Wednesday, December 17, 2008

Feminist Bean Counters to the Rescue

Two aspects of Obama's economics and other early appointments and pronouncements have troubled me for some time but this afternoon's advance announcement that Ray LaHood, a mediocre white male Republican from Illinois, will be appointed Secretary of Transportation in the morning has finally pushed me over the edge and compels me to post an item.

Two warning signs in Obama's early appointments that women would not be treated well in the senior most positions and that women's needs would not be seriously assessed in policy discussions were the appointments of Larry Summers and Rahm Emmanuel. Neither is known for their commitment to enhancing equal opportunity for women. Having Emmanuel as the ultimate gate keeper in the White House was a bad sign for all future appointments, and having Summers as the inside-the-White-House-czar of economic policy was a bad sign for the content of economic policy, at least as far as meeting women's needs goes.

So what has happened since these major bad signs in the immediate post November 4 period? Of 15 department secretaries, 14 have been announced: 12 are men and 2 are women, for a ratio of 14 percent--lower than women's share of Congress (which itself puts the US at the bottom of countries of similar economic standing). The Department of Labor position is still open. Let us hope that it is filled with a better choice with regard to expertise and commitment to equal opportunity.

In the context of the economic disaster that is upon us, these last two jobs, transportation and labor, are very important to the success of the economic recovery program, to make sure grants and contracts are efficiently and fairly let and appropriately monitored. And to make sure women and women -owned businesses get their fair share of the new work created. Sure, you don't need to be a woman to be a feminist and you don't need to be a feminist to make sure women are treated fairly, but all the research evidence suggests it helps. And the construction industry is not known for equal opportunity for women. Moreover, our last great publicly-funded economic recovery program was also not known for equal opportunity for women--in the great depression of the 1930s women were dismissed from jobs and they got very, very few of the new public works jobs made available.

Feminist economists and other academics have been buzzing about the need for a fair economic recovery program for more than a month. Somehow, discussion of creating jobs in education, child care and health care seemed to morph overnight in Obama's language to almost exclusive focus on jobs in transportation infrastructure and retrofitting buildings to be more energy efficient. Jobs in health care have become jobs to computerize records. Unless health care, education, and early care and development SERVICES are expanded, or jobs are created in other areas in which a substantial number of women have trained for and work in, women will not get a share of jobs commensurate to their share of unemployment (which was 42% in the third quarter of 2008). Economist Randy Albelda had an op ed in the Boston Globe in November on these points. Petitions making the same arguments have recently been circulated among historians and economists as well as networks of academics and activists working on caregiving issues (see The Take Care Net and Institute for Women's Policy Research websites, and These experts believe the economic recovery will not be successful unless women have access to a fair share of the employment and business opportunities, in areas both traditional and nontraditional for women. Moreover the petitions and their signers stress the need for good-quality jobs, jobs that include not only decent wages and health insurance but also family friendly benefits like paid sick time. With women 46 percent of the labor force, it would be folly to ignore job creation for them or to fail to create the kinds of jobs that can truly move our country forward.

One good sign is that on Friday the Obama Transition Team is slated to meet with leaders of women's organizations to discuss the economic stimulus package and proposals for economic recovery. I wonder if senior members of the economic team will be at the meeting and if, in view of appointments like Ray LaHood, which seemingly came out of nowhere with no discussion, everything isn't already a done deal. Several pundits have commented that so far neither Obama's appointments overall nor his recovery proposals give Americans anything to get positively excited about--there's no big vision in the recovery plan (nothing to capture the imagination). And there's not even basic competence in the appointment of Ray LaHood.

Of the 14 secretary appointments so far, 5 are minority men. There is not a single woman of color appointed to head a major department. Whoa. Why did I title this entry "feminist bean counters to the rescue"? I'm hoping another positive development will occur: that the person appointed to head the Labor Department will actually be a champion for workers of both genders and all races and ethnicities. I'm even hoping the ridiculously inept nomination of Ray LaHood can be stopped. There are many Republican policy makers who could make a substantive contribution at Transportation: Ray LaHood is not among them. And there are many women with expertise in transportation who could make a significant contribution to the economic recovery. If he gets that far, Ray LaHood is likely to serve as the joke of Obama's cabinet.

Moxie Momma

Saturday, November 22, 2008

Geithner, Grace Under Pressure

While I was somewhat disappointed that Summers won't be tapped to run Treasury, I'm very relieved that it will be Geithner.

Jeff Frankel, who was in Geithner's presence yesterday --presumably when he got the call from Obama-- describes him as a cool customer and as a strong choice.

I enjoyed reading this piece by Noam Schreiber that paints a pretty nice picture of Geithner (h/t Steve Benen, more here). I can't begin to imagine his smarts if Rubin and Summers relied on this guy despite his relatively minimal training or background in finance and economics.

Monday, November 17, 2008

Fourteen Black Paintings

Since Jonah posted about's new song, I thought I'd share as well.

I put on Peter Gabriel's "Us" (link is to rhapsody) the other day and thought about Obama while listening to "Fourteen black paintings":

From the pain come the dream
From the dream come the vision
From the vision come the people
From the people come the power
From this power come the change

Saturday, November 15, 2008

Right now, we need Summers

Jeff Frankel bets Obama will pick Summers for Treasury. I know there are many in the progressive blogosphere with strong negative feelings about Summers but I have to say that I think it would be a wise choice by Obama --assuming Obama feels he can personally get along with him.

The bottom line for me is that right now, the Treasury Secretary will likely be the second most powerful position in the administration. During this period of financial crisis we need someone who has a deep intellect and a sophisticated understanding of the interplay between macroeconomics and financial markets. Right now, we simply cannot afford to have anything less than the best person for the job. If we just focused on this criteria and put aside Summers' history of making offensive comments I think there's a compelling case for Summers.

Summers is by all accounts one of a small group of leading intellectual thinkers about macroeconomic policy. For those who are Krugman fans, Summers is one of a few who are at Krugman's level of intellect. (Krugman, in my view is simply not at all temperamentally well suited to be a Treasury Secretary). In addition to his intellect, Summers brings tremendous real world experience having already served at Treasury during the peso crisis and during the Asian financial crisis. Although he bears some responsibility for being involved in some of the missteps of the 1990s e.g. the financial deregulation that helped lay the foundation for the current financial crisis, I think that he probably has a deeper understanding of these mistakes than most of his critics and is not ideologically driven to defend them or repeat them.

I was somewhat reluctant to write this post not only because of Summer's controversial comments but also because I doubt it will make all that much difference to the currently severe economic conditions we are facing. Summers will certainly not be a savior. I see Summers as more of an insurance policy, as a way of minimizing the downside risks rather than dramatically changing the current situation. Two years from now we do not want to be engaged in second-guessing whether or not Obama picked the most capable person for the job.

Until recently, my feeling has been that if there was a fresh young talented person who say resembles a Larry Summers of 20 years ago who could serve as a strong Deputy under a Volcker or Tyson, that this might be a satisfactory alternative. Maybe such a person exists but I certainly don't know who it is. As for Geithner --he wouldn't be bad but I think we're well served with him remaining at the Fed.

Tuesday, November 11, 2008

Obama Campaign Photos

There are many great sites out there celebrating President-elect Obama's victory. Here's one of my favorites: professional photographer Scout Tufankjian's photos from two years of following the campaign.

Sunday, November 9, 2008

The Fair Model and the Crisis

I've been trying to figure out a way to argue the case for more short-term stimulus in a way that might appeal to those worried about deficits over the longer term. It is likely that a stimulus that reduces the duration and intensity of the recession will result in a lower national debt over the medium-term horizon (say, 5-10 years). This is because the longer and deeper the recession is, the more government revenue will suffer.

I thought to run Ray Fair's macro model to quantify what government debt might look several years in the future, with and without a stimulus package now. Empirical forecasting models like this one suffer from the Lucas critique, but they're the best we have.

