Pages

Tuesday, June 5, 2012

How a Delay in the Debt Limit Will Change America’s Fiscal Politics


By now, you know the great taxmageddon story: At the end of the year, a lame duck Congress and a new or newly re-elected president will face the confluence of three extraordinary challenges—the 2001/2003/2010 tax cuts expire, the automatic spending cuts adopted in 2010 begin to bite, and the Treasury loses its ability to borrow new money.
But what if that schedule is wrong? What if that third forcing issue—hitting the statutory debt limit—does not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck.
Here’s what might happen:
Assume President Obama is re-elected. Separating the debt limit from those other fiscal issues strengthens his hand enormously in 2012.
It makes it much easier for him to push Congress to extend the 2001/2003 tax cuts for all but those making $200,000 or more. Without the threat of a government shutdown, congressional Republicans lose their strongest leverage. And they’d have to explain why they forced a tax increase for nearly all Americans in order to preserve tax cuts for a handful of the wealthiest. Worse, they’d look like petulant losers.
The GOP hand will be weakened even more by the Congressional Budget Office’s new estimate that falling off the fiscal cliff would likely throw the nation back into recession.
Obama could, in that environment, come off as the voice of reason—the role he loves to play more than any other. He could sweeten the pot by offering a deal to delay the automatic spending cuts (which almost no-one supports) and set a date in 2013 by which Congress would enact tax reform and, perhaps, additional spending reductions. He’d try to work a debt limit extension into the mix too. But worse case, he could put it off until say, March of 2013.
The more interesting speculation, however, is about what happens if Mitt Romney is elected President. If he wins in November, there will be no living human in America more anxious to have the debt limit resolved in 2012 than Romney. He would, I suspect, give up almost anything to avoid having to face the debt limit shortly after he is sworn in. I can hardly think of a less auspicious start to his presidency than a knock-down drag-out brawl over increasing government borrowing.
Just think about it. If he asks for a debt limit increase as one of his first acts in office, already-skeptical tea partiers would abandon him in droves. If he didn’t, and allowed the nation’s borrowing authority to expire….Well, no self-respecting ex-Wall Street guy is going to do that.
As a result, a newly-elected Romney would put enormous pressure on congressional Republicans to make the debt limit issue go away. In 2012. That would mean convincing the lame duck Congress to quietly pass a one or two year increase.
Just defeated Democrats, who have spent the past year ripping Republicans for irresponsibly holding the debt limit hostage would, of course, switch roles and hold the debt limit hostage. Their price for dealing: Tax increases. Big. Fat. In-your-face-Grover-Norquist tax increases.
So watch what happens to that debt limit deadline. It could change everything.

First Thoughts: The Age of Polarization


Darren Hauck / Reuters
Citizens wait in line to cast their vote in the recall election between Republican Gov. Scott Walker and Milwaukee Mayor Tom Barrett in Wauwatosa, Wis., June 5, 2012.
Today’s Wisconsin recall is just the latest chapter in this modern Age of Polarization… What the recall results will tell us… And what they probably won’t… Sound familiar? Walker’s rhetoric on campaign trail (especially when talking about jobs) is very similar to Obama’s rhetoric… Polls close in Wisconsin at 9:00 pm ET… And don’t forget: There are four other recalls taking place in the state… Today’s other political races (in CA, NM, NJ, MT, and SD)… This week’s 10 hottest TV markets… Bill Clinton unloads on Romney… And Team Romney’s double standard on job numbers?
*** The Age of Polarization: When the political drama in Wisconsin first began more than 15 months ago, it triggered a partisan battle in the state that divided neighbor against neighbor and co-worker against co-worker -- all over union rights and the role of government. And today, that drama concludes (or at least enters a different phase) with the gubernatorial recall between Gov. Scott Walker (R) and Milwaukee Mayor Tom Barrett (D). But it’s worth noting that today’s recall in Wisconsin is just the latest chapter in this current Age of Polarization, where the ballot box doesn’t end political debates. It started, in our eyes, with Bill Clinton’s impeachment; carried over into the Bush-vs.-Gore recount, the 2003 California recall, and the aftermath of the 2004 presidential election; and it continued with the collective efforts by Republican state AGs to get the Supreme Court ultimately rule over the health-care law. And in Wisconsin, Walker didn’t want just to balance his state’s budget by reforming pensions; he wanted to crush organized labor and the Democratic Party. Meanwhile, after winning the PR battle last year, labor and state Democrats decide to punish Walker, not just by tying his hands legislatively but with this recall. It’s political combat -- and the fight doesn’t end. And it won’t end regardless of tonight’s result.


Scott Olson / Getty Images
Neighbors display signs with opposite views on the Wisconsin recall election June 4, 2012 in Beloit, Wisconsin.
*** What the recall will tell us… : We will learn some answers to these questions in today’s recall: Does Walker pay the ultimate political price for the hard-charging reforms that he and other GOP governors pursued in 2011? Or does he get rewarded? Does organized labor still pack a punch in American politics, especially after it got punched in the face first? And what's the best recipe for achieving reform -- bipartisan compromise where all sides make sacrifices, or a take-no-prisoners approach where just one side does all the sacrificing? Those are the issues at stake in the Wisconsin recall, in which Walker appears to be the favorite to win. And those are the issues that could play out again in November's presidential contest.

The Daily Rundown's Chuck Todd explains why this period of American politics will be referred to as bitter  where candidates utterly delegitimized their political opponents.
*** … and what it won’t: But here are some of the questions the recall probably won't tell us, at least not yet: Who will win Wisconsin in November -- President Obama or Mitt Romney? (If you believe that same Marquette Law School last week that showed Walker up seven points, it also had Obama ahead of Romney by eight points; we'll also see what the exit poll shows regarding the president’s standing.) How much political capital will Walker have if he wins? (Does a win strengthen him, or is it simply survival after nearly one million Wisconsin voters signed petitions to launch the recall?) By the way, it’s possible Wisconsin voters somehow send a more mixed message than the national media is likely to take away: Walker could win but face a Democratic state senate and even a Democratic LG.

*** Sound familiar? Late last week, one of us wrote about how Walker and President Obama -- despite their ideological and stylistic differences -- are pretty much using the same campaign playbook in a tough election. Examples: Turn the race into a choice rather than a referendum and tout the economic progress made, no matter how tepid it has been. So just check out what Walker said on the campaign trail yesterday. Anything sound familiar? “A couple years ago, before I was sworn in as governor, Wisconsin lost more than 100,000 jobs. In 2009-2010, we lost more than 100,000 jobs in the state, and our unemployment rate more than 9%,” he said, per msnbc.com’s Mike O’Brien. “That was a tough time. And instead, we tried to change things, turn stuff around, and last year, in 2011, we gained job. In 2012, we've already gained jobs… Since I've been governor, we've gained more than 30,000 jobs in the state. But we're not done yet.” And this: “We want to move this state forward; we don't want to go backwards. We don't want to go back to the days before, when we had double-digit tax increases, billion dollar deficits and job losses.”

*** What else you need to know: Polls in Wisconsin close at 9:00 pm ET (and 8:00 pm CST). And the gubernatorial race isn’t the only recall in the state. Lt. Gov. Rebecca Kleefisch (R) and
four
three GOP state senators who voted for Walker’s reforms also are on the ballot today. And turnout is expected to be incredibly high. “About 60 to 65 percent of Wisconsin residents of voting age are expected to go to the polls on Tuesday, the state’s Government Accountability Board said,” per the New York Times. “That would be a higher turnout than two years ago, when Mr. Walker and a wave of Republicans largely swept state and federal offices here, but not as high as the more than 69 percent turnout in 2008, when Barack Obama easily won the state.” As mentioned above, there also will be a network exit poll.


Tom Lynn / Getty Images
Gov. Scott Walker walks past media after he filled out his ballot at Jefferson School to vote in the gubernatorial recall election June 5, 2012 in Wauwatosa, Wis.


*** Today’s other races: And Wisconsin voters aren’t the only ones heading to the polls today. Five states are holding their presidential and congressional primaries. In California, we’ll see the results from its first official free-for-all primaries (where the top-two finishers, regardless of party, advance to the general election); in New Jersey, we’ll find out the winner between the Obama-backed Steve Rothman vs. the Bill Clinton-backed Bill Pascrell in that member-vs.-member race; in New Mexico, we’ll see who wins the Democratic Senate primary between Martin Heinrich and Hector Balderas; and Montana and South Dakota also hold their primaries today.

*** 10 hottest TV markets: Here’s our latest installment of the 10 hottest TV markets in the presidential contest (for the week of June 4 to June 10). Some quick notes compared with last week: Norfolk, VA remains the top market; just four states (VA, OH, IA, and NC) are on this top-10 list; Columbus, OH goes from No.4 to No.2; Cedar Rapids, IA goes from No.7 to No.3; Charlotte goes from No.8 to No.5; and Colorado Springs, CO dropped out, meaning no CO markets are on this list.

Hottest Markets for this week 6/4-6/10 and in terms of advertising points:

1. Norfolk-Portsmouth, VA (Romney/1500, Obama/825, Crossroads/630, Priorities/400)

2. Columbus, OH (Romney/1500, Obama/815, Crossroads/600, Priorities/350)

3. Cedar Rapids, IA (Obama/1600, Romney/850, Crossroads/600, Priorities/350)

4. Roanoke-Lynchburg, VA (Romney/1500, Obama/815, Crossroads/750)

5. Charlotte, NC (Romney/1500, Obama/750, Crossroads/600)

6. Richmond, VA (Romney/1200, Obama/575, Crossroads/450, Priorities/350)

7. Greensboro-High Point, NC (Romney/1000, Obama/700, Crossroads/675)

8. Cincinnati, OH (Romney/1200, Obama/600, Crossroads/550)

9. Des Moines, IA (Romney/850, Obama/550, Priorities/500, Crossroads/350)

10. Greenville-Spartanburg, NC (Crossroads/1200, Obama/950)

11. Raleigh-Durham, NC (Romney/900, Crossroads/700, Obama/575)

*** Bill Clinton unloads on Romney: The irony on all the attention that Bill Clinton going off script last week received? It brought extra attention to the tough political shot he took at Romney last night in New York. And don’t be surprised if you see the Obama camp adopt this line. “Former President Bill Clinton on Monday accused Republican presidential nominee Mitt Romney and the Republican Congress of having ‘adopted Europe's economic policies’ of austerity,” The Hill notes. More: The former president — speaking at the home of a hedge fund manager — added that ‘the politics is wrong on the Republican side, the economics are crazy.’ Clinton said Romney would be ‘calamitous’ for the country and the world. Obama, he said, has good politics, he's got a good record, he's made the best of a very challenging situation, he deserves to be reelected.”



*** Team Romney’s double standard? If you’ve been following this presidential contest over the past year, you know Mitt Romney’s central argument against Obama: The president has presided over a lackluster economy where there have been too many job losses and where recovery has been too slow. But the Obama campaign has pounced on Team Romney’s explanation for the relatively weak job growth in Massachusetts (47th out of 50 states) during Romney’s tenure as governor. On FOX over the weekend, Romney adviser Ed Gillespie said: “You take the first year which is a low base year when the governor came in and took office because it was 50th in job creation out of all of the states dead last, and moved it to 30th by the fourth year and a net job creation of 40,000 jobs… So, they are bringing down the gains of his fourth year in office which shows the real impact of his policies and diluting it with the first year in office when came into office and it was 50th in job creation.” In other words, Gillespie said, don’t count Romney’s first year; count his last. The Obama camp is up with a video highlighting what they say is this double standard.

Stephanie Cutter: The Romney Campaign's Double Standard


*** Other odds and ends: Crossroads GPS hits Obama in a new TV ad (it says the buy is $7 million)… And Team Romney is up with a web video blasting Obama.

Crossroads GPS: "Stopwatch"


Countdown to GOP convention: 83 days

Countdown to Dem convention: 90 days

Countdown to Election Day: 154 days


Rawls on a property-owning democracy


Sunday, June 3, 2012

John Rawls's critique of capitalism was deeper than has been commonly recognized -- this is a central thrust of quite a bit of important recent work on Rawls's theory of justice. Much of this recent discussion focuses on Rawls's idea of a "property-owning democracy" as an alternative to both laissez-faire and welfare-state capitalism. This more disruptive reading of Rawls is especially important today, forty years later, given the great degree to which wealth stratification has increased and the political influence of wealth has mushroomed. (I've addressed this set of issues in prior posts; link, link.) Martin O'Neill and Thad Williamson's recent volume, Property-Owning Democracy: Rawls and Beyond, provides an excellent and detailed discussion of the many dimensions of this idea and its relevance to the capitalism we experience in 2012. It includes contributions by a number of important younger political philosophers.

O'Neill and Williamson make the point in their introduction that this issue is not merely of interest within academic philosophy. It also provides a powerful conceptual and normative system that might serve as a basis for a more successful version of progressive politics in North America and the UK. Politicians on the left have found themselves locked into a defensive battle trying to preserve some of the features of welfare state capitalism -- usually unsuccessfully. The arguments underlying the idea of a property owning democracy have the potential for resetting practical policy and political debates on more defensible terrain.

The core idea is that Rawls believes that his first principle establishing the priority of liberty has significant implications for the extent of wealth inequality that can be tolerated in a just society. The requirement of the equal worth of political and personal liberties implies that extreme inequalities of wealth are unjust, because they provide a fundamentally unequal base to different groups of people for the exercise of their political and democratic liberties. As O'Neill and Williamson put it in their introduction, "Capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties" (3).  A welfare capitalist state that succeeds in maintaining a tax system that compensates the worse-off in terms of income will satisfy the second principle, the difference principle. But in the striking recent interpretations of Rawls's thinking about a POD, a welfare state cannot satisfy the first principle. (It would appear that Rawls should also have had doubts about the sustainability of a welfare state within the circumstances of extreme inequality of wealth: wealth holders will have extensive political power and will be able to effectively oppose the tax policies that are necessary for the extensive income redistribution required by a just welfare capitalist state.) Instead, Rawls favors a form of society that he describes as a property-owning democracy, in which strong policies of wealth redistribution guarantee a broad distribution of wealth across society. Here is how Rawls puts it in Justice as Fairness: A Restatement:
Property-owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality. (139)
O'Neill and Williamson draw out the implications of this view of a just society by contrast with the realities of 2012:
The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interests taking a leading role in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general.... The United Staes is now further than ever from realizing what Rawls termed the "fair value of the political liberties" -- that is, the core value of political equality. (5)
How would the wide dispersal of wealth be achieved and maintained?  Evidently this can only be achieved through taxation, including heavy estate taxes designed to prevent the "large-scale private concentrations of capital from coming to have a dominant role in economic and political life" (5).

It seems apparent that progressives lack powerful visions of what a just modern democracy could look like. The issues and principles that are being developed within this new discussion of Rawls have the potential for creating such a vision, as compelling in our times as the original idea of justice as fairness was in the 1970s.  It is, in the words of O'Neill and Williamson, "a political economy based on wide dispersal of capital with the political capacity to block the very rich and corporate elites from dominating the economy and relevant public policies" (4).  And it is a society that comes closer to the ideas of liberty and equality that underlie our core conception of democracy than we have yet achieved.

(Williamson and O'Neill provided an excellent exposition of the idea and some of the foundational questions that need to be explored in 2009 in "Property-Owning Democracy and the Demands of Justice" (link).  The concept of a property-owning democracy originates in writings by James Meade, including his 1965 Efficiency, Equality and the Ownership of Property.)

John Rawls's Critique of Capitalism

Sunday, June 03, 2012

Daniel Little:
Rawls on a property-owning democracy, by Daniel Little: John Rawls's critique of capitalism was deeper than has been commonly recognized -- this is a central thrust of quite a bit of important recent work on Rawls's theory of justice. Much of this recent discussion focuses on Rawls's idea of a "property-owning democracy" as an alternative to both laissez-faire and welfare-state capitalism. This more disruptive reading of Rawls is especially important today, forty years later, given the great degree to which wealth stratification has increased and the political influence of wealth has mushroomed. (I've addressed this set of issues in prior posts; link, link.) Martin O'Neill and Thad Williamson's recent volume, Property-Owning Democracy: Rawls and Beyond, provides an excellent and detailed discussion of the many dimensions of this idea and its relevance to the capitalism we experience in 2012. It includes contributions by a number of important younger political philosophers.
O'Neill and Williamson make the point in their introduction that this issue is not merely of interest within academic philosophy. It also provides a powerful conceptual and normative system that might serve as a basis for a more successful version of progressive politics in North America and the UK. Politicians on the left have found themselves locked into a defensive battle trying to preserve some of the features of welfare state capitalism -- usually unsuccessfully. The arguments underlying the idea of a property owning democracy have the potential for resetting practical policy and political debates on more defensible terrain.
The core idea is that Rawls believes that his first principle establishing the priority of liberty has significant implications for the extent of wealth inequality that can be tolerated in a just society. The requirement of the equal worth of political and personal liberties implies that extreme inequalities of wealth are unjust, because they provide a fundamentally unequal base to different groups of people for the exercise of their political and democratic liberties. As O'Neill and Williamson put it in their introduction, "Capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties".  A welfare capitalist state that succeeds in maintaining a tax system that compensates the worse-off in terms of income will satisfy the second principle, the difference principle. But in the striking recent interpretations of Rawls's thinking about a POD, a welfare state cannot satisfy the first principle. (It would appear that Rawls should also have had doubts about the sustainability of a welfare state within the circumstances of extreme inequality of wealth: wealth holders will have extensive political power and will be able to effectively oppose the tax policies that are necessary for the extensive income redistribution required by a just welfare capitalist state.) Instead, Rawls favors a form of society that he describes as a property-owning democracy, in which strong policies of wealth redistribution guarantee a broad distribution of wealth across society. Here is how Rawls puts it in Justice as Fairness: A Restatement:
Property-owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality.
O'Neill and Williamson draw out the implications of this view of a just society by contrast with the realities of 2012:
The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interests taking a leading role in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general.... The United States is now further than ever from realizing what Rawls termed the "fair value of the political liberties" -- that is, the core value of political equality.
How would the wide dispersal of wealth be achieved and maintained?  Evidently this can only be achieved through taxation, including heavy estate taxes designed to prevent the "large-scale private concentrations of capital from coming to have a dominant role in economic and political life".
It seems apparent that progressives lack powerful visions of what a just modern democracy could look like. The issues and principles that are being developed within this new discussion of Rawls have the potential for creating such a vision, as compelling in our times as the original idea of justice as fairness was in the 1970s.  It is, in the words of O'Neill and Williamson, "a political economy based on wide dispersal of capital with the political capacity to block the very rich and corporate elites from dominating the economy and relevant public policies".  And it is a society that comes closer to the ideas of liberty and equality that underlie our core conception of democracy than we have yet achieved.
(Williamson and O'Neill provided an excellent exposition of the idea and some of the foundational questions that need to be explored in 2009 in "Property-Owning Democracy and the Demands of Justice" (link).  The concept of a property-owning democracy originates in writings by James Meade, including his 1965 Efficiency, Equality and the Ownership of Property.)
Posted by Mark Thoma on Sunday, June 3, 2012 at 09:02 AM

House Bill Would Pay for Tax Breaks by Increasing the Number of Uninsured

Paul N. Van de Water

Posted by:

June 5, 2012 at 5:07 pm
The House will consider legislation this week to repeal the excise tax on medical devices and the limitation on the use of flexible spending accounts (FSAs) to buy over-the-counter medicines — both enacted to help pay for health reform.  The proposed legislation would also allow participants to cash out up to $500 in unused FSA balances at the end of a year.

To offset the cost of these changes, the bill would reduce in some cases the tax credits that health reform will provide to help low- and moderate-income families purchase health insurance.  This provision would cause 350,000 people to forgo coverage and make it harder for health reform’s insurance exchanges to work effectively.

In a new series of papers we explain why Congress should not repeal the medical device excise tax and FSA provisions and why the proposed offset is extremely unwise.

The 2.3 percent excise tax on medical devices is one of several new levies on industries that will gain business due to health reform.  As we previously explained, the tax will not make the medical device industry less competitive, since it applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax exempt.  Bloomberg Government has found claims that the tax would cause large job losses “not credible.”

Under another provision of health reform, starting in 2011, individuals may no longer receive reimbursements from FSAs and other tax-favored accounts for the cost of over-the-counter medications and other items — such as aspirin, cough syrup, and sunscreen — without a prescription from a physician.  Only a minority of workers benefits from these accounts, and high-income people benefit disproportionately.  Moreover, for most people, spending for over-the-counter items is minor.  About 9.8 million households used an FSA to purchase over-the-counter medicines in 2010, spending an average of just $136 — conveying a tax benefit of $14 to $48, depending on the household’s tax bracket.  Few people will find it worthwhile to pay to visit a doctor to obtain a prescription for an over-the-counter medicine.

Repealing those provisions would come with a high cost — and the solution included in the legislation would burden some low- and moderate-income people.  The proposed change in the subsidies to purchase health insurance would substantially increase the repayment charges that the Internal Revenue Service would impose at tax time on many low- and moderate-income people who received subsidies during months when their incomes were low, but whose incomes rose when they found a job or received a promotion.  For many families, the amounts they would have to repay would be more than five times higher than the penalty they would owe if they remained uninsured.  That’s why Congress’s Joint Committee on Taxation estimates that the House provision would cause 350,000 people who would otherwise purchase coverage to do without it instead.  Those who forgo coverage would be healthier, on average, pushing up premiums for health insurance purchased through the exchanges and weakening the exchanges’ ability to function effectively.

"Will Jobs Be Reshored from China?"

Monday, June 04, 2012

Timothy Taylor:
Will Jobs Be Reshored from China?, by Timothy Taylor: China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration.  ...
I was ... struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.
"The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. ... Furthermore, ...  such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. ... Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain risk, and only secondarily by total landed cost."
Posted by Mark Thoma on Monday, June 4, 2012 at 12:48 PM


Will Jobs Be Reshored from China?

 

Monday, June 4, 2012

 
China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration. 

"[T]he manufacturing competitiveness of China compared to advanced economies and low-cost geographies is eroding. Stagnant or declining manufacturing wages in the West, rising transportation costs, concerns about intellectual property protection, and Chinese wage-rate inflation have brought traditional calculations about global manufacturing sourcing strategies to a tipping point  .... Our findings debunk a myth about the future of manufacturing that has been much discussed in the press recently: that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. The reality is that the net amount of capacity coming back barely offsets the
amount that continues to be sent offshore. Our study confirms that China’s relative competitive position is indeed eroding rapidly, to the detriment of its overall economy. However, few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries."

Here is their estimate of  the gap in manufacturing costs and in "total landed cost," which includes costs of manufacturing along with costs of raw materials and components, transportation and logistics, taxes and duties, and costs of carrying inventories. China continues to have an cost advantage, but the advantage is no greater than other  emerging markets. Moreover, the Hackett Group argues that when China's advantage in total landed cost gap drops to the levels projected for 2013, it starts to make sense to think about shifting production elsewhere.


I was also struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.

"The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. ... Furthermore, ...  such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. ... Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain
risk, and only secondarily by total landed cost."

Misguided “Fiscal Cliff” Fears Pose Challenges to Productive Budget Negotiations

Failure to Extend Tax Cuts Before January Will Not Plunge Economy into Immediate Recession

June 4, 2012
 We released a new analysis earlier today that sorts through some of the fears about what policymakers and pundits are calling the “fiscal cliff”:  the income and payroll tax cuts that will expire and the across-the-board spending cuts that will take effect — all around New Year’s Day.  Here’s the opening:

The sooner policymakers enact legislation to put the budget on a sustainable long-term path without threatening the vulnerable economic recovery, the better.  But, as they prepare for an almost certain post-election "lame duck" session of Congress, policymakers should not make budget decisions with long-term consequences based on an erroneous belief:  that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on January 2 because policymakers haven't yet worked out a budget agreement.

Understanding the relationship between changes to the budget and changes to the economy is critical for making sound decisions.  Policymakers, media, and others widely refer to the tax and spending changes slated to take effect at the start of January as the "fiscal cliff."  Those changes will not produce an economic calamity, however, if the measures most damaging to the economy in the short term are in effect for only a few weeks or even a month or so while policymakers work toward an agreement.  If current law initially takes effect — causing various income and payroll tax cuts to expire on January 1, emergency unemployment insurance (UI) to expire while joblessness remains very high, and across-the-board spending cuts to kick in on top of the discretionary cuts that the 2011 Budget Control Act caps mandate — the economy will indeed start down a slope that could ultimately lead to a recession in 2013.  But that's a far cry from the economy falling off a cliff and plunging immediately into recession.

In fact, the slope would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution).  This means that if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines in its recent analysis of what will happen if the expiring tax cuts and new spending cuts take effect on a permanent basis.[1]  That is, they will have some time to work out the needed compromises and craft a budget and economic package that can support the recovery over the next few years while putting in place a balanced package of spending and revenue measures that will stabilize deficits and debt (relative to the size of the economy) over the coming decade.

Recent headlines related to CBO's analysis have fueled visions of a "fiscal cliff" that produces an immediate economic disaster, but that reflects some misunderstanding of CBO's analysis.  CBO does estimate that the budget deficit would fall by $560 billion between fiscal years 2012 and 2013 (3.7 percent of Gross Domestic Product) if policymakers let current tax and spending law take effect permanently.  And because the policy changes are concentrated around the beginning of calendar year 2013, the deficit would fall by a somewhat larger amount — 4.7 percent of GDP — if measured on a calendar-year basis, from December 2012 through December 2013.

The economic impact of such fiscal restraint would be large.  The economy would contract at a 1.3 percent annual rate in the first half of 2013, CBO estimates, before starting to grow again in the second half at a 2.3 percent annual rate.[2]   Real (inflation-adjusted) GDP would grow by just 0.5 percent from the end of 2012 to the end of 2013, and unemployment would rise.  With that outcome, the National Bureau of Economic Research would likely conclude that the economy was in recession in the first half of the year.  No one should consider that outcome acceptable.

But, much of CBO's interesting analysis is lost by focusing solely or primarily on the "fiscal cliff" scenario.  CBO's report is, in fact, about the trade-offs involved in adopting policies to avoid this worst-case short-term outcome, which policymakers almost surely will do — one way or another.  The question is whether policymakers will respond to frightening rhetoric about the immediate economic impacts of a "fiscal cliff" by simply extending current policies and postponing the hard decisions needed to restore long-term fiscal stability.  That would be a serious mistake and an unnecessary step.  As CBO states:

If policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.[3]

Ideally, policymakers would enact such a package in the next few months.  But if they cannot reach agreement by the end of the year on a balanced plan of tax and spending changes that will improve both the mid- and long-term outlook, they should continue to work on it intensively early in the next year.  Suppose policymakers could not work out such a package until January or even early February 2013 — because it took the intense political pressure that they would face after failing to reach agreement by December 31 to move them off some of their rigid positions, such as opposition to any tax increases to help reduce deficits.  That modest delay could produce a policy that is better for the economy over the mid- and long-term than another extension of current tax and spending policies.  To be sure, no one should aspire to a debate that extends into January or early February.  That will not engender confidence in our political system, and the onset of tax increases and spending cuts whose duration appears uncertain will cause confusion on the part of many taxpayers, businesses, and beneficiaries of federal benefits and services.  Nevertheless, a relatively brief implementation of the tax and spending changes required by current law should cause little short-term damage to the economy as a whole, since policymakers would surely make whatever tax and other agreements they worked out in January or early February retroactive to January 1.  Thus, the delay would withdraw little aggregate demand from the economy.

Politically speaking, such a scenario would resemble in some respects the government shutdown in the winter of 1995-96, when President Clinton and Republican Congressional leaders failed to reach agreement on legislation to fund government departments and agencies.  The intense political pressure that both sides faced once the shutdown ensued broke the impasse fairly quickly, and the sides reached agreement that limited the shutdown to 21 days.  This time, with tax increases and spending cuts taking effect under current law on January 2 amidst a still-weak economy, the political pressure to reach an agreement quickly would likely be even greater.

To be clear, the issue of what policymakers should do later this year or early next on long-term deficit reduction is distinct from whether they should act much sooner — in fact, immediately — to provide a further stimulus to an economy that shows increasing signs of weakness.  Last week's disappointing reports on economic growth and job creation, as well as growing concerns about Europe's debt crisis and an economic slowdown in China, suggest that U.S. policymakers should act through both fiscal and monetary policy to strengthen the U.S. recovery. On the fiscal front, however, they should be careful to choose policies that will be most cost effective in boosting demand for goods and services while the economy is weak without making the nation's long-term fiscal problem worse.

What Would Actually Happen in January?

The economy will not immediately fall off a cliff into recession the first week in January if the policy changes mandated by current law take effect.  But what will happen?  Table 1 lays out the major expiring tax and spending provisions and the scheduled spending cuts under the Budget Control Act's "sequestration" process; together, these changes will reduce the deficit by $483 billion between fiscal years 2012 and 2013, according to CBO.  Other factors largely beyond policymakers' control will reduce the deficit by an additional $77 billion, CBO projects, for a total deficit reduction in 2013 of $560 billion under current law.[4]

Income, Estate, and Gift Taxes and the AMT "Patch" 

Policymakers in 2010 extended through December 31, 2012 the Bush-era tax cuts, along with the 2009 Recovery Act's expansions in several tax credits.  They also limited the reach of the alternative minimum tax (AMT) in 2011 but did not similarly "patch" the AMT for 2012.  Altogether, the scheduled expiration of these provisions accounts for nearly half (46 percent) of the $483 billion reduction in the deficit between 2012 and 2013 that is due to the expiration of various tax cuts and spending increases plus sequestration (and almost 40 percent of the total $560 billion reduction in the deficit in 2013).

Table 1
Reduction in the Budget Deficit Under Current Law
Between Fiscal Years 2012 and 2013
Provision Reduction in deficit (billions of dollars) Percent of expiring tax cuts and spending increases, plus sequestration Percent of total reduction in deficit
Expiration of 2001, 2003, and 2009 tax cuts and indexing of the Alternative Minimum Tax (AMT) for inflation $221 46% 39%
Expiration of 2% payroll tax cut $95 20% 17%
Expiration of federal emergency unemployment insurance (UI) $26 5% 5%
Other expiring tax provisions $65 13% 12%
Across-the-board spending cuts ("sequestration") under Budget Control Act of 2011 $65 13% 12%
Reduction in Medicare payment rates for physicians $11 2% 2%
Total from expiration of tax cuts and spending increases, plus sequestration $483 100% 86%
Other changes in revenue and spending, including effects of economic feedbacka $77
14%
Total reduction in deficit $560
100%
Source:  Congressional Budget Office
a  Includes $105 billion of other changes in revenues and spending not due to specific policy changes (apparently primarily reflecting the effects of economic growth) plus $18 billion from revenue measures in the Affordable Care Act that take effect in 2013, minus $47 billion from the effects of "economic feedback" on the deficit (the fact that substantial fiscal restraint will slow the economy, reducing revenue and increasing spending on programs such as unemployment insurance) , and correction for rounding.


But these individual income tax changes will not reduce taxpayers' cash flow on January 1 by anything like the full revenue increase they would produce over the course of the year.  As CBO states, the immediate impact on most households' cash flow will be limited to an increase in taxes withheld from their weekly or monthly paychecks, while those taxpayers newly falling within the reach of the AMT in 2012 will not actually pay those higher taxes until they file their returns in subsequent months.[5] 

In addition, there is broad bipartisan agreement that most of the middle-class income-tax cuts should not expire in 2013 and that the AMT should continue to apply only to more affluent households.  Thus, middle-class taxpayers might reasonably expect that they would not ultimately bear any additional burden in 2013 from higher tax rates or an expanded AMT.  As long as they have reason to expect that Congress will rescind the increase in the tax rates and patch the AMT before March or April, many affected taxpayers, especially those with savings, might well maintain most (or all) of their spending over the first couple of months.[6]
For the health of the economy in 2013-14, the important issue with respect to the tax cuts is to ensure that tax cuts for low- and moderate-income households do not expire; the fate of the Bush tax cuts for the top 2 to 3 percent of taxpayers should be of little economic consequence in 2013 and 2014.  Moreover, if only the tax cuts for lower- and middle-income households are extended, high-income taxpayers will still benefit from the reduced tax rates on the full portion of their income that falls in the lower tax brackets.  CBO's analysis indicates that a cost-effective way to continue using the tax cuts to shore up the weak economy would be to extend the middle-class tax cuts for a year or two, allow the upper-income tax cuts to expire, and extend the tax-credit expansions targeted on low- and moderate-income households.  Such an approach would provide the most "bang-for-the-buck" in terms of supporting the economic recovery in 2013-14 without seriously compromising long-term fiscal sustainability.
  • As CBO says in its analysis of how different policies affect spending in a weak economy, allowing the rate increases for the top brackets to go into effect while deferring the other scheduled rate increases would be "more cost-effective in boosting output and employment in the short-run" — i.e., it would do more to increase growth and jobs per dollar of cost — than deferring all of the scheduled tax-rate increases.[7]   The reason is that higher-income households would spend a smaller fraction of any increase in their after-tax income than the typical household would.  In other words, the cost in terms of forgone short-term stimulus from allowing the top rates to rise in order to reduce the deficit would be much smaller than the cost of allowing the rates for middle- and lower-income households to increase.
  • For analogous reasons, a higher tax rate and lower exemption level for the estate tax would almost surely exert even less restraint on growth and have even less effect on the economy in 2013-14 than the very small effect from allowing the increase in upper-bracket income tax rates to take effect.
  • CBO goes on to suggest that it is far more cost effective to provide (or continue) tax cuts to lower-income households, who would be more likely than both middle-class and high-income households to spend a large share of any additional after-tax income they receive. 

The Payroll Tax Cut and Emergency Unemployment Insurance

Legislation enacted this February extended through this year the two-percentage-point cut in the payroll tax that first went into effect in January 2011 (replacing the Making Work Pay tax credit enacted in the Recovery Act).  The same legislation extended federal emergency unemployment insurance (UI) through the end of 2012 but provided fewer weeks of UI benefits to the long-term unemployed than were available between late 2009 and the end of 2011.[8]   Both provisions expire at the end of this year, and those expirations account for about a quarter of CBO's estimated $483 billion reduction in the deficit between 2012 and 2013 that is due to expiring tax and spending provisions plus sequestration (and a fifth of the total $560 billion reduction in the deficit).

Expiration of the payroll tax cut and federal emergency UI would affect households' cash flow in much the same way as expiration of the middle-class tax cuts.  A worker's weekly or monthly paycheck would be smaller due to the higher payroll tax deduction; an unemployed worker's weekly income would be lower without UI.  The impact in the first month or so would be only a fraction of the year-long impact.

CBO estimates that the effects on output and employment of the payroll tax cut's expiration would be fairly similar to those of the middle-class tax cuts' expiration.  The payroll tax cut is somewhat better targeted as stimulus than individual income tax cuts — a higher proportion goes to moderate-income workers, who likely will spend rather than save most of it — but not as well targeted as the refundable tax-credit expansions targeted to low- and moderate-income taxpayers that Congress enacted in the Recovery Act and extended in 2010.

As for letting federal emergency UI expire, CBO judges UI to be one of the most cost-effective policies for boosting output and employment in a weak economy.  Although the amount of UI spending that would be lost is much smaller than the amount of the payroll tax cut, the bang-for-the-buck of UI spending is higher.

Unfortunately, there appears to be less support in Congress for extending the payroll tax cut (or enacting a better-targeted temporary tax cut) than for extending the middle-class tax cuts.  As a result, if there is no agreement by December 31, middle-income households will be more likely to adjust their spending immediately in response to the higher deduction of payroll taxes from their paychecks than in response to a rise in income tax rates that they expect will soon be rescinded.

Although Congress has extended federal emergency UI several times since enacting it in 2008, support among lawmakers for recent extensions has been mixed, and another extension is likely to prove difficult to achieve — even though the highest unemployment rate at which federal unemployment benefits have been cut off in the past was 7.2 percent,[9] a rate no one expects the economy to be close to at the end of 2012.

In sum, expiration of both the payroll-tax cut and federal emergency UI will likely exert more of an immediate restraint on the economy than expiration of the income and estate tax cuts will.  This is because expectations will be much lower that Congress would reinstate the former in a new budget deal and because the people receiving UI and the payroll tax cut are, on average, much more likely to spend much or most of any additional income they receive.  Even here, however, only a fraction of the ultimate economic impact of those expirations will be felt in the first month or two.

Across-the-Board Spending Cuts Mandated by the Budget Control Act

In addition to imposing caps on discretionary programs that will reduce their funding by about $1 trillion over the ten years from 2012 through 2021, the Budget Control Act (BCA) of 2011 established an automatic enforcement procedure called sequestration — a form of automatic spending cuts that apply across a substantial part of the budget — that is scheduled to first take effect in January 2013.  CBO estimates that sequestration will account for about 13 percent of the $483 billion reduction in the deficit between 2012 and 2013 that is due to expiring tax and spending provisions plus sequestration (and about 12 percent of the total $560 billion reduction in the deficit).

Sequestration calls for a reduction in spending authority of $109.3 billion each year from 2013 through 2021, split evenly between defense and non-defense programs.[10]   While the limit on spending authority will be imposed at the beginning of the year, the actual reductions in spending will occur over the course of the year and into subsequent fiscal years.  Once again, only a fraction of the impact occurs in the first month or so, although expectations of the cutbacks can affect the behavior of government contractors and others in advance of the actual cuts.

Policymakers designed sequestration to prompt the Joint Select Committee on Deficit Reduction created by the BCA to propose legislation that would reduce deficits by at least $1.2 trillion over ten years, but the Joint Select Committee failed to come up with such legislation.  While sequestration is highly unpopular with lawmakers, there is no agreement at this point on what to put in its place.  The President's 2013 budget proposes eliminating all sequestrations through 2021; instead, it would achieve more than the scheduled savings through a mix of revenue increases and reductions in mandatory programs that wouldn't have a substantial impact on the most vulnerable families and individuals and would largely take effect after 2013, when the economy is expected to be stronger.  The House of Representatives has passed a bill to eliminate sequestration just for 2013 (and just for discretionary programs), replacing it with a package that hits hard at programs for low- and moderate-income people while failing to raise any revenue.[11] 

Thus, government agencies, government contractors, and others face uncertainty about how sequestration will play out.  Much will depend on the signals policymakers send about the kind of longer-run budget deal they are likely to strike and the guidance agency officials receive about how to conduct business in the meantime.

The best policy would be to replace sequestration with at least an equivalent amount of deficit reduction that occurs with much less force in the first few years and more in the later years, in order to minimize the restraint it imposes on the economy in 2013-14.

Other Tax and Spending Changes

The policies just discussed account for 85 percent of the $483 billion reduction in the deficit between 2012 and 2013 that is due to expiring tax and spending provisions and sequestration.  In CBO's accounting, the remaining 15 percent of that reduction comes from:
  • other expiring tax provisions, popularly known as "extenders" (13 percent), the largest of which is the scheduled expiration at the end of 2012 of partial expensing of investment in plant and equipment; and
  • the scheduled reduction in Medicare's payment rates for physicians (2 percent).
In addition to the above $483 billion, another $77 billion of deficit reduction in 2013 comes from:
  • what CBO calls "other changes in revenues and spending not linked to specific policies" ($105 billion), which appears to primarily reflect changes in revenues associated with the underlying growth in the economy from 2012 to 2013 and is partially offset by $47 billion in higher deficits due to the adverse economic impact from the scheduled tax increases and spending cuts; and
  • $18 billion of new revenues that will result from a few revenue-raising provisions of the Affordable Care Act taking effect in January 2013, primarily an increase in Medicare taxes on high-income taxpayers. 
The only potentially large one of these changes under policymakers' control is the scheduled expiration of partial expensing of certain business investments at the end of 2012.  CBO does not analyze the effects of this particular policy on economic growth and employment, but it argues that extending full expensing (which expired at the end of 2011) through 2012 would have had a bang-for-the-buck comparable to the payroll tax cut.  CBO also notes, however, that firms are less likely to increase investment when they have idle capacity, as they do now, and that the largest effect of this policy in spurring increased investment is likely to occur just before it expires.

The expiration of partial expensing at the end of 2012, whether on a temporary or a permanent basis, would likely impose little restraint on the economy in early 2013.  Firms hoping their business might pick up in 2013 might move up new investments to late 2012 if they expect the expiration to be permanent.  Conversely, if firms expect Congress to extend partial expensing into 2013, they might defer investments until later in 2013, waiting to see if business does indeed pick up.

Conclusion

The federal budget is expected to shrink dramatically between 2012 and 2013 if the laws governing revenues and spending remain largely unchanged.  With no action from policymakers, that sharp reduction in the deficit would slow the economy dramatically, likely creating a mild recession in 2013.

Even under that scenario, however, the economy will not go over a cliff and immediately plunge into another Great Recession in the first week of January.  Rather, most households will begin to receive somewhat smaller paychecks due to higher income tax rates and the expiration of the payroll tax cut, but the impact on their cash flow would play out over the year rather than being concentrated in January.  More important, there is bipartisan support for extending most of the middle-income tax cuts through 2013, so the impact of a temporary expiration of the tax cuts on consumer spending is likely to be modest, given the very high likelihood that lawmakers will end up extending them retroactively to January 1, 2013 if they haven't acted by New Year's Day.

The greater danger is that misguided fears about the economy going over a "fiscal cliff" into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year, rather than craft a balanced plan that supports the economic recovery in the short term and promotes fiscal stabilization in the intermediate and longer run.


 
End notes:
[1] Congressional Budget Office, Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf.
[2] CBO also estimates that if businesses and households anticipated that these changes would take place, they would take anticipatory actions that could shave 0.5 percent off economic growth in the second half of 2012.  CBO makes its baseline economic and budget estimates under the assumption that current laws generally remain unchanged.  Private forecasters are unlikely to make a similar assumption because they do not expect policymakers to allow most of the changes required under current law to actually take place.  Hence, their forecasts for the second half of 2012 would anticipate less fiscal restraint in 2013 than is in the CBO baseline.
[3] CBO, op. cit., p.2
[4] CBO estimates that the deficit would fall by $607 billion if that fiscal restraint had no effect on the economy.  In fact, however, CBO estimates that the restraint would slow the economy, lowering taxable incomes (and hence revenues) and increasing spending on programs like unemployment insurance.  These "economic feedback" effects add $47 billion to the deficit, resulting in a net reduction in CBO's estimate of the deficit of $560 billion between fiscal years 2012 and 2013.
[5] CBO states that the non-AMT changes to individual income taxes “will affect tax payments beginning in calendar year 2013, when withholding schedules will reflect those expirations,” and the increase in AMT liabilities for 2012 “will not be paid by most taxpayers until calendar year 2013, as they file their 2012 returns.” CBO, op. cit., p. 3.
[6] They would be even more likely to maintain their spending if changes to the withholding tables required by the expiration of the tax cuts were delayed or some other administrative change were taken that would leave households' cash flow unaffected in anticipation of an extension of the middle-class tax cuts.  At the moment, it's not clear that such steps would be feasible.
[7] Congressional Budget Office, "Policies for Increasing Economic Growth and Employment in 2012 and 2013," Statement of Douglas W. Elmendorf, Director, before the Committee on the Budget, United States Senate, November 15, 2011, p. 33, http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-15-Outlook_Stimulus_Testimony.pdf.
[8] For details, see Hannah Shaw and Chad Stone, "Conference Agreement Far Better for Unemployed Workers and UI System Than Original House Bill," Center on Budget and Policy Priorities, February 17, 2012, http://www.cbpp.org/cms/index.cfm?fa=view&id=3686.
[9] Chad Stone and Hannah Shaw, "Emergency Unemployment Insurance Benefits Remain Critical for the Economy," Center on Budget and Policy Priorities, November 10, 2010, http://www.cbpp.org/cms/index.cfm?fa=view&id=3320.
[10] For details see Richard Kogan, "How the Across-the-Board Cuts in the Budget Control Act Will Work," Center on Budget and Policy Priorities, revised April 27, 2012, http://www.cbpp.org/cms/index.cfm?fa=view&id=3635.
[11] Robert Greenstein and Richard Kogan, "House Budget Bills Would Target Programs for Lower-Income Families While Breaking Last Summer's Bipartisan Deal," Center on Budget and Policy Priorities, updated May 10, 2012,  http://www.cbpp.org/cms/index.cfm?fa=view&id=3767.



More on whether Romney is the Keynesian choice

at 03:50 PM ET, 06/05/2012





WWJMKD: What would John Maynard Keynes do? (JR - Associated Press)


A lot of people took Monday’s column on the Keynesian possibilities of a Romney presidency as a commentary on who they should vote for rather than as an observation on the policy consequences of gridlock. So let me put it slightly differently.

There are two variables worth thinking about in the 2012 election: Who is the president? And is Congress divided? That gives you four possible outcomes: Barack Obama can win with a divided Congress or a Democratic Congress, and Mitt Romney can win with a divided Congress or a Republican Congress. Here’s how I’d rank the Keynesian possibilities of those four scenarios, in descending order:

1) Obama and a Democratic Congress;

2) Romney and a Republican Congress;

3) Romney and a divided Congress;

4) Obama and a divided Congress.

I think the only choice on that list that’s even mildly controversial is ranking Romney and a divided Congress above Obama and a divided Congress. But Romney clearly understands and agrees with the need for short-term Keynesian budgeting, and as Jon Chait has written, “Democrats don’t have any history of opportunistically abandoning Keynesian economics when the other party’s neck is on the economic line.”

Congressional Republicans, meanwhile, do have a history of opportunistically abandoning Keynesian economics when the other party’s neck is on the economic line. Making matters worse, the Obama administration believes, rightfully, that they can’t let Republicans continuously hold the economy hostage. At some point, this brinksmanship has to end. But that means that if the GOP insists on taking us over the cliff and breaching the debt ceiling, there’s a good chance Obama will let them do it, at least so long as he’s confident they’ll be blamed. So Republicans will be holding the line for contractionary policy, and there’s a high chance of fiscal/financial disaster. That’s terrible for the recovery.

Now, let’s rank those scenarios by their probability of occurring, at least according to the In Trade market’s betting estimates:

1) Obama and a divided Congress.

2) Romney and a Republican Congress;

3) Romney and a divided Congress;

4) Obama and a Democratic Congress;

The least Keynesian outcome is suddenly the most likely outcome. The most Keynesian outcome is the least likely outcome. But Romney and a Republican Congress — the second most Keynesian outcome — remains the second-most likely outcome.

Which is the basic point of my column: If you assume the only really likely outcomes are Obama and a divided Congress and Romney and a Republican Congress, the most Keynesian outcome is probably Romney and a Republican Congress. But that’s also the outcome that’s worst for the political system’s long-term health, as it will mean the Republican Party was rewarded for the incredibly dangerous brinksmanship of the past year, and if their victory is partially because the economy slows on fears of a crisis in 2013, based on their reckless promises of more brinksmanship next year.

The overarching point isn’t that I’m telling you who to vote for — that’s not my job, and this doesn’t say anything about whose long-term policies for the economy are better, or whose Supreme Court picks would be superior, or who is more likely to go to war with Iran, to name just a few considerations you’ll want to make — but that people need to understand the role strategic gridlock is playing in our economic problems. Right now, however, neither candidate has a persuasive plan for how they’ll end gridlock going forward. The only idea with even a possibility of working is if the American people delivered a clear verdict against its practitioners at the polls.

Mitt Romney Makes the Case for ObamaCare

The rationale for ObamaCare--what we used to call RomneyCare in Massachusetts, where it has been a substantial success. Nobody wants to repeal it:
Romney Emails on Massachusetts Health Care Law  WSJ com
Romney Emails on Massachusetts Health Care Law  WSJ com 1
Romney Emails on Massachusetts Health Care Law  WSJ com 2
Romney Emails on Massachusetts Health Care Law  WSJ com 3
Romney Emails on Massachusetts Health Care Law  WSJ com 4
Romney Emails on Massachusetts Health Care Law  WSJ com 5
Romney Emails on Massachusetts Health Care Law  WSJ com 6


Around the world, cap-and-trade is still alive and kicking

at 03:32 PM ET, 06/05/2012


When the climate bill died in the U.S. Senate in 2010, most observers assumed that was the last dying gasp for “cap-and-trade” as a policy for tackling global warming. Here in the United States, it’s hard to find an environmentalist or Democrat who will even whisper the phrase anymore.


Australia’s getting in on the act. (TIM WIMBORNE - REUTERS)


 Yet cap-and-trade is very far from dead. Across the globe, dozens of countries are either enacting or studying cap-and-trade programs for their heat-trapping greenhouse gases, according to the World Bank’s 2012 Carbon Market Report. Some countries, like South Korea and New Zealand, have just recently passed full programs, in which they set a hard overall ceiling on their carbon emissions, and companies get pollution permits to trade among themselves. Other nations — from China to Costa Rica to Indonesia — are seriously considering the idea.

“A range of countries seem to have decided that this is the policy of choice for meeting their emissions goals,” says Jennifer Morgan of the World Resources Institute. Here’s a rough grouping of the countries detailed in the World Bank report:

Countries or regions that have already passed cap-and-trade: This includes the European Union, Australia, New Zealand, South Korea, California, and Quebec. They’ve all set hard limits on a significant portion of their carbon emissions. (Different countries have different targets and exemptions for various sectors.) This is a sizeable chunk of the planet: By my calculations, these countries and regions represented roughly 19 percent of the world’s carbon emissions in 2008.

Countries that could shift to cap-and-trade this decade. Mexico and Brazil have both recently passed laws to significantly slow their rate of emissions growth by 2020. (Brazil’s target is voluntary.) They’ve both set up task forces to study various ways to achieve this, with cap-and-trade as an option. Japan, for its part, has set up a limited cap-and-trade scheme for Tokyo and has a voluntary carbon-trading scheme at the national level that has slightly curbed emissions.

Meanwhile, China is setting up its own regional cap-and-trade systems in several of its provinces and is looking to set up a national program by the end of the decade. Jennifer Morgan says that her organization, WRI, recently hosted a Chinese delegation in the United States to study California’s climate program, as well as the small cap-and-trade system for electric utilities in the Northeast. While China’s program likely wouldn’t shrink the country’s overall level of emissions, it would at least slow the country’s ferocious growth in greenhouse gases.

Countries that are still pondering the idea. According to the World Bank report, there are at least 14 developing countries that are in various stages of study. Chile, Costa Rica, Indonesia, Thailand, and Jordan are all developing some sort of “crediting mechanism.” South Africa has a carbon tax that could well be converted to a cap-and-trade program.
Add these programs all up, and it’s potentially quite significant. Right now, about 6 percent of the world’s greenhouse-gas sources are capped and traded. By the end of the decade, according to some estimates, that could rise to as much as one-third of all emissions.

Many of these countries could eventually link together — Australia’s climate-change minister, Greg Combet, has suggested that eventually South Korea, Australia, New Zealand and China could cooperate on some sort of pan-Asian carbon-trading system. And, the World Bank notes, there’s still plenty of demand for carbon-offset projects in the developing world under the U.N. program. All told, the global carbon-trading market rose to a record $176 billion in 2011.

To be sure, there are still plenty of concerns about carbon trading. For one, carbon prices in Europe have collapsed with the recession down to $8 per ton, which gives companies little incentive to invest in clean-energy projects. (Of course, one argument is that this is how cap-and-trade should work — when there’s a recession and pollution is way down, then companies should get a reprieve from cutting.) Critics have also questioned whether the United Nation’s carbon offsets really work, or whether they’re just funding projects, like reforestation, that might have happened anyway.

That said, cap-and-trade is still garnering plenty of interest in most of the world — even if the idea’s verboten here in the United States.