Betting on Bradley?

The sophisticated average of polls fivethirtyeight.com 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 fivethirtyeight.com 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 intrade.com 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.

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.

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.

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:
http://econ4obama.blogspot.com/2008/10/obamas-95-illusion-revisited.html
http://econ4obama.blogspot.com/2008/10/obama.html

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
disapproval.

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 ElectionTaxes.com , which requires you to input detailed information from your tax forms.

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.

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:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4).

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.

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?

http://www.joewurzelbacher2010.com/

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.

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. ...

Barbara West: McCain SecTreas/WH Spox?

In the unhappy event that McCain should win, I think Barbara West could be an excellent choice to serve as simultaneously as his Treasury Secretary and WH Spokesperson.

Joe Stiglitz for Secretary of the Treasury?

I was able to hear Joe Stiglitz at the Women's Economic Round Table in NYC (held at Bloomberg News) on October 22. He offered a biting and funny critique of the current policy makers' inept attempts to deal with the financial crisis, describing the bail out effort as giving a blood transfusion to a hemorrhaging patient without attempting to stop the hemorrhage. But his main point was really the failure to do anything for the taxpayer, like stopping dividend payments for those banks and other entities accepting the bailout money (as was done in the UK). He estimated that something like 20% will immediately go out in dividends and said why not just write a check directly to them and skip the middleman? He also emphasized the need to help those who live on Main Street--he recommended extending unemployment benefits and giving aid to local and state governments, which he said were automatic stabilizers because when the need lessened the payments would decrease. For immediate infrastructure that could be built quickly he recommended school rehab and construction, for which there is a readily available labor force since residential construction has fallen so much. Overall he recommended a stimulus package of about 2-3% of GDP over two years. Both he and Paul Volcker, another panelist, described the current crisis as serious, without precedent, and said new forms of financial regulation will be needed. The third panelist, Robert Mundell also agreed with that, as I recall, but pinpointed the imposition of a high corporate income tax in June of 1932 as a major cause of the length of the depression in the 1930s; he recommended it be cut to 20% as a major way to restore confidence and limit the seriousness of this recession. Thanks to the video clip posted by Don Pedro on the Bloomberg debate between Holtz-Eakin and Furman, I know that McCain is proposing almost what Mundell wants, lowering it to 25%.

But can we have some debate and comments about Joe Stiglitz for Treasury Secretary? I'd really love readers' reactions. When in grad school at Yale I must admit we thought of him as quite conservative, steeped in Samuelson neoclassical economics (really at the time I don't think we fully realized how "liberal" that was relative to what else was out there and beginning to come to prominence in the discipline). But it seems to me he has become radical, even, and feminist, and I never thought I would ever say that either. At the same forum he extolled the Scandinavian countries as countries that have adjusted successfully to an open global market (saying because they were small they didn't have much choice) through a strong social safety net and massive investment (about 1% of GDP) to advance women in the labor market, because that is an investment with high returns and contributes to a successful, productive economy.

Those comments are a far cry from those of Larry Summers on the lesser brains of women. Really I fear that Obama could make a terrible mistake, insulting many, many women who have campaigned for him by picking Summers as Secretary. Please, please NO! It's really not possible to have men with these views in important leadership positions without doing damage to the advancement of women.

Capital Gains and Capitol Pressures

Politics provides strong incentives to stretch or deny the truth. Michael Boskin is a distinguished economist who resisted those ubiquitous pressures for many years. That is, although conservative, Professor Boskin represented the consensus views of economists to powerful people in Washington, resisting political pressures for wishful thinking.

It is, thus, both understandable and regrettable to read his editorial in today's Wall St. Journal., where he claims that raising taxes on capital gains will reduce the capital available to American businesses. If the government reduces its tax revenue by a dollar, then the domestic capital available to American businesses declines by a dollar. If that tax cut spurs less than a dollar of private savings, national savings declines.

The United States (even after last month's debacle) has trillions of dollars of unrealized capital gains. These gains are the result of savings and portfolio allocation decisions Americans made in past years. Thus, the main effect of a capital gains tax cut is to reward people for earlier decisions. If McCain cuts capital gains taxes in 2009, national savings will decline during his first term.

