporate taxes dropped 11 times. Since 2000, individual income and corporate tax revenues dropped five times, while payroll taxes fell twice. Not only do revenues from individual tax returns drop more often now. They fall more severely, with recent collapses of 14%-20% versus the 3%-5% range before 2000.

If "the rich" pay all of the taxes (and they pay a massive share in the U.S.) than tax revenues will be directly tied to the fates of the rich. Right now, the federal government needs high income earners to continue earning high incomes. As soon as the high incomes take a hit, tax revenue takes a massive hit.

We now have a government that has a massive incentive to ensure that "the rich" never see their incomes drop. We might have a more just government if we evened out the tax code, so that income taxes were spread more broadly and more evenly over the entire country instead of being concentrated over a very small portion of the country.

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Lara Seligman, for The Hill:

55 percent of likely voters opted for a plan that would slash $5 trillion in government spending, provide for no additional tax revenue and balance the budget within 10 years — in essence, the path recommended by House Budget Committee Chairman Paul Ryan (R-Wis.) last week.

...

However, as soon as respondents heard the words “Republican” and “Democrat,” the picture changed drastically. A plurality of voters, 35 percent, said they trust the Democrats more on budgetary issues, while 30 percent said they trust the Republicans more. A full 34 percent said they trust neither party. 

These findings buttress the impression that the Republican label itself incites mistrust among many voters.  

Fiscal conservatives either need to figure out how to fix the GOP's image problem or else we need to figure out how to fight under another banner.

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Matt Yglesias, not known as a Republican booster, defends Mitt Romney's tax rate.

The main reason Romney's effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That's something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Romney. And Romney himself as a rich guy who's also a member of the political party seen as favoring the rich, and who's been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy.

But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

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Garett Jones talks about speed bankruptcy as an alternative to bank bailouts. I like this idea—especially if the alternative is bank bailouts.

When a corporation's assets appear to be worth less than its liabilities--for whatever reason--the economists' normal solution (as discussed last week) is for the bankruptcy judge to legally convert the bank's rigid debt claims into flexible equity claims. That's corporate bankruptcy in one sentence.

In a financial crisis, when megabanks are supposedly too big and too complicated and interconnected to wait for a formal, years-long bankruptcy process, I recommend doing the debt-to-equity conversion of the course of a weekend: I call this speed bankruptcy. I wrote a short piece on this in Fall 2008 here, a later academic version here.

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Veronique de Rugy talks about the immense size of our deficit and the impossibility of paying it off by raising taxes on "the rich".

This is where the middle class comes in. Politicians know the real potential for tax revenue lies with the middle class. Middle-income Americans far outnumber the rich and, at least for now, are taxed at relatively low rates. But even if we tapped the middle class, we’d have to raise tax rates by a staggering amount.

To balance the budget, we’d have to triple tax rates on every household earning over $100,000. Alternatively, we could merely double tax rates, but we’d have to do it on every household earning over $75,000. Not only are there not enough rich households to tax, there are barely enough middle-income households.

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Economist Veronique de Rugy.

I have written a few times in the past about the growing evidence that, contrary to common belief, a political party that implements ambitious reforms or spending cuts won’t be punished by voters in the next election. In fact, it may even be rewarded.

Among other studies, there is a Goldman Sachs Global Economics study by Ben Broadbent called “Fiscal tightening need not be electorally costly, but it will test government unity.” It shows that spending cuts can actually be a good thing politically. “It is commonly assumed that cuts in government spending will be both economically painful and electorally costly,” he writes. And:

Neither is borne out in the data. We’ve written before about the limited (and sometimes positive) effects of spending cuts on economic growth, at least in open economies. Here we add some simple analysis on the electoral consequences and, like others, find no evidence that spending cuts reduce support for the incumbent government. If anything the opposite tends to be true.

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Arnold Kling offers some perceptive words Congressional budgeting and campaign rhetoric.

Because the budget is so far from being sustainable, budget rhetoric needs to be re-interpreted.

When their side refuses to cut spending because it would be "cruel," they are ensuring that future spending cuts will be even crueler.

When our side refuses to raise taxes, we are ensuring that future tax increases will be higher.

Until the baseline is a sustainable budget, the rhetoric will be the opposite of reality.

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Tim Geithner (aka the tax cheat Treasury Secretary) wrote an op-ed in the Wall Street Journal, defending the new financial regulations. I think he better illustrated the perils of the passive voice, however.

A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity. The derivatives markets grew to more than $600 trillion, with little transparency or oversight. Household debt rose to an alarming 130% of income, with a huge portion of those loans originated with little to no supervision and poor consumer protections.

A "shadow banking system had developed"? Just like that? All by itself? I think there might be some interesting history about why various people started trading and banking outside of the normal system. What incentives did they have to do that? What was wrong with the normal system?

Why were these shadow bankers so interested in inherently risky financial activity? Did they feel constrained by existing restrictions and regulations? Did they feel driven by some kind of requirements to see out excessive risk?

Why did the derivatives market grow so large? What benefit did bankers see in trading so massively in derivatives? Was there a reason that they couldn't trade more directly?

What did households choose to grow their debt so dramatically? What factors made them feel that large levels of debt were both safe and desirable?

These are just a few of the potential questions that people might ask, if Geithner had used the active voice. It's a good thing then that he used the passive voice to defend the administration's priorities.

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Zygi Wilf, Minnesota governor Mark Dayton discuss new Minnesota Vikings stadium - ESPN

When Gov. Mark Dayton and state lawmakers announced that the outlines of a new budget deal were in place, the Minnesota Vikings were hoping that the door was finally open to discuss their plan for a new $1 billion stadium in the Twin Cities suburbs.

It may not be quite that simple.

Vikings owner Zygi Wilf spoke with Dayton on Friday, telling him in a phone conversation that the team wants a stadium bill to be considered in a special legislative session expected to begin next week, according to Vikings vice president for stadium affairs Lester Bagley.

"He made the case that now is the time," Bagley said. "We've done everything that has been asked of us. It's time to do it. We're down to months left on our lease and every day that goes by, the cost of the project goes up."

… Arden Hills is about 10 miles north of the Metrodome in downtown Minneapolis. The new facility would be located at the site of a former Army ammunition plant with plans to open in spring 2015.

Wilf and the Vikings have pledged more than $400 million to the project, which also calls for a half-cent sales tax in Ramsey County that would contribute another $350 million and $300 million in state money.

This is just disgusting. Depending on where you Google, Zygi Wilf is worth somewhere around $300 million and the Vikings franchise itself is worth around $700 million. If he wants a new stadium, he has several options:

1. invest more of his own fortune and the team’s worth into the new facility
2. ask the team’s fans to invest into the facility in exchange for benefits (priority access to available tickets? special access to memorabilia?)
3. Get banks or investors to loan or invest the needed funds

The Vikings are a cash generating franchise. If a new stadium is a good investment, Wilf shouldn’t have any problems obtaining the funding he needs. If a new stadium isn’t a good investment, Wilf shouldn’t be demanding that the Minnesota taxpayers fund his boondoggle.

It’s disgusting the way that he’s demanding that a state that’s struggled to close a $5 billion budget hole turn around and give $300 million in state money and $350 million in county money to his privately owned business. I hope the state legislature smacks him down and shuts the door on his demands.

As changes to collective bargaining powers for public workers take effect today, the Kaukauna Area School District is poised to swing from a projected $400,000 budget shortfall next year to a $1.5 million surplus due to health care and retirement savings.

“These impacts will allow the district to hire additional teachers (and) reduce projected class sizes,” School Board President Todd Arnoldussen wrote in a statement Monday. “In addition, time will be available for staff to identify and support students needing individual assistance through individual and small group experiences.”

The district anticipates that elementary class size projections for next year will shrink from 26 students to 23 students. Class sizes for River View Middle School are expected to fall from 28 students to 26 students.

Kaukauna High School classes could be reduced from 31 students to 25 students.

Huh. That’s certainly … unexpected.

(Hat tip to Glenn Reynolds, Ann Althouse, and the Milwaukee Journal Sentinal.)

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You may have seen charts floating around that supposedly show that we could pay for the Social Security shortfall by simply rolling back the Bush tax cuts “for the rich”. Megan McCardle has seen those charts too and she explains why they’re misleading and wrong.

The CBPP gets its figure by taking present values of the Bush upper income tax cuts extended over 75 years, and comparing them to the present value of the Social Security shortfall. For those who haven't taken finance classes, present values are sort of like compound interest, in reverse. Instead of adding up the future gains from interest rates, you discount future cash flows by a discount rate.

… Because it discounts future dollars, often quite heavily, cash flows which happen beyond 10-20 years out virtually disappear.

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The Tax Foundation crunches the numbers to see if it’s true that “the economic downturn, President Bush's tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years.”

1) Tax revenues have fluctuated largely with the economy, dropping precipitously in the aftermath of the 2008 recession, but are projected to remain close to historical norms with or without expiration of the Bush tax cuts in 2012.

2) Entitlement spending has roughly doubled in the last 40 years as a percentage of GDP and is projected to remain there through 2021, pushing total spending well above any historical precedent. Thus, the CBO projects deficits as far as the eye can see.

Should we blame Bush (or rather, all that happened during his presidency) for this? In a sense, yes, but not for the reason the CBPP would have us believe; the role of Bush-era policies in the projected deficits is mainly on the spending side of the equation, not the tax side.

We have a spending problem, not a revenue problem.

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Everyone thinks that we needed to bail out the failing U.S. banks lest they collapse and, in their collapse, take down both the U.S. economy and the international economy, plunging the world into a new Great Depression and (potentially) a new Dark Age.

As it turns out, maybe not. Ásgeir Jónsson explains that Iceland allowed their banks to collapse for the simple reason that they couldn’t afford to bail them out and no one else was interested in taking on the job. Today, Iceland’s economy is growing and Iceland’s banks are healthy once again.

Three years ago, Iceland forced its over-leveraged financial sector into a painful debt restructuring instead of bailing out its banks. The government had no other choice: Icelandic banks' assets totalled roughly 1,000% of GDP, and in the world's smallest currency area, no less. The central bank could not take on the role of lender of last resort without igniting a currency crisis.

Critics dubbed this response disastrous, and Iceland served as the cautionary tale of an "Icarus economy" whose banks had grown too big to save.

I remember this. I distinctly remember being in a doctor’s office, reading an article about the Icelandic economy, the massive levels of money in the banks, and the complete inability of the government to deal with the looming crisis. The tone of the article (probably in either Time or Newsweek) was apocalyptic.

Instead, we see now that Iceland and its banks both recovered. The medicine of bankruptcy didn’t taste good but it worked.

It is becoming clearer by the day that too many of Europe's banking crises were initially misdiagnosed as liquidity, rather than solvency, problems. For some countries, most notably Ireland, the policies prescribed for that misdiagnosis have transformed banking crises into sovereign-debt crises.

Europe's bailout path has only diverted ever-more resources to failing enterprises, postponing and deepening the problem. Iceland's restructuring was both painful and costly for the population, but the government did not throw good money after bad, and the taxpayers were spared a nationalization of private debts. Is it any wonder that forward-looking financial markets are now betting on the Icelandic recovery?

It’s hard not to think that we’d be in a better place if we’d done the same thing.

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Alan Reynolds is great in explaining the income tax facts of life. Higher tax rates on the rich do not bring in nearly as much revenue as lower tax rates. It’s important to emphasize that tax rates are not the same as tax revenues. Higher rates do not automatically bring higher revenues. In fact, historically, the opposite has happened.

Moreover—and this is what Mr. Reich and his friends always fail to mention—the individual income tax actually brought in less revenue when the highest tax rate was 70% to 91% than it did when the highest tax rate was 28%.

As the nearby chart shows, however, those super-high tax rates at all income levels brought in revenue of only 7.7% of GDP, according to U.S. budget historical data.

President John F. Kennedy's across-the-board tax cuts reduced the lowest and highest tax rates to 14% and 70% respectively after 1964, yet revenues (after excluding the 5%-10% surtaxes of 1969-70) rose to 8% of GDP. President Reagan's across-the-board tax cuts further reduced the lowest and highest tax rates to 11% and 50%, yet revenues rose again to 8.3% of GDP. The 1986 tax reform slashed the top tax rate to 28%, yet revenues dipped trivially to 8.1% of GDP.

The rest of the article is chock full of interesting facts on the link between tax rates and tax revenue.

I don’t think it can be repeated nearly often enough: if you want the rich to pay a lot of taxes, you should probably keep their rates low. Ignore what Warren Buffet says in favor of watching what Warren Buffet does. If you raise his tax rates, he’ll probably just shift his money and income around, so that his effective rate of taxation remains nearly the same.

(And, if he really wants to pay more in taxes, he can cut a check to the IRS anytime he wants to.

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William Voegeli takes on the idea that “it’s absurd to cut spending because we tax the wealthiest Americans less today than we did in 1955”.

First he illustrates that today’s rich pay more in taxes than the rich of 1955 did. (They pay more in real dollar terms, even if they do pay less in percentage terms.) Then he cuts to the core of the moral argument.

If the principle is that the rich should pay higher taxes because they can more easily bear the rates, then we should keep raising tax rates until the rich can no longer bear them—until, that is, they're no longer rich. One need not be rich to find this prospect disquieting. A government that can take whatever it wants strikes a lot of people as unfair, and unfree.

He also points out that (many) blue states are net federal taxpayers while (many) red states are net federal tax recipients because “states with wealthier residents pay higher federal taxes per capita thanks to the progressive structure of the income tax”. If you don’t like the idea of states subsidizing each others’ residents, you need to scale back (or eliminate) the progressivity of the federal income tax.

I like this welfare reform idea too.

Buckley would confine eligibility for [Federal] welfare state programs to Americans living in states whose median income was below the national average. Because Buckley thought it was economically and politically debilitating to "turn the skies black with criss-crossing dollars," his reform would ground a lot of those dollars. Federal welfare expenditures would shrink, as the number of people eligible for them was limited, and prosperous states would pay for their own welfare programs without the transit and administrative fees of sending them on to Washington and then back to the states.

This reform would do much to take power away from Washington, D.C.

Only the poorest states would receive moneys from Washington. The more well to do states would spend their own money on welfare programs. Of course, they do that today too. But right now, that money goes through Washington (in the form of federal income taxes), where policitians get to attach rules and conditions to it, before sending it back to the states (as Medicaid payments or transportation funds or something else). If this reform were implemented, policitians would have many fewer opportunities to meddle and states would have a much greater freedom of action. That’s what I call a win-win scenario.

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This is a terrific program to cut.

Because, despite all the good intentions behind Head Start, the program is not working. It is failing to make any significant difference in the educational advancement of low-income children.

And that’s not based on a study from a partisan group or an ideological think tank. That’s the conclusion drawn by a 2010 study conducted by the Department of Health and Human Services, which reported that “by the end of 1st grade, there were few significant differences between the Head Start group as a whole and the control group as a whole for either cohort.”

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The grand total of the combined net worth of every single one of America's billionaires is roughly $1.3 trillion. It does indeed sound like a "ton of cash" until one considers that the 2011 deficit alone is $1.6 trillion. So, if the government were to simply confiscate the entire net worth of all of America's billionaires, we'd still be $300 billion short of making up this year’s deficit.

That's before we even get to dealing with the long-term debt of $14 trillion, which if you're keeping score at home, is between 10 to 14 times the entire net worth of all of the country's billionaires, combined. That includes the all-powerful Koch brothers ($40 billion between them), the all-powerful George Soros ($14.5 billion), all the Walton family (of the Wal-Mart fortune), Steve Jobs, Oprah (at a paltry $2.7 billion), the Google Founders, Michael Bloomberg, and the Mars family (of the candy bar empire).

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The U.S. ran a $233 billion deficit, just in February alone. Fun fact:

As noted in the Washington Times, the GOP's proposed $61 billion in spending cuts is about 27 percent of the monthly deficit, while the Democratic plan — $6 billion — is just 3 percent of that figure.

Senator Rand Paul wants to cut $500 billion from the budget. No one in Washington is taking him seriously. And, yet, his proposal would still leave us with a budget deficit for 10 months out of the year.

Are there any adults in Washington? Any at all?

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Scott Walker has intended to cut state spending by $2.4 billion all along. The Budget Repair Bill, that limits collective bargaining, was intended to give local governments more tools to reduce costs besides just eliminating programs.

Christian Schneider details some of the ways that Walker's repair bill will help cut costs.

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