My intents were stymied, however, by the fact that the most baseline run of the model doesn't forecast a severe recession. Here's what the model's forecast memo of October 30 says:

Real GDP Growth and the Unemployment Rate: The model is predicting no growth in the next two quarters, 1.7 percent in 2009:2, and 2.3 percent in 2009:3. The unemployment rate rises to 6.9 percent in 2009:3.
The negative wealth effect from the fall in stock prices ... is one of the reasons the model is predicting no growth for the next two quarters. There is, however, nothing in the initial conditions and likely paths of the exogenous variables that suggests there is going to be a deep and prolonged recession. It may be, of course, because of the current financial crisis that consumers and investors are concerned enough or restricted enough in their ability to borrow that they decrease their spending by huge amounts. These potential "animal spirits" and "credit crunch" effects are not the type that the model can capture. If, for example, people have been spooked by the dire warnings of policy makers and significantly cut back their spending, the economy could be much worse in the next few quarters than the model is predicting.
Real housing prices are exogenous in the model, and the baseline scenario has prices continuing to drop slowly and stabilizing at about 5% below current values. I tried running the model with a bigger decline in housing prices (which creates a larger wealth effect in the model), but it didn't make much difference for the trajectory of the economy beyond a couple quarters down the line.

The model's forecast does make me wonder just for a moment if the dangers of a deep recession have been overstated. But I am fairly confident that the main reason the model doesn't forecast a more severe recession is that, reflecting the weaknesses of macro modeling, the model doesn't have a way of incorporating the "credit crunch" effect.

(Note that I'm not actually a macroeconomist, and this was first stab at tinkering with the Fair model, so take all my conclusions with a grain of salt.)

Still Celebrating

I keep thinking I should come up with something original to say about what to expect from Obamanomics going forward, but I've too busy savoring our victory. I was at the DC for Obama rooftop karaoke party last night, and everyone was just so joyous. And the inauguration is still to come! Here's one of many great videos from last Tuesday:

Keynes Lives in Beijing: U.S. vs. Chinese Stimulus Numbers

Like Yves Smith says, the Chinese stimulus package puts into context America's puny stimulus efforts thus far. Yves, however, confuses the numbers a bit by converting everything into dollars at PPP exchange rate. Much better to stick to thinking about this in terms of national currencies:

  • The Chinese have announced plans to spend 4 trillion yuan for "transportation networks, ecology, technical innovation and post-disaster reconstruction" to stimulate their economy. That amounts to 16.2% of GDP (which was 24.67 trillion yuan in 2007).
  • In contrast, the U.S. $150 billion package passed earlier to this year is equivalent to just 1.1% of GDP (which was $13.84 trillion in 2007).
Put in other terms, a U.S. stimulus of the same size as the Chinese package (proportional to GDP) would amount to $2.2 trillion.

That's the kind of rocket-powered stimulus we need! I would say that we could learn from the Chinese Keynesians, but Obama's team is already ready to roll with similar plans. It's great to see that all signs are that Obama is ignoring the New Hoovers and planning a "big bang" investment package. Job 1 right now is preventing what will be a severe recession from turning into a 2nd Great Depression, and it is absolutely not the time to be worried about short-run deficits.

It's a New Day

Just now I was writing up a technical appendix concerning the asymptotic covariance matrix of an estimator. I was listening to's new song, "It's a New Day", for probably the fifth time today. When he got to the part where he sings, 

'Cause we weren't fighting for nothing
And the soldiers weren't fighting
For nothing
No, Martin wasn't dreaming for nothing
And Lincoln didn't change it for nothing
And children weren't crying for nothing
I just started crying. 

This is unusual for me. 

As I wrote on election night, I supported Obama because I thought he was the best candidate, not because he's black. But just now, it really hit me, just how big a deal this is for America.

Here's the video:

Thursday, November 6, 2008

Thank you Don Pedro

As a late addition to blogging here I just want to say how useful I have found the information on the site. I so much appreciate all the great facts and analysis and the initiative you all took to set it up. (I even ordered some Economists for Obama items from the listed vendor--a tip they still have items that are sold out elsewhere.) I hope the founders will keep the site going for the next couple of months as the transition unfolds. Doubtless there will be some economic policy initiatives that can be usefully commented upon. I too share in the optimism that this new administration will be able to get our country back on the right track. As one whose daily work is super affected by who's in power, it will be very hard to wait for January 20th!

Wednesday, November 5, 2008

Today's Newspaper Front Pages from Around the World

A marvelous sight. See it here.
(I switched the link from the archive to just the permanent today's page, since the archive link turned out to not be stable.)

Tuesday, November 4, 2008

Congratulations, America!

What an amazing day for our country. I had some colleagues and friends over to watch the returns come in, and it was a moving experience.

I am very proud, very optimistic, and very hopeful. I know the road ahead will be difficult, but finally, it is a road that plausibly leads somewhere better than where we find ourselves now.

I thought McCain's concession speech was appropriate to the moment, and I hope he will be willing to work with President-elect Obama. 

I also hope and trust that President-elect Obama will move to implement the policies on which he campaigned. Some details will need adjusting, but the tapestry he proposed is what he should hang on the wall.

I want to say one other thing. I came to support Barack Obama for President of the United States of America because he convinced me he is a true progressive, one with the right policy and political instincts. I didn't support him because he is black, or because it is time for a black President. Indeed, President-elect Obama is black, and it is long past time for a black person's run for the presidency to be considered serious regardless of his or her race. But President-elect Obama's race was always beside the point for me. A wonderful bonus, and now, a wonderful statement about Progress In America. 

But I gravitated to Barack Obama because he was the best candidate. Period.

Congratulations, America: finally, you picked the right candidate.

Reflections on Election Day

I used to walk in front of the White House on the way to work. I stopped doing so after the revelations that the United States had tortured prisoners in Iraq and Afghanistan and at Guantanamo Bay. I felt so ashamed of my country and so angry at the occupant of the White House that I couldn't bear to walk by the building.

Tonight, I joined a crowd of many, many thousands in front of the White House, crying with joy, chanting "Yes We Did" and "U. S. A.", and singing the Star Spangled Banner and God Bless America. I've never felt so proud of my country. And I'm proud that our little blog played a tiny role in electing President Barack Obama. I want to thank Lerxst, Jonah, David, Pike, Susan, Progedi, and Moxiemomma for their dedication and contributions over the last many months. We helped make history happen.

As Lerxst noted, the original idea for the blog came from the model of the Economists for Dean blog, which he headed up while I was economic adviser for Howard Dean during his presidential campaign. In many ways, Barack Obama's election is the ultimate vindication of Dean's campaign, his political vision, and his policy views. I could not be more please to see Barack Obama carry forward this legacy to the White House.

A new era

A new era has arisen in American politics. Much ink has and will be spilled about the race of our new president-elect and his age and his politics. The new era is much deeper.

In 1994 a Republican Congress arrived in power with no respect for the laws of arithmetic. Following the lead of Ronald Reagan, they prescribed fiscal policies that had only the vaguest pretense of adding up. The goal was clearly to enrich the prosperous, disregarding the burden on future generations. The Bush Administration expanded this model, moving from disregarding reality in fiscal policy to disregarding it in a host of areas ranging from climate change to Saddam's relationship to 9/11.

The incoming adminstraiton faces two wars, an unsustainable fiscal policy, and a financial crisis. The next two years will be bleak for the living standards of much of the world. In short, it is an unimaginably challenging time for a new administration to take power. At the same time, it is an unimaginably great feeling to be proud that our government is once again in the hands of people who believe in reality and who will respect the laws of arithmetic as they try to improve the world.

Celebrating with Thousands at the White House

A Joyous, Joyous Day


Howard Dean was a few years ahead of his's the scream for old time's sake. !!!

(for those who don't know our roots started as Econ4dean)

Where the Celebration Is

The DC chapter of Economists of Obama is at Lucky Bar (you're welcome
to join us--we're in the back corner and I'm wearing my econ4obama t-
shirt. The Chicago contingent is, I believe, at Grant Park. No word
on where the others are.

I just voted for Barack Obama and Joe Biden!

The line was an hour long at my DC polling place. It was twice that
at the middle school a few blocks away, according to a guy on the bus
who voted there.

Monday, November 3, 2008

McCain ends with a fiscal meltdown

John McCain closed his campaign for president with one last speech showing how the possibility of high office has caused a great American to lose his will to speak the plain truth. The most obvious example is McCain’s continued claim: “I'm going to make government live on a budget just like you do.” If that were true, it would strongly bolster his claims he will “bring real change to Washington.”

Unfortunately, the claim continues to be unrelated to reality. Senator McCain also explains:

  • “We're going to cut taxes for working families.
  • “We will cut business taxes
  • “We are going to win in Iraq [while attacking the possibility Obama might reduce military spending]
  • “I'm going to protect Social Security; and
  • “I'm going to protect Medicare."

Over the next decade these numbers are trillions of dollars away from “living on a budget.” This is not bringing "change to Washington" – it continuing the last 8 years' unsustainable fiscal policy. It is a tragic season to make the analogy, but I can only assume when McCain says he will to “make government live on a budget just like you do” he is speaking to over-extended homeowners about to default.

John McCain’s campaign has coincided with America’s financial markets finally recognizing how the short-term interests of some decision-makers (coupled with deception and wishful thinking) have led to the misallocation of hundreds of billions of dollars. The next few hours will tell us if the electorate has come to that same realization about the America’s recent fiscal policy.

Tomorrow's the Day!

Go to this site to find out where to vote. If you're trying to convince your spouse/friend/boss/colleague/neighbor/coach to vote for Obama and have last-minute questions about economic policy, send us an email at You can also search past posts on this blog using the box to the left of the "Search Blog" on the upper left side of this page.

Sunday, November 2, 2008

People in the Middle for Obama

That's the name of this website with videos of Republicans and Independents talking about Obama. Here's one which I think captures the reasons lots of Republicans find themselves ready to cast a vote for Obama:

Also see the Republicans for Obama website.

Economic Hacks for McCain

This article in the L.A. Times on the candidates' economic programs includes the following bits:

"Barack Obama is a sure-fire depression," said Douglas Holtz-Eakin, McCain's domestic policy chief.
"The policy Obama has proposed is unlikely to result in any economic growth," said Alex Brill, a research fellow at the conservative American Enterprise Institute for Public Policy Research.
Not any economic growth? An economist with any self-respect would be ashamed to see his name in print next to such a ridiculous claim.

Obama would raise tax rates to at or below where they were during the Clinton years, a period of tremendous prosperity and sustained job growth. The idea that these policies would grind the economy to a halt or plunge us into a depression is not a serious claim. (Or maybe Holtz-Eakin is referring to his own psychological state?)

The article quotes Jared Bernstein as saying, correctly, "You can't find evidence that low tax rates foster high economic growth." What we need for long-term growth are the investments in education and infrastructure that Obama is proposing.

Small Business Taxes Under Obama

Media Matters notices that an article in the NY Times yesterday quoted the McCain campaign as asserting that Obama would raise taxes on small businesses, but makes no effort to inform readers as to whether the claim is true.

Obama would raise taxes only on individuals earning over $200,000 per year and families earning over $250,000. These are a subset of taxpayers in the top two tax brackets. According to the Tax Policy Center, only 1.9 percent of tax filers with small business income are in the top two brackets.

Therefore, less than 2 percent of taxpayers with small business income would see their taxes rise under Obama's proposals.

Obama vs. McCain on Special Needs Children

In a Wall Street Journal interview published today, Sarah Palin says that if she were elected VP, her portfolio would include policy for children with special needs.

For such families, the key issue has long been fully funding the Individuals with Disabilities Education Act.

Under the original act passed in 1975, the federal government promised to cover 40% of the costs of educating children with disabilities, but it has never kept that promise. Currently, the feds only cover about 12% of those costs. As a result, special education programs have long been starved for funds, and such programs are a drain on local school districts. Bush's refusal to fully-fund IDEA is what drove Sen. Jim Jeffords to abandon the Republican party in 2001.

Biden and Obama strongly support fully funding special education. In fact, Biden was a co-sponsor of the original IDEA legislation way back when he was a freshman senator.

In a press release issued a week ago, McCain said that he favors fully funding IDEA, but it's hard to see how this is credible given that he's voted against doing so multiple times, most recently last year.

You can find the summary of the Obama-Biden disability policy here
and a PDF with their disability policy plans here. And here's the blog of Obama's disability policy director.

McCain Lies in "Joe the Plumber" Ad

This ad from the McCain campaign says, "Obama raises taxes on seniors, hard working families, to give welfare to those who pay none." At one point, the screen shows “$100 billion to those that pay no taxes.”

It's amazing how many falsehoods the ad can squeeze into a few seconds. We covered some of this in our FAQ on taxes.

Key points of Obama's proposal:

  • Eliminates income taxes for seniors making less than $50,000.
  • Reduces taxes for 95% of working families.
  • Cuts taxes for individuals making less than $200K and couples making less than $250K.
The $100 billion figure is just a pure fabrication. Contrary to what the ad says, everyone who receives a tax cut under Obama's proposals pays taxes.

Here is Wall Street Journal column which describes the Obama plan in detail. Also see the tax calculator and assorted links at left.

Friday, October 31, 2008

Betting on Bradley?

The sophisticated average of polls shows Obama ahead by almost 6 percentage points in the popular vote and on track to win about 350 electoral votes – almost twice McCain’s total (accessed October 31, 2008). There is sampling error in polls, so also simulates the sampling error 10,000 times and tells us in over 97% of those simulations Obama wins most of the electoral votes.

These predictions tells us the likely outcome if the main source of error in polls is sampling error and if votes do not change much in the next few days.

In contrast, the betting site puts McCain’s winning chances at around 17%.

One interpretation of the dramatically higher betting odds on McCain than in the simulated voting is that the polling data is unbiased measures on the day taken, but bettors believe votes change a lot in the last few days. That interpretation seems dubious, as the polls’s estimated vote share tends to change by about 1 percentage point a week. It would take an extraordinarily large amount of news to move the polls 6 points in 4 days.

A second interpretation of these odds is that polls are biased in an unknown direction. For example, polls rely on models of who is likely to vote that are typically based on historical patterns. In addition, most polls miss voters who use only a cell phone. The systematic noise in polls, while surely there, is probably not a good explanation for why bettors favor McCain more than polls. For example, blacks are likely to vote more than historic norms, and cell phone users probably favor Obama as well. Thus, these factors – while surely present – would not explain a high betting line on McCain.

The third interpretation is that many bettors believe a “Bradley effect” exists; that is, that many voters will say they are voting Democratic or are undecided, but in the privacy of the polling place will not vote for an African-American to be president. The evidence for a Bradley effect in recent elections is weak, but it is extremely difficult to prove it does not exist. As best I read the evidence, it appears some people are betting this form of discrimination remains strong in America.

(updated by lerxst to correct misspelling of Bradley)

Obama Econ Adviser Jason Furman on Bloomberg TV

The Economist Magazine Endorses Obama

It's here. Among other things, the editorial says

Mr McCain has never been particularly interested in economics, but, unlike Mr Obama, he has made little effort to catch up or to bring in good advisers (Doug Holtz-Eakin being the impressive exception).

This is a strange sentence. The "but" implies there is some contradiction between McCain's lack of interest in economics and the fact that his slate of economic advisers is made up of Phil "Deregulator" Gramm, Kevin "Dow 36,0000" Hassett, Carly "Golden Parachutes" Fiorina, Nancy "Petro-flack" Pfotenhauer, Donald "I Am Wrong About Everything" Luskin, and Arthur "Forget Evidence" Laffer.

Wouldn't it seem, however, that his lack of interest in the subject is the reason he picked these clowns?

As for the sad case of Doug Holtz-Eakin, he may have been a good adviser when he was brought in to the McCain campaign, but he has now been thoroughly hackified. Here's the latest evidence.

Thursday, October 30, 2008

NYT on Obama and McCain Tax Plans

The NY Times today has a good article examining the incidence of Obama's tax plan. It is accompanied by this quick summary of the Obama and McCain tax proposals.

McCain Endorses Obama's Signature Retirement Policy Proposal

I'm pretty sure I'm in the 99th percentile of the population in terms of knowledge of the Obama and McCain economic policy proposals, so I was very surprised to read this post on the Tax Policy Center blog saying that McCain supports the automatic IRA. I have read through the McCain economic policy in detail, listened to McCain economic adviser Doug Holtz-Eakin speak about said policy in person on two occasions, and heard him talk in innumerable radio interviews and debates, and I've never heard any mention of the IRA proposal. I put my Googler skills to work and discovered that this endorsement came in the form of the McCain campaign's answers to this recent questionnaire from the American Society of Pension Professionals and Actuaries. The Retirement Security Project, which promotes the idea, put out a press release yesterday to herald the news.

This is remarkable because the automatic IRA is a major Obama policy proposal which has been repeatedly trumpeted by the candidate and by economic adviser Austan Goolsbee. I wrote about it way back in January when comparing the Obama and Clinton retirement proposals. Here's how the campaign described the proposal:

  • Create Automatic Workplace Pensions: Obama's retirement security plan will automatically enroll workers in a workplace pension plan. Under his plan, employers who do not currently offer a retirement plan, will be required to enroll their employees in a direct-deposit IRA account that is compatible to existing direct-deposit payroll systems. Employees may opt-out if they choose. Experts estimate that this program will increase the savings participation rate for low and middle-income workers from its current 15 percent level to around 80 percent.
I wrote in January that the proposal is
a political no-brainer and is supported by both progressive economists and the right-wing Heritage Foundation. This is because it's smart, nearly cost-free policy. As such, it does fit better with Obama's "bring us together" rhetoric and gives lie to the claim that the only way forward on every issue is hard-core political warfare. Making IRAs "automatic," i.e. the default option, for workers without 401(k)s, would make millions of Americans better-prepared for retirement with a policy that Democrats and Republicans can readily agree on.
If we weren't in the final days of the campaign, I might hope a journalist would ask McCain why he decided at this late date to take time off from calling Obama a socialist and endorse his key retirement policy proposal.

My guess is that Holtz-Eakin was tasked with filling out this questionnaire and said to himself, what the hell, why not back the automatic IRA?

For the Economist Who Has Everything: Econ4Obama Gear

I am now ready for election day with my Economists for Obama t-shirt, bumper sticker, and coffee mug. You can get yours at this site.

As I explained in an earlier post, we did not set up the site ourselves, and the site's organizer assures us that everything is sold at cost.

Wednesday, October 29, 2008

Buying Milk

I was unexpectedly moved at times when watching the Obama commercial (below). Digby writes today about a former Edwards speech writer who is disappointed that Obama doesn't talk about poverty. But when you watch the mom in the commercial who feels the suffocating pain about whether she can afford to buy a gallon of milk or the mom whose kids have to make their snacks last a whole week --if that is not talking about poverty then I don't what is. Apparently in today's GOP, you're a dirty freaking socialist if you talk about providing refundable tax credits based on the payroll tax. Can you imagine the outcry from the right if Obama actually talked about poverty.

Below is the commercial. Also check out Robert Frank, an economist at Cornell who points out that the The National Council on Economic Education’s curriculum standards say that "Most government policies also redistribute income." (h/t to Yglesias)

Obama Responds to "Socialist" Charge (with Humor)

What about wage insurance...isn't that redistribution?

Atrios notes that McCain is reduced to spouting gibberish when trying to reconcile his support of social safety nets with his new political tactic of the week --criticizing any use of the word redistribution in a sentence by Obama.

I know this whole argument is laughable, especially given Palin's support of collectivism and redistribution of natural resource wealth in Alaska, but it also seems that everyone has forgotten about McCain's call for wage insurance in his convention speech:

For workers in industries -- for workers in industries that have been hard-hit, we'll help make up part of the difference in wages between their old job and a temporary, lower paid one, while they receive re-training that will help them find secure new employment at a decent wage.

I wonder what Tito the builder and Joe the plumber would think about that?

Wage insurance is actually something I've supported in the past but I am skeptical that McCain views it as anything other than a way of helping to dismantle the unemployment insurance system. And although I am supportive of wage insurance it would come with a hefty price tag that could crowd out other priorities like health care reform which is probably a big reason why Obama deferred on it. Meanwhile McCain who supposedly wants a "spending freeze" supports wage insurance but provides no price tag for its cost or any explanation of how it would be implemented. Indeed, I doubt that there is a single article in the mainstream press that has called McCain on it. Its seems clear that the press knew it was a gimmick without even bothering to report that to the public.

FAQ on Taxes

Here are responses to questions we've received repeatedly. Please use these as you're talking to family, friends, co-workers, and neighbors over the next few days in a last push to get them out to vote for Obama. If you have other questions, please put them in comments below, and we'll update this post with responses.

Will Obama raise my taxes?
Your taxes would be reduced under Obama's proposals, if you are single and making less than $200,000 or married and making less than $250,000 jointly. See the tax calculator and assorted links at left. For a detailed description of his tax plan, see this article.

Won't raising taxes on corporations and the wealthiest hurt the economy?
No. Obama would return tax rates to at or below where they were during the 1990s, an era during which the economy thrived, median income grew by $6000, and 22.3 million jobs were created. In contrast, McCain would extend the Bush tax policies, which have brought us 30% lower economic growth, anemic job growth, and a decline in income and wages for the typical American. See details in the slides included in this post.

Won't marginal tax rates increase under Obama, taking away incentives for people to work?
No. Analysis by the fully objective, non-partisan Tax Policy Center shows that Obama's plan would actually reduce marginal rates for most (61%) taxpayers. Marginal rates would increase for only 15%. See discussion and links in this post.

Why is Obama going to cut taxes for the 38% of people who don't pay taxes?
It's true that many people don't pay income taxes. But anyone working pays payroll taxes, along with other taxes, and Obama's tax cuts are overwhelmingly geared towards working Americans. Virtually everyone who receives a tax cut under Obama's plan pays some tax. See this post for details.

Obama would reduce taxes through tax credits. Isn't this welfare rather than a tax cut?
If you receive a tax credit, the size of the check you write to the government decreases. As most people understand it, this is a tax cut. McCain himself proposes a large refundable tax credit for health care. Bush pushed for and signed a child tax credit. The largest existing credit, the EITC, was introduced by Republican President Ford, and increased under Reagan, Bush I, and Bush II.

Is Obama a wealth-spreading socialist?
Here's a good response to that question:

I think you're questioning, questioning the fundamentals of a progressive tax system where people who make more money pay more in taxes than a flat across the board percentage. I think it's to some degree because we feel obviously that wealthy people can afford more... I believe that when you really look at the tax code the very wealthy because they can afford tax lawyers and all kinds of loopholes really don't pay as much as you think they do, when you just kook at the percentages. And I think middle income Americans, working Americans, who when you count in payroll taxes, sales taxes, mortgage -- all of the, all of the taxes that working Americans pay-- I think you would also think that they also deserve very significant relief...

When you reach a certain level of comfort, there's nothing wrong with paying somewhat more...The first people who deserve a tax cut are working Americans...and they're the ones I would support tax cuts for first.

That's John McCain in 2000.

Not Even A Good Hack

The other day, I noted a recent example of McCain domestic policy adviser and (formerly?) respected economist Doug Holtz-Eakin's dishonest and shameful behavior.

One of the few good things about Holtz-Eakin's embarrassing performance in this campaign is that in the process of sullying his reputation, he's managed to repeatedly undermine John McCain's own arguments. 

For example, there was that whole thing with the earmarks, when Holtz-Eakin undermined the silly claim that McCain can cut taxes by hundreds of billions of dollars a year and pay for it by cutting a few billion dollars in unnamed earmarks (for details, see my post or Ben Smith's). 

And who can forget Holtz-Eakin's claim that John McCain invented the Blackberry? (The great part of that Holtz-Eakin stroke of genius is that it was his serious answer to being asked a serious question, "what work John McCain did as chairman of the Senate Commerce Committee that helped him understand the financial markets"; that's all Holtz-Eakin could come up with.)

And yesterday, Holtz-Eakin struck again. The McCain campaign has claimed that its health plan will leave basically everyone better off (see this post and those to which it links for a discussion of that claim). Meanwhile, many economists worry that by eliminating the income-tax subsidy for employer-provided health insurance without providing universal coverage, McCain's plan will induce serious adverse selection problems: if younger and healthier workers opt out of employer plans whose premiums are based on pooling over a relatively representative workforce, then some employer plans will collapse, leaving others in the pool exposed to very high-cost individual plans. Here's how Doug Holtz-Eakin seeks to allay these worries:

Younger, healthier workers likely wouldn't abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain's senior economic policy adviser.
"Why would they leave?" said Holtz-Eakin. "What they are getting from their employer is way better than what they could get with the credit." [original source here.]
Employer-group plans typically don't (never?) price as a function of age or projected health risks (holding constant family size and leaving aside pre-existing conditions). This means that younger, healthier workers cross-subsidize everyone else in a group plan. So in any such plan, these workers are the ones getting the least benefit from a group insurance plan. Now Holtz-Eakin tells us that such plans are "way better" than what these workers could get with McCain's credit. Logic implies that this claim must therefore be true for all workers. 

So, Holtz-Eakin has just told CNN that the McCain health plan will make workers worse off.

Doug Holtz-Eakin: Not just a hack. Not a good hack, either.

Attacking all vs. some protectionists

Professor Greg Mankiw ran a column from India yesterday pointing out that Senator McCain has been more consistently in favor of free trade than Senator Obama. He then challenges his “economist friends who are working for Obama… to defend his positions on ethanol subsidies, tariffs on Chinese goods, the Byrd amendment, etc.” As most economists agree with Professor Mankiw, not Senator Obama, on these issues, it is a fair challenge.

When he was the Bush administration’s chief economist, Mankiw was a consistent fighter for free trade. At the same time, over the last 8 years President Bush has supported a vast array of protectionist policies. Since Mankiw left what has arguably been the most protectionist presidential administration of either party in recent decades, I have found no critiques of Bush administration protectionism. In contrast, his blog reprinted a Wall St. Journal column from the 2006 Congressional election attacking Democrats as protectionists.

Economists typically argue for lowering any country's trade barriers, without requiring a symmetric lowering by trading partners. That endorsement of asymmetry does not hold within a country - there is no general result in political economy that says you will get freer trade by attacking only the other party's protectionists while giving your own party's protectionists a free pass. I would be surprised if an Obama administration were to be more protectionist than the one Mankiw worked for.

Tuesday, October 28, 2008

Reader Mailbag: Various Questions

A reader writes in the following:

If you have the time, can you point me to anything that talks about the following:

1. Obama wants to raise taxes on big employers and "spread the wealth around." That leads to higher unemployment - obviously not what America needs right now.

2. Obama wants to give tax credits to people currently not paying income tax - thus creating a disincentive for people to work harder since they lose credits as their income rises. We need to be growing our economy, not shrinking it!

3. I bet most Obama supporters can't name a single tax that Obama is saying he is cutting.

4. “…A complete credit quagmire, thanks to Democratic friends of Fannie Mae and Freddie Mac on the hill (including Obama) trying to appeal to their narrow voting bloc rather than focus on what was right for America.
My quick response:
This is a good article on the two tax plans, by Obama's advisers.

A general reply to these points is that Obama would return tax rates to something like what we had in the 90s, an era of great prosperity and growth. In contrast, the McCain approach--lowering taxes on the wealthy and corporations--is what we had over the last 8 years, when wages for the typical American fell.

On your second point, see these two posts:

Marginal rates (meaning the tax rate people face on their next dollar of income) would decline for most people under Obama's plan.

Obama will cut taxes for 95% of working Americans. I'm not sure what "name a tax he will cut" is supposed to mean. He will cut income taxes. See the links on the left bar of our site.

On the 4th point, there are many analyses that point out that by the time Fannie and Freddie got into the subprime business, the housing bubble was already near its peak. So it's not possible that they are a primary cause of the bubble and crisis. Here is a good discussion of this issue.

McCain and Palin Wrong on Corporate Taxes

This won't be news to long-time readers of this site, but a new CBPP study offers a chance to review an important point.

Sarah Palin today (echoing what McCain has said many times):

We’ll cut the capital gains tax and we’ll cut business taxes. Right now the U.S. business tax is the second highest in the world.
The Center on Budget and Policy Priorities yesterday:
The U.S. corporate tax burden is smaller than average for developed countries. Corporations in the 19 member states of the Organization for Economic Co-operation and Development paid 16.1 percent of their profits in taxes between 2000 and 2005, on average, while corporations in the United States paid 13.4 percent.

Nevertheless, some have argued that U.S. corporate tax rates unduly burden U.S. companies by pointing to the country’s top statutory tax rate, which is 35 percent. For example, a recent Wall Street Journal editorial calling for corporate tax cuts noted that this is the second highest top statutory tax rate among developed countries. While true, this gives the false impression that the corporate tax burden is greater here than in other developed countries. Because the U.S. tax code offers so many deductions, credits, and other mechanisms by which corporations can reduce their taxes, the actual percentage of profits that U.S. corporations pay in taxes — or what analysts refer to as their effective tax rate — is not high, compared to other developed countries.

Rich Lowry, editor of the very conservative National Review, is a consistent supporter of Republican causes. It was, thus, with surprise to read:

If McCain weren’t running for president, and it were some other Republican
who had attacked Obama for his associations and picked Sarah Palin as his
running mate, surely McCain himself would be on some Sunday show clucking his
In the article Lowry notes McCain historically disliked most "typical" Republican campaign tactics such as the Swift Boaters' attack on John Kerry. Thus, Lowry is not disparaging Republicans who attack Democrats for their associations, just noting that McCain typically has. I assume Lowry is not claiming Palin is unqualified, merely pointing out that a gadfly like McCain would hold that view.

Tax Policy Center Analyzes McCain and Obama's New Proposals

A new Tax Policy Center brief looks at the following proposals to respond to the economic downturn:

Senator McCain proposes to exempt unemployment compensation from federal income tax in 2008 and 2009 for most taxpayers, suspend required distribution rules for IRAs, lower the tax on some withdrawals from retirement savings accounts, increase the limits on the deductibility of capital losses, and lower the tax rate on long-term capital gains. Senator Obama would eliminate all taxation of unemployment compensation, allow limited penalty-free withdrawals from retirement savings account, and provide firms a refundable credit of $3,000 for each additional employee they hire. All of those proposals would be temporary and expire by 2010 or 2011.

I agree with TPC that none of these are likely to help, although McCain's capital gains tax changes stand out as the worst proposals. My colleagues may have different opinions.

I also agree with TPC that the one effective thing the government chould do in response to the downturn is to extend unemployment benefits for those who are suffering long spells of unemployment. Not to fault TPC too much, but they should have mentioned that Obama not only favors extending unemployment compensation, but he introduced a bill in the Senate to do so more than a month ago.

Lewin Group's Estimates of Increased Coverage Under McCain Health Program Based on Bogus Assumptions

The estimable Len Burman of the Tax Policy Center clears up a few points of confusion on McCain's health care plan. Apparently, the main reason the Lewin Group estimated that there would be a huge increase in coverage under the plan is that they assumed McCain would spend 5 times what he has said he would to subsidize the uninsured through "GAP" programs. This is completely bizarre. Of course it is often the case that analysts trying to forecasting a policy's effects need to make assumptions to fill in blank spots on policy proposals. But in this case, the Lewin Group appears to have decided that the McCain campaign must be lying about how much would be budgeted for these subsidies, because if, as the campaign has said, the budget would only be $7-10 billion a year, McCain's plan would make only a tiny dent in reducing the number of uninsured.

It's unclear to me whether the Lewin Group made this assumption because they were trying to produce an analysis more favorable to McCain or because the McCain campaign manipulated them into this position. I can't find the $7-10 billion figure in the Lewin Group report, even though it's been widely reported in the press. It's impossible to believe that the Lewin Group analysts weren't aware that McCain's campaign has said that $7-10 billion will be budgeted for the GAP program. Why would they possibly leave that out of their 182 page analysis of the candidates' plans?

I must conclude that contrary to what I wrote earlier, the Lewin Group is not a trustworthy source. Here's Len's full post:

When TPC analyzed Senator McCain’s proposal to replace the income tax exclusion for employer-sponsored health insurance with flat refundable tax credits of $2,500 for single coverage and $5,000 for family coverage, we found only modest net effects on coverage. Our model predicted that more than 21 million people would gain insurance coverage in the individual nongroup market by 2013 while 16 million would lose employer-based coverage. Despite a $1.3 trillion price tag over the next decade, the proposal would yield only modest and temporary gains.

A couple of factors drove that result. One was the $7-10 billion per year that Senator McCain’s campaign says it would spend on its Guaranteed Access Plan (GAP). That’s a fraction of the $100 billion annual cost we estimated for covering those with serious health problems who’d otherwise lack insurance. Ignoring the campaign’s statements about its own plan, John Sheils of the Lewin Group assumed that the government would provide $470 billion in subsidies over ten years ($47 billion per year) for the GAP, half of it financed by a new assessment on insurance premiums. By Sheils’s estimate, 5.8 million people would gain coverage under that plan. Unlike Sheils, we judged the funding proposed to be inadequate and the plan’s details too nebulous, so we did not model the GAP’s effect on either cost or coverage.

Sheils also concluded that Senator McCain’s proposals to limit health care costs would be effective, something my colleagues in the Urban Institute’s health policy center doubt. Moreover, Sheils appears to assume that firms are less sensitive to changes in the price of health insurance than TPC does, which means that fewer firms drop coverage. All told, Sheils’s more optimistic scenario produces much more coverage. Lewin estimates that the number of uninsured would fall by 21 million people in 2013.

There is one way that McCain’s plan might really boost coverage: if just about anything could be labeled as “insurance.” With no minimum standards, insurers could design products that cost less than the tax credit amounts, even for people with serious pre-existing conditions. For example, they might sell a single policy that covers the first $2,000 of medical expenses for a $2,500 premium. This sounds like a bad deal, but if the entire tab is paid by the federal government and it is all a sick person can find, it’s better than nothing. State regulators couldn’t block such policies because Senator McCain’s plan would allow insurers to market products across state lines, meaning that shady insurers could just set up shop in a state with no regulation.

Of course, token insurance that doesn’t cover major costs would be cold comfort to those with expensive health problems, but it would make the statistics on coverage look better. And if you think that insurers would not offer such products or that consumers would not use their tax credits to purchase them, consider the experience with the short-lived health EITC, a small, but poorly designed subsidy intended to help low-income families acquire health insurance coverage for their children. Unscrupulous insurers sold nearly worthless policies—often using fraudulent methods—to credit recipients according to a 1993 Congressional investigation (summarized by CBPP).

And, despite its limited value, the coverage gains would carry a heft price tag. If all uninsured people bought non-group coverage qualifying for the tax credits, the cost of the plan could almost double, from our estimated $1.3 trillion to $2.5 trillion.
All that said, it is remarkable that a conservative Republican is proposing more than a trillion dollars in refundable tax credits for health insurance. Those seeking a bipartisan compromise that could significantly expand health insurance coverage might take heart from that. But then again, Senator McCain also insists that his plan, in fact, has no budgetary cost over ten years, suggesting that he might not really be serious about the tax credits.

Updated Obama and McCain Tax Calculator Link

I've switched our tax calculator link at left to the Obama campaign's tax calculator site. It is set up to be a bit more user-friendly than the calculator we linked to before. Here is an analysis from Politifact that examines the Obama calculator. The heart of their writeup is the following:

Now, let's look at the Obama tax calculator and evaluate its accuracy. We ran a number of scenarios through the calculator, which allows you to select an income range and plug in other factors that would be affected by Obama's plan. We also asked Bob Williams of the Tax Policy Center to check it out for us. Generally speaking, if you accept its methodology and premises, the Obama tax calculator appears mostly accurate. That is, it does not significantly distort either candidate's tax plans. The Obama tax calculator has a lengthy "frequently asked questions" list that spells out its assumptions. But it does present Obama's tax policies in their best light, and it makes a few assumptions that may not be true for all taxpayers.

"It gets reasonable answers and is not really wrong," said Williams, the Tax Policy Center's principal research associate. "That said, it is simplistic. It allows only broad ranges of income, which results in only approximate answers. Some people with income in the given ranges would get larger cuts while others would get less."

This criticism of the Obama calculator applies equally to the calculator we linked to previously, which uses numbers directly from the Tax Policy Center's tables.

If you want to get an estimate of the effects of the candidates' proposals tailored to your particular tax situation, try , which requires you to input detailed information from your tax forms.

Monday, October 27, 2008

Bailing out Shareholders

For much of the 1990s the Japanese government shoveled resources into troubled banks while the banks shoveled dividends to shareholders. The most important result was a lost decade of economic growth, as under-capitalized banks failed to lend. An additional important result was the government deficit grew while bank shareholders benefited from government largesse.

The Paulson plan replicates this error, shoveling hundreds of billions at banks while permitting them to pay a substantial fraction of that bailout directly to shareholders. David Schoarfstein and Jeremy Stein andxx jones also point out that $250 million of the bailout will go directly to dividends for bank CEOs. These dividends constitute a massive reward for past poor decisions and an incentive for future misbehavior. More broadly, bank dividends decapitalize the banking system that the government is trying to recapitalize.

No bank or other financial institutions wants to declare itself so cash-strapped that it cannot pay its dividend. In addition, if the bank is near bankruptcy, shareholders benefit at the expense of creditors if the bank pays dividends prior to going under.

Unfortunately, as we have all read about at length in recent weeks, few are willing to lend if most of the possible borrowers are under-capitalized -- it is too likely they will go bankrupt. Thus, each bank's decision to pay dividends imposes a negative externality on both its own bondholders and on investors and the economy more broadly.

Ironially, bank shareholders would almost surely benefit from a moratorium on dividends, as each bank would be more able to resume lending. Obama should push for such a change. Suspending dividends is a no-brainer for banks and others receiving aid from the federal government. In the short run, I recommend this requirement for all financial institutions.

Jonah The Economist

That's how I want to be known from now on, after reading this.

Almost Everyone...

The Tax Foundation's Robert Carroll has an op-ed in today's WSJ concerning the McCain health plan. Carroll emphasizes that the simple characterization of McCain's plan as taxing health care benefits neglects the fact that the plan would also include a (socialistic, according to Republicans) refundable tax credit for a married couple's health insurance spending up to $5,000. Carroll's main point can be summed up by the title of his article: "Almost Everyone Would Do Better Under The McCain Health Plan".

This is an important fact, and one I discussed here and here back in September.

While I agree with Carroll that it's distortive to focus only on the tax part of McCain's plan, I find his column today to be quite misleading. As I've discussed previously, the amount of McCain's refundable credit is indexed to the consumer price index (CPI), rather than health costs. Because health costs increase more quickly than the CPI, the real value of the McCain plan's credit will fall quickly over time. Here's what I wrote back in September:
The Tax Policy Center has just released some new estimates on this issue (for both candidates' plans). See their post for more, but here's the money quote vis-a-vis McCain's plan:
By 2014, the non-refundable portion of [McCain's] credit is worth less than the tax exclusion and, by 2018, income taxpayers pay $62 billion more in tax in the aggregate (although many middle-income taxpayers still come out ahead under the proposal).
For more, see the TPC post.
A more appropriate title of Carroll's article might have been "Almost Everyone Would Do Better Under The McCain Health Plan, Until A Few Years Have Passed, After Which Point Lots Of People Will Do Worse".

Shame On Doug Holtz-Eakin

Today a silly brouhaha is underway about a statement Barack Obama made in 2001. Here's what has Republicans so up in arms:

And one of the I think the tragedies of the Civil Rights movement was because the Civil Rights movement became so court focused I think that there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributive change and in some ways we still suffer from that."
The point Obama makes here is the conservative critique of liberals in the Warren Court era: that they should have done more to work for legislative, rather than court-ordered, change. (Cass Sunstein makes this point in the same Ben Smith post that has Holtz-Eakin's quote below.) 

Here's the response, in the form of Doug Holtz-Eakin's latest contribution to the civil, respectful campaign promised by his boss John McCain:

"No wonder he wants to appoint judges that legislate from the bench – as insurance in case a unified Democratic government under his control fails to meet his basic goal: taking money away from people who work for it and giving it to people who Barack Obama believes deserve it. Europeans call it socialism, Americans call it welfare, and Barack Obama calls it change." [emphasis added]

I used to respect Holtz-Eakin. But his performance in this campaign has been a true embarrassment. He's a pathetic shell of the decent man I thought he was. 

Newspaper Endorsements

The Financial Times joins the growing list of newspapers endorsing Barack Obama. Setting aside the debate of whether endorsements still influence the race in any meaningful way, it's worth noting that many publications that normally lean conservative are backing Obama, often citing his superior competence when explaining their choice.

Sunday, October 26, 2008

Reality Seeps In

I found this comment by former Bush speechwriter David Frum to be extremely revealing:

"I don't know that there's a lot of realism in the Republican Party. We have an economic message that is largely irrelevant to most people.

(emphasis mine)

Ah yes, "realism", I guess maybe now reality matters again. Recall, it was only a little more than 4 years ago today --just a few weeks before Bush defeated Kerry-- that Ron Suskind publicized this quote from a Bush senior advisor (Rove?) that has come to define the failure of the Bush Presidency:

In the summer of 2002, after I had written an article in Esquire that the White House didn't like about Bush's former communications director, Karen Hughes, I had a meeting with a senior adviser to Bush. He expressed the White House's displeasure, and then he told me something that at the time I didn't fully comprehend -- but which I now believe gets to the very heart of the Bush presidency.

The aide said that guys like me were ''in what we call the reality-based community,'' which he defined as people who ''believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

By the way, Suskind's article is worth re-reading again today as we near the end of the Bush nightmare of a Presidency. A couple of things I forgot about: 1) the story involving the late Tom Lantos --where Bush confused Sweden and Switzerland but insisted that he hadn't; 2) How Biden was extremely perceptive in analyzing Bush's basic character flaws.

McCain has Depreciated a Valuable Asset: His Reputation

Senator McCain reached almost the pinnacle of American politics based in large part on his reputation as a maverick who stood up for his principles. His reputation was a valuable asset based on a number of issues on which he has disagreed with his president and his own party, including opposition to torture, support for campaign finance reform, and opposition to some of President Bush’s fiscally irresponsible tax cuts.

What is remarkable about the list is how each time McCain disagreed with Bush, McCain was right. What is tragic about the list is that McCain has backed off many of his maverick opinions – most obviously in terms of tax policy.

A few years ago, McCain talked of progressive taxation favorably: “I believe that when you reach a certain level of comfort, there's nothing wrong with paying somewhat more.” He explained “I voted against the tax cuts because of the disproportional amount that went to the wealthiest Americans.” (These quotes are from Meet The Press today.)

Today his tax policies are incoherent.

On the one hand, he promises to increase the child deduction. This is a sensible short-term policy to spur spending in a recession, but has no long-term benefits for the economy. It is an obviously populist move to offer a tax cut to the median voter.

On the other hand, his economic advisors speak of the need to cut taxes on dividends and capital gains in order to free up capital for investment. That outcome would only make occur if the tax cuts reduced consumption by more than the government deficit grew and, thus, decreased aggregate demand. Such a decline in demand would be a disaster in a recession.

Mavericks are desirable if they buck powerful pressures to sustain an ethical point of view. McCain’s move to the right-wing orthodoxy on fiscal policy depreciates the investment he made in his reputation as a principled maverick.

Greg Mankiw Tackles the Theory of Tax Incidence

Greg Mankiw laments the impact of enacting Barack Obama's tax plans on his personal work incentives:

Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:


For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years....

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81....

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85....That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan...
One problem with Mankiw's analysis here is that Mankiw assumes that all corporate stocks pay dividends. That's not true; I don't know the actual figures, but I believe the share of companies that pay dividends is a lot less than 1. This matters for the simple reason that dividend taxes aren't owed when no dividends are paid. 

A second problem is that the capital gains tax is imposed only when gains are realized, not as gains are accrued. This means that for the part of Mankiw's income related to cap gains liability, the proper formula is [(1-t1){[1+r(1-t2)]^T}(1-t4)](1-t3). That is, the (1-t3) part doesn't get compounded, instead being applied after the gains have fully compounded. Plugging in Mankiw's chosen numbers, this fact means that under Obama's plan, a dollar earned today and invested in non-dividend paying stocks at a fixed return of 10% leads to $2.27 (see update immediately below) when Mankiw leaves his money to his children, which is more than 25% higher than Mankiw's reported figure. (I leave it as an exercise to compute the corrected number for McCain's plan; I note also that assets that don't pay dividends will have to have a higher rate of capital gain than those that don't, other things equal).

[Update: David Levine points out an additional factual error of Mankiw's in the comments. When assets are inherited, the basis for capital gains taxation often/usually becomes the value of the asset at the time of inheritance, provided that this value is greater than the original purchase value. As a consequence, capgains taxes aren't owed at all on the return Mankiw receives before his death: the only capgains liability is whatever attaches after Mankiw dies, starting in year 36 in his example. Thus, for assets paying no dividends, t3 is 0 in all cases, not 0.15 or 0.2. This means that Mankiw's return to a dollar saved now would be something like $2.84 under Obama's plan, not Mankiw's $1.85. Another point I didn't note is that Mankiw will pay estate taxes under Obama's plan only if his estate is valued at more than $7 million (I'm assuming Mankiw is married: there's a $3.5 million exemption for each spouse). That's plausible, given the success of Mankiw's textbooks. But if he does have an estate this size, Mankiw will be very unusual.]

The above problems are factual errors on Mankiw's part. But he also makes a third error, one of economic analysis. Mankiw assumes that the entire economic incidence of capital income taxation is on suppliers of capital: they receive the same pre-tax return regardless of tax policy, and they write the entire tax check to the government. This combination of no change in the pre-tax price and full legal incidence on the supply side can occur only if the demand for capital is perfectly elastic, i.e., borrowers are willing to borrow an infinite amount of capital at 10% and not a bit of it at a higher rate. 

[Update: It would also be possible for the full economic incidence of capital gains taxation to be on the supply side if the supply of loanable funds were perfectly inelastic, i.e., if the supply curve were vertical. But Mankiw says he will work less if the tax rate increases, so he must not believe this to be the case.]

I do not know what the actual elasticity of demand for loanable funds is, but I do not think it is infinite. I also do not think Mankiw thinks this elasticity is infinite. I would be interested to see him redo his calculations after taking into account the possibility that the demand for loanable funds slopes down, in which case the pre-tax rate of return to capital will be higher than it is under Mankiw's baseline, no-taxes assumption.

Fourth, I note that McCain's plan would increase the federal debt by more than Obama's plan (actually, taken by itself, Obama's tax plan reduces the debt on net). So, if McCain's plan were enacted, Mankiw's children would themselves have to pay higher taxes to make up for Mankiw's ability to earn a higher return now. It seems we should account for this fact somehow; I leave that as an additional exercise.

Final note: Mankiw concludes by writing that
If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place.
Given the merits of Mankiw's analysis above, perhaps this is a threat whose promise we should all welcome.

The Special Needs of School Choice

Sarah Palin and her husband are experts in how parents can best care for a child with special needs in a way that I can never equal. At the same time, Sarah Palin is not an expert in how markets can best care for those with special needs. In a speech on special needs children yesterday she stated:

Like John McCain, I am a believer in providing more school choice for families.
The responsibility for the welfare of children rests ultimately with mothers and
fathers, and the power to choose should be theirs as well.
Most children with special needs cost far more than average to educate. While there may be advantages from school choice, the likely losers are children with special needs. With widespread school choice, we expect private schools respond to market incentives and accept applicants with lower expected cost of education. The result is that public schools will disproportionately be left with the expensive-to-educate and a shrinking budget.

The specific proposal Palin discussed yesterday is not as disadvantageous to children with special needs as universal school choice. She proposed: “We'll make explicit that when state funds are portable, federal funds are fully portable.” If state and federal funds for children with special needs were accurate measures of the additional cost of educating such children, such a policy could work without further disadvantaging the already-disadvantaged.

Unfortunately, the correlation between funding and need is not very strong. Our systems for classifying children’s needs remain quite inaccurate. The result is that children whose parents understand the system often receive more funding than more disadvantaged children.

If funding followed the child to a private school, incentives for gaming the system would grow stronger. Many parents would be happy to have their child diagnosed with a minor learning disability so the government paid their private school tuition.

School choice is an important policy option that should be explored. Such exploration will need well-conceived regulations to minimize private schools cherry-picking cheap-to-educate students and parents gaming systems of government-paid tuition at private schools. It is hard to believe Sarah Paliun’s party of deregulation will somehow get the regulations right in this domain.

Saturday, October 25, 2008

Yesterday a major party's presidential candidate proclaimed boldly in his speech on economic policy:

We cannot spend the next four years as we have spent much of the last
eight: hoping for our luck to change at home and abroad. We have to act. We need
a new direction, and we have to fight for it.

The candidate continued with talk of the importance of "spreading equal opportunity for those who need jobs" and "I'm going to make sure we take care of the working people who were devastated by the excesses of Wall Street and Washington."

Somewhat peculiarly, that candidate was John McCain. I say it is peculiar, because the speech was full of policies to enrich the prosperous. I have already posted on hhow is promises to cut capital gains taxes do nothing to spur investment but raises the debt we will pass on to our children and the fantasy underlying how his claim about balancing the budget while cutting taxes enormously.

McCain claims Obama's tax increase will "would impact 50 percent of small business income." What is amusing about this statement is that McCain does not explain what share of small businesses will be affected by the tax policies. Small business income in phenomenally skewed, my deduction is that the vast majority of small businesses will benefit under Obama's plan.

McCain's claim "I'm not going to spend $750 billion dollars of your money just bailing out the Wall Street bankers and brokers who got us into this mess" are contradicted by his plan for "buying up bad mortgages." As I hope he understands, his plan is to buy those mortgages from the Wall Street bankers he claims not to be bailing out. While sophisticated plans could purchase mortgages for far less than face value and help homeowners without bailing out bankers, the version of McCain's plan I read was a massive transfer to banks and other lenders. That is far from my preferred way to spend the bailout funds.

Every politician has strong incentives to explain how their policies will help essentially all Americans. McCain the politician responds well to those incentives. Unfortunatley, McCain the policy-maker does not follow through.

Maybe He's Hoping for a Raise?

Palinomics: What does it MEAN?

Over at Politico, Ben Smith has an article suggesting tension between the Palinistas and McCainiacs. I'll leave aside Smith's, um, generous description of Palin's debate performance as "adequate", and his, um, intriguing reference to Joe Biden as "the Democratic Party's foremost debater."

Let's focus instead on this statement of Sarah Palin's apparent opposition to further fiscal stimulus:

"I say, you know, when is enough enough of taxpayer dollars being thrown into this bill out there?" she asked. "This next one of the Democrats being proposed should be very, very concerning to all Americans because to me it sends a message that $700 billion bailout, maybe that was just the tip of the iceberg. No, you know, we were told when we've got to be believing if we have enough elected officials who are going to be standing strong on fiscal conservative principles and free enterprise and we have to believe that there are enough of those elected officials to say, 'No, OK, that's enough.'" 
Can you discern an actual economic policy argument here? Even a meaning

I still knock wood every time I say or write the phrase "if we win". But, if we win, I will admit that I am really looking forward to watching the 2012 GOP primaries as Palin, Huckabee and Romney go after each other. I suspect the Mittster, for one, will be less than generous in his characterization of Palin's "economic" views.

Friday, October 24, 2008

McCain Taxes "Cuts" or "Delays"?

Today the Wall St. Journal editorial page repeated its oft-made claim that: "Sen. Obama is proposing to raise taxes more than any recent candidate, while Sen. McCain wants to cut them substantially."

What I find remarkable about the claim is how it ignores basic accounting: tax cuts without spending cuts will raise government borrowing above the already too-high level of the Bush Administration. That unsustainable borrowing, in turn, will mostly lead to higher taxes in the future. There may be some modest reductions in spending to the extent McCain's tax cuts lead the government to break promises about Social Security and health care for retired people - although this is not the spending restraint McCain emphasizes. As everyone who has looked at the federal budget knows, with military spending off the table, there is not enough other government spending to cut to make up for McCain's tax plans. To put it simply, McCain's plans to reduce tax revenue without cutting spending are delaying taxes for our children to pay, not cutting them.

McCain is a good and decent man. It is a shame that his weak knowledge of economics leads him to favor policies that I think he would abhor if he understood their effects.

Palin's Makeup Artist Made 5 Times as Much as Holtz-Eakin

After reading in the NYT caucus blog that the top paid person in the McCain campaign for the first 2 weeks of October was Amy Strozzi, Pailin's traveling makeup artist, I decided to see what McCain's domestic policy advisor (and former head of the CBO) Doug Holtz-Eakin had earned.

It took me a while to figure out how to get around the FEC website but I finally found the right pdf. So it turns out that Strozzi, who earned $22,800 made 5 times more than Holtz-Eakin who only earned $4525.12. Interestingly, Randy Scheunemann, McCain's foreign policy adviser made nearly three times as much at $12,500.

Maybe they should have put Strozzi up against Austan Goolsee at the CFR instead of Doug.

Rogoff and Redistribution

In response to the flood of Republicans who are now endorsing Obama, Brad Delong asks:

But where are the economists?

Marty Feldstein?
Glenn Hubbard?
Greg Mankiw?
Eddie Lazear?
John Taylor?
Michael Boskin?
Ken Rogoff?

I think the one name on that list of prominent academic economists who support McCain that has always gnawed at me is Harvard economist Ken Rogoff. I've been wanting to link to this interview with Rogoff in Der Spiegel for some time and I think that this silly "spreading the wealth" line of attack by McCain is a good opportunity to use Rogoff's words against his apparent choice for President. Here are a few excerpts.

Rogoff on the inheritance tax:

I tell my children that a man like Bill Gates has a personal fortune of $100 billion. They can't even comprehend that. Then I explain that he has more money than some countries. If we have these extremes, I can't understand why we should get rid of the inheritance tax. It hasn't harmed the economy, and it has evened out the distribution of income across generations.

ummm, that sounds a tad bit like "spreading the wealth"...does that mean that one of the big 90 is really a socialist?

Rogoff on inequality:

There has never been a better time to get rich. It's quite astonishing how much money people make in the hedge fund business and in the private equity field, and how well-off affluent families really are. Given these contradictions, it comes as no surprise that average Americans have a different perception of the economy than (US President) George W. Bush and his friends. They can play around with statistics as much as they want, but it's clear that we have an unfair distribution of wealth.

On labor's share of income:

Rogoff: There has been a noticeable decline in the labor factor in all wealthy countries in the past 20 years. The rich are getting richer, but those at the lower end aren't moving ahead as quickly as the capitalists.

SPIEGEL: So Marx was right after all?

Rogoff: We're still a long way away from that. Workers are not being exploited. But if their share of growth doesn't increase, this could be a potential cause of social tension worldwide. ...