Economists disagree on many things, but both liberals and conservatives agree on basic principles of causality: unanticipated 2009 tax laws did not affect savings from 1960-2007. As I said, it is understandable that Professor Boskin gave in to pressures to conform with conservative dogma. At the same time, I wish he had continued defending future generations from unsustainable deficits and continued defending common sense.

Obama Economic Advisers Crush Doug Holtz-Eakin

Here's the highlights clip from a debate between Austan Goolsbee and Doug Holtz-Eakin at the Council on Foreign Relations. Starting at the 7:35 mark he's just mocking Holtz-Eakin, and he has the CFR crowd in stitches.


And here's this great dual interview on Bloomberg with Jason Furman and Holtz-Eakin. My favorite part is about 2:30, where Holtz-Eakin making the laughable claim that the increase in inequality in the Bush years is just due to rising returns to education, rather than, say insane executive compensation. While he's speaking, the screen displays a summary table from the Piketty and Saez inequality work, which shows that over 2002-2006 the average income gains for the top 0.1% were 57.5%. Those are some juicy returns!

Economists Grade Candidates on Issues Vital to Women

Following up on moxiemomma's inaugural post about the new report put out by the Economists' Policy Group on Women's Issues:

The full report provides a very valuable and concise summary of the candidates' positions on the 10 issues. I imagine the McCain's campaign will try to argue that these economists are just another socialist front group, but it's hard to imagine how McCain could come out ahead in a rating on women's issues, under any criteria.

The contrast on domestic violence is the most extreme. On the one hand, you have Obama, who sponsored legislation both as a State Senator and as a U.S. Senator to protect victims of domestic violence, and Biden, whose signature legislative achievement is the Violence Against Women Act (VAWA). On the other hand, McCain "has consistently opposed efforts to curb domestic violence" and voted against VAWA twice, including in 2007, when it was signed by President Bush.

Below I've copied excerpts from the sections on two issues that have not been discussed much during the campaign: paid leave and early childhood education.

I am a particularly big fan of Obama's early childhood education plans, which were written in consultation with Nobel laureate economist James Heckman and are motivated in part by research showing that each $1 spent on early childhood education has a payoff of $3 or more down the line due to higher wages, lower crime and delinquency, and lower rates of welfare participation. Here is a 2004 book by the Economic Policy Institute which summarizes that research. Given the tremendous consensus around the social value of early childhood education, it's stunning that McCain doesn't make even a nod towards expanding such programs. I guess he thinks that would be "socialism." Here are the excerpts:

Paid Time Off
The United States is one of a few nations without a national program of paid family leave...

McCain: Grade D
The McCain campaign does not support any expansion of the unpaid provisions of the 1993 Family and Medical Leave Act (which provides up to 12 weeks of unpaid leave to workers at firms with 50 or more employees). Nor has the Senator supported proposed federal legislation to require paid sick days for most workers or paid parental leave for federal employees. However, the proposed Family Friendly Workplace Act, which the Senator supports, would provide compensatory time, where employees can bank unpaid overtime and use it later for time off, including for illness. Some analysts are concerned that this type of law, which would negate portions of the Fair Labor Standards Act, could lead to employer abuse and avoidance of overtime pay, while others believe it would respond to the felt needs of workers for more flexibility at work.

Obama: Grade B+
The Obama campaign supports the extension of the Family and Medical Leave Act from employers with at least 50 employees to those with at least 25, as well as extensions to cover care for elders, care for any ill individual residing in the household for at least six months, leave for purposes of dealing with domestic violence, and 24 hours leave per year for parents to be involved in their children’s academic activities. The Senator is also a co-sponsor of proposed federal legislation that would require most employers to provide up to 7 days of paid sick and family care leave for employees. He also is a co-sponsor on a bill to provide paid parental leave to federal employees. The Senator does not support a central insurance fund to provide paid family leave, instead proposing to seed funding mechanisms at the state level.

Child Care and Early Education

McCain: Grade D
McCain has proposed no new initiatives to expand child care or early childhood education. Instead he proposes increasing the child exemption on the personal income tax. The Senator has not supported any expansion of Head Start, child care funding for parents transitioning from welfare, nor after-school programs under NCLB. His campaign instead suggests that states use existing Head Start funding more wisely.

Obama: Grade B
Obama has supported an expansion of Head Start funding and the creation of challenge grants for states to support care for ages 0-5 including universal, voluntary pre-school. The Senator also supports an expansion of child care funding under CCDF, the creation of a Presidential Early Learning Council to promote collaborations around child care and early child hood education, and an expansion of after-school programs under NCLB. The latter proposed expansion would, however, cover only 1 million additional children.

Obama & McCain rated on women's econ issues

The Economists' Policy Group, a nationwide network of more than 40 economists today released a report card on how the two presidential candidates are doing on 10 economic issues of importance to women. Not surprisingly Obama does much better than McCain since he has better anti-poverty and health care programs, supports paid sick days and child care expansion, and so on. The two come out closest on health care, where McCain rates a C- and Obama a B-; the group argued that the idea of McCain's tax credit for health care has merit since the refundable credit would make the tax expenditures for health care much more progressive, but without more regulation it might lead to less coverage. Obama's plan at least guarantees universal coverage for all children if not all adults.

Here's the report card. The full report and the list of members of the group can be found on their website, www.epgwi.org.

REPORT CARD McCain Obama
Overall Grade D B
Health Care C- B-
Pay + Employment Equity F B
Retirement Security D B
Taxes D B-
Paid Time Off D B+
Child Care + Early Education D B
Poverty D B
Nontraditional Families C- B+
Domestic Violence D A
Reproductive Rights F A

Senator McCain repeated today the misleading claim: “History shows that cutting [the capital gains] tax rate actually yielded more revenue to the government.” It is true that a temporary cut on capital gains will often lead to a short-term spike in people selling assets and realizing capital gains. This burst of capital gains realizations may increase revenue that first year – but at the expense of lower tax revenues in future years because there are fewer capital gains left to be realized. In other words, a cut in capital gains taxes has more in common with government borrowing (where future deficits rise) than with the Laffer curve (where tax cuts reduce future deficits).

It is also ironic that Senator McCain believes a policy that leads to asset sales will spur investment. It is not true that all demand curves slope down, but to the extent they do for stocks, a cut in capital gains will lower stock prices. That is a peculiar policy to spur investment.

Unfortunately, as Senator McCain's economic advisors understand (even if he does not), taxing capital gains is not "a case where increasing taxes would decrease the funds available for all the spending government does." Senator McCain accuses Senator Obama's plans of "digging us further into debt," while McCain promises unfunded tax cuts in capital gains (among others). Senator McCain supported the vast majority of the laws President Bush supported; unfortunatley, he appears to also reject the laws that President Bush has rejected so forcefully - the laws of arithmetic.

1913: When Socialism Was Ratified

Since the GOP can't stop with this socialism nonsense, I thought I'd quote the 16th Amendment to the United States Constitution: 

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

You can read about the amendment's history here. The jist has to do with Article I, Section 2 of the Constitution, which is primarily about the U.S. House of Representatives. It includes this language:

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers

If the income tax was a direct tax, then it had to be paid in proportion to states' populations. The 16th amendment allowed the feds to collect income taxes without regard to state populations. Insofar as the amendment does not declare a flat tax the only constitutional income tax, it also allows for progressive income taxation.

Indeed, here's what the U.S. Treasury's website says about the income tax enacted immediately after ratification:

By 1913, 36 States had ratified the 16th Amendment to the Constitution. In October, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid income tax at the time. Form 1040 was introduced as the standard tax reporting form and, though changed in many ways over the years, remains in use today.

In sum:

1. The income tax has its own amendment to the U.S. Constitution.
2. The Congress in office at the time enacted a system of progressive marginal income tax rates.
3. Today's Republicans believe a progressive marginal income tax system is socialism.
4. Therefore, today's Republicans must believe that the legislatures of 36 U.S. states and the U.S. Congress of the teens were.....SOCIALISTS!

It's that simple. 

Odd Man Out: Sack's Article Was OK IMHO

Regarding that Kevin Sack article in today's NYT, I have to disagree with my fellow e40 bloggers.

Here are two substantive criticisms that have been made:

1. Sack doesn't come to a conclusion about which plan is better. True. But, I looked at the front page scan of today's Times (I read it on my Kindle, since our local delivery person refuses to deliver the dead-tree version to my house). And the piece isn't an analysis piece, it's a straight-news article. As my wife the accomplished journalist will tell you, there's a big difference: straight-news articles report what's out there, hopefully with sufficient info to allow people to draw reasoned conclusions on their own, while analysis pieces have some room for the reporter's own conclusions. 

Now, I understand that many people would like reporters to do more refereeing, and on some things I agree. But if that's the problem, blame the current model of journalism, not Sack personally.  

Moreover, I have a bigger problem with Uwe Reinhardt than with Sack:

Dr. Reinhardt offered voters the same instruction he delivers to his students, that economics as practiced in the political arena is often “just ideology marketed in the guise of science.”

“I give a lecture on whether you can trust economists, and I tell them no,” Dr. Reinhardt said. “I tell them that if at the end of the year I tell you the time of day and you trust me, I have failed.”

Reinhardt's view is not exactly gospel: there are some things that are more plausible than others, and the idea that all economists are just hacks out to sell you snake oil is a pretty damaging one. (Not because there are none who are hacks, but rather because the rest of us wind up working pretty hard to undo the damage they do, a job made much harder by the position that Reinhardt is selling.) Reinhardt is a pretty eminent guy among health policy scholars, though, and I can understand why Sack would print that quote. The one criticism I'd offer of Sack here is that he doesn't question whether Reinhardt's right about this, i.e., he doesn't quote anyone else addressing that quote (uh-oh: now I'm arguing for he-said/she-said journalism!).

Finally, on the merits, I will say that I am less sure than others about the effects of the candidates' health insurance proposals, particularly McCain's plan (whose details I know better than I do Obama's plan's). McCain's plan would involve a pretty massive change in the system, with the extent of adverse selection hard to predict ex ante. For that reason I think almost any estimate is highly speculative. Indeed, that's a major reason to oppose the plan, in my view. Its advantages appear to me to be slight by comparison to its potential adverse effects. Since we can't reasonably predict how likely the really bad cases are, why take the risk? But honestly, I'm skeptical of any point estimates on McCain's plan. And I'm betting I'd feel similarly if I knew more about Obama's.

2. Sack reports the results of a study paid for by the McCain campaign. Also true. But I think Sack did a good job of providing lots of info about who's who, and who benefits from which association (e.g., noting that Parente is a co-owner of the firm that was paid by the McCain campaign for their report). I don't agree that Sack should "toss in the trash can the analysis" of that paper, simply because it "was paid for by the McCain campaign", as Don Pedro suggests. The fact that the report was paid for is enough for readers to know. (My one real criticism in terms of giving readers info they need is that Sack doesn't identify Kate Baicker as a former Bush appointee at CEA, though nothing she says is particularly colored by that fact, so it's a minor sin.)

[Update: adding this line for consistency] Here's a third criticism:

3. Mis-spelling Goolsbee's name. I am happy to note that, as journalistic mistakes go, this is considered a very big one. My lovely wife will tell you that journalism students get auto-fails on assignments with errors like this. It's shocking that Sack would make this mistake, esp given the fact that he's probably been working on this article for a while, not under a tight deadline.  That said, personally I think newspapers should worry more about content and less about stuff like that than they do. (And they really do worry a lot about stuff like mis-spelling names; I've picked up my share of 1 am phone calls from copy editors calling to check with Gwyneth on stuff like that.)

Clarification on the Prescott Exchange

Brad Delong has posted an e-mail exchange between one of the organizers of Obama for a Sound Economy and Nobel laureate Ed Prescott.

The OSE guy says in the post "I showed this exchange to the founder of "Economists for Obama" (http://econ4obama.blogspot.com/) and he said that this is most definitely Prescott and that I probably sent Prescott into a rage with the Heckman quote that appears on the first page of our site."

That's not correct. He did send us the emails, and I replied that Prescott's response wasn't surprising, but of course I can't attest to whether the emails are genuinely from Prescott. And I didn't speculate as to why he would have written what's in the messages.

Its Goolsbee NOT Goolsby

In this pathetic New York Times article by Kevin Sack on the candidates health care plans, there is a clear "tell" that Sack is out of his depth. Any reporter who has been covering economics would know by now that Austan Goolsbee is spelled with 2 e's and not a "y":

"Mr. Obama receives advice from Mr. Cutler, David Blumenthal and Jeffrey Liebman, all of Harvard; Stuart Altman of Brandeis; Austan Goolsby of the University of Chicago;..."

Read Don Pedro's post for a thorough dismantling of this piece. The article basically says that since economists are not totally unbiased we can't learn anything about the merits of each plan. You would think that 2 weeks before the election the New York Times could find somebody to take the time to read through the 2 plans and provide at least some informed guidance about them. What is the purpose of this kind of an article?

As Brad Delong would say..."why oh why can't we have a better press corps?"

More Socialists: McCain, Ford, Reagan, Bush I and II, Milton Friedman

A reader wrote in to ask us to explain the mechanism of how people who don't pay income taxes get a tax cut.

Note that total taxes paid on wages = income taxes on wages + payroll taxes.

Yes, many tax filers--38 percent in 2009 under current law--do not pay income tax. They still pay payroll taxes (the employee's share is 7.65% of wages up to a ceiling, and employers pay an equal amount). So if they receive a net credit (i.e. their income taxes on wages is negative), their total taxes paid on wages decline. When they file taxes with the IRS, they owe less. That's the tax cut.

Such tax cuts have been put into law many times in the past, in the form of the introduction and expansion of the Earned Income Tax Credit (EITC) which is one of the chief anti-poverty tools the country has.

There are three ironies in the right's current assault on tax credits as "socialism": 1) McCain himself is proposing a huge tax credit for health care, 2) the main existing credit, the EITC, was introduced under a Republican president (Ford) and expanded by Reagan, Bush I, and Bush II (and Clinton as well), and 3) the EITC is a very close cousin of the negative income tax that was proposed and pushed by Milton Friedman, the grandfather of conservative economics.

Where Not to Go for Analysis of the Candidates' Health Care Plans

The New York Times has just published a horrendous article about the candidates' health care plans. The writer, Kevin Sack, takes the attitude that because there are different estimates of costs and effects on coverage, none of them can be believed. It never seems to occur to Mr. Sack that it's the job of a policy journalist to sort through the competing estimates.

What he should have done is to toss in the trash can the analysis that was paid for by the McCain campaign and then sift through the two respected, non-partisan analyses of the plans to get to the essentials. There is the Lewin Group's report and the health care section of the Tax Policy Center's analysis of their tax plans (executive summary and complete report.) The Lewin Group's site even has a helpful Powerpoint which summarizes things for busy journalists with no time to read or think.

Update: This post from Think Progress points out that the Lewin Group's estimates of changes in coverage under the McCain plan are very different from those of the TPC analysis and two other analyses: the Health Affairs article and another study by the Commonwealth Fund. The post includes a table comparing the different estimates--exactly the kind of information it would have been useful to have in the NY Times article.

McCain's Plan B: Tax Cuts are Socialism!

Like Jonah, I find it kind of silly to even address McCain's bizarre "socialism" charge. But I haven't quite seen anyone make the following point yet so here goes: After months of just flat out lying about Obama's plan to cut taxes, its pretty clear now that McCain's plan B is to simply acknowledge (implicitly) that Obama is cutting taxes, but call it a dirty word. So I guess that even though tax cuts used to be the cure-all for everything for conservatives, now that our guy is beating the pants off their guy, all the old rhetoric goes out the window --that is until next election.

Bernanke's goals for a stimulus package (& mine)

Ben Bernanke tells the Congress that a good fiscal stimulus package should:

• [have] its peak effects on aggregate spending... during the period in which economic activity would otherwise be expected to be weak;
• maximize the beneficial effects on spending and activity per dollar of increased federal expenditure or lost revenue;
• [ensure] funds are used effectively and responsibly;
• limit longer-term effects on the federal government's structural budget deficit;
• [and redress] specific factors that have the potential to extend or deepen the economic slowdown... [such as] improve access to credit by consumers, homebuyers, businesses, and other borrowers.

This is a good list, but it leaves of an important category: the many good forms of supply-side economics. These spending priorities such as expanding children's access to health care, improving schools for the disadvantaged, increasing research on energy efficiency, and so forth both spur aggregate demand today and build productive capacity for the future.

Obama's 95% Illusion Revisited

In a previous post, I debunked the Wall Street Journal's attempt to say that it is an only an "illusion" that 95% of workers would get a tax cut under Obama's plan.

The WSJ suggested that tax cuts that come in the form of tax credits shouldn't count as tax cuts for people who don't pay income tax, even though those people do pay payroll and other taxes. I rejected this as an arbitrary and senseless definition of "tax cut."

The fact checking site Politifact, however, points out that if you play the WSJ game and only count tax cuts among those who pay income tax, you find that 92% of those workers would get a tax cut under Obama.

Another Economist for Obama

Heidi Hartmann informs me by email that she is an economist for Obama and that she has been an outside adviser to the campaign, so I will add her to our comprehensive economic advisers list. She may even blog on our site!

Joe the Plumber: the Director's Cut

Sarah Palin wrote me this morning:

During a recent campaign event in Toledo, Ohio, "Joe the Plumber" asked a simple question and got a surprising answer from the Democratic nominee. When he asked why Barack Obama's tax plan was going to punish him for working hard and living the American Dream, Barack Obama responded, "When you spread the wealth around, it's good for everybody."

In that brief exchange, the American people got to see what this campaign is all about ...

Unsurprisingly, this is untrue. The actual conversation was not this "brief exchange"--it was a 5 1/2 minute conversation. Here is the full video and transcript.

In the video, you can see Obama's breathtaking skills at work. He calmly explains his tax plan, fairly articulates the case against his own plan, and then presents the case for it, completely disarming Joe the Plumber. Obama's so amazing in this video, I half-expected the campaign to send this video around on their email list.

Chairwoman Palin?

I've resisted the urge to write about the McCain campaign's latest silliness, the whole Obama's-a-socialist-because-of-his-"spread-the-wealth-around"-comment. But I can't help myself. Two points:

1. The definition of socialism to which most economists, poli sci types, etc, adhere is that socialism is that form of economic organization in which the state controls the means of production.
   
   
2. While there are some examples of this sort of thing in just about any market-based economy (geez, the government controls the military!), the idea that redistribution per se implies socialism is ridiculous. Hell, the second welfare theorem states that in a perfectly competitive economy (I bet that got the attention of all those neoclassical macro fans!), you can get to any desired  (Pareto) efficient allocation with laissez-faire marginal tax policy and the right set of lump-sum...wait for it...redistributions! I guess in current parlance you might call that socialism the Arrow-DeBreu complete-markets way.

   More seriously, I challenge anyone to find me an example of an extant national economy of a non-failed state that has no government involvement. You can't do it, because even in the most laissez-faire-loving polity, someone has to protect property rights, and lump-sum taxes aren't feasible in the real world.

   A further point on redistribution is that it is effected not only via tax policy, but also via spending policies. It makes no sense to denounce as socialism refundable tax credits but not, say, government-funded refinancing of underwater mortgages at below-market rates. I could go on.

So the real questions for a mixed economy like ours, and like those in Europe to choose one example, is not whether there is redistribution as a result of government's activities, but how much there is and who benefits.

Now that we have all of that stuff out of the way, I'd like to flag this excellent point by TPM Media's Eric Kleefeld:

Palin: We Shouldn't Experiment With Socialism
Sarah Palin derided Barack Obama's and Joe Biden's tax policies yesterday, telling a rally in New Mexico, "Friends, now is no time to experiment with socialism." Note: Sarah Palin is the governor of a state that practices collective ownership of oil and other natural resources, and equally distributes the state's cut of the revenues to every citizen.

It's been amusing to watch the denunciations of Obama's economic plans by conservatives (e.g., the 90 economists who call themselves 100 economists supporting McCain). You get the usual stuff -- taxes bad, spending bad, defies economic reason, Obama=socialism, etc. Yet Sarah Palin's government fuel-injected popularity somehow has escaped comment.

What would a real free-market fan do if s/he were running Alaska? I think it's pretty clear: auction off all oil rights to the highest bidder (the specific form of auction would be important in practice, but that's a side point for my purposes). The proceeds could then be distributed however Alaskans see fit. One possibility would be to hold them in a trust whose investment income could be used to pay for future state operations. Another possibility would be to simply write checks to all Alaskans immediately following the auction. There are serious distributional questions involved in these and any other approaches to distributing revenues, and I don't mean to take a position on those issues here.

If I were an Alaska resident, I would want to see my state government regulate the use of these resources in a way that protected health, safety, and environment. So I wouldn't stop at the auction: I would also enact sensible regulations concerning the extraction of oil, use of the land, etc. I recognize that others would disagree, which is fine, because this, too, is a side point.

The one thing that is absolutely not debatable is that a serious laissez-faire type would not want the government making year-to-year operational decisions about Alaska's oil resources. Apparently, though, Governor (Chairwoman?) Palin disagrees.

Mankiw is careless about health care

Greg Mankiw writes:

I don't see a good argument for [Obama's health care plan] favoring health insurance bought through an employer over health insurance bought as an individual. A level playing field makes more sense. David Cutler notes in his book Your Money or Your Life,

Health insurance is not something that is made better by tying it to
employment. As a result, essentially all economists believe that universal coverage should be done outside of employment.

I agree with David. Note that the Furman-McCain plan moves toward a level playing field. [gregmankiw.blogspot.com]

David Cutler's point about the benefits of decoupling insurance from employment is specifically in the context of universal coverage. The McCain plan will not move meaningfully towards universal coverage. Thus, its promotion of individual purchases can lead to adverse selection worsening substantially in employer-based plans as the healthiest people leave group plans for high-deductible plans. It is not a level playing field to worsen adverse selection. Thus, it is not kosher to quote Cutler's endorsement of universal coverage outside of employment as an endoresement of moving us away from universal coverage by reducing employer-based insurance.

Galbraith vs. Walker in the Fiscal Stimulus Debate

Obama adviser Jamie Galbraith is everywhere these days. His new book The Predator State is reviewed by Benjamin Friedman in the NY Review of Books. He's quoted in the NY Times today stating the obvious about the conflicts of interest of Goldman alumni working at Treasury, and he's gleefully taken the chief antagonist role in this very stimulating debate at the National Journal site.

There exists a species of DC policy thinker dedicated to the proposition that the greatest threat sto the country are its long-run obligations under Social Security and Medicare. Even in normal times, these are exaggerated claims. With Medicare, the problem is that costs are skyrocketing for the entire health care system, not just the program. And with zero changes in policy, Social Security could pay full benefits for the next 33 years, and afterwards still pay 78% of scheduled benefits. For Medicare, the task at hand is reform of the entire health care system, while for Social Security, just minor tweaks are needed, and there's no hurry. But of course these are not normal times.

On the National Journal site you have several in this crowd who, when asked "Is there room for fiscal stimulus?" all grudgingly respond in the affirmative, but then they leap across a logical Grand Canyon to say that a stimulus should be used as a pretext for cutting Social Security and Medicare. Huh? David Walker goes even farther and says it says we need to address the "super sub-prime crisis associated with the federal government's deteriorating finances."

Galbraith rightly calls Walker out for trying to hijack the language of the financial meltdown. The financial crisis has nothing to do with the long-run entitlement picture. I hope that "super sub-prime crisis" doesn't become the metaphorical safety blanket for every policy wonk arguing that his/her issue is the do-all and end-all for humanity.

In a response to Galbraith, Walker digs in even more deeply, again invoking the current financial woes and saying that he wants "to prevent a similar but larger and potentially more damaging breakdown in the federal government's own finances." This doesn't make any sense at all. There is no situation that the federal government could face with its own finances that would be "similar" to the current crisis.

The danger is that enough people might be confused by this rhetorical jujutsu into thinking that we can't afford the fiscal spending that's desperately needed to stave off the coming deep recession. I count myself firmly in Galbraith's camp on this one.

McCain's Health Care Shell Game

We've spent considerable time here at Economists for Obama pulling our hair out trying to understand how the McCain health care plan would work. We've conducted several analyses of the plan's likely effects, based on our best understanding of the plan at the time.

I wrote this analysis last April, assuming--as the McCain campaign's official plan seemed to say and published accounts stated--that the McCain insurance tax credit would not apply to employer-provided plans. Months later, the McCain campaign said that, no, it could be used for employer-provided plans.

Then, last month, Jonah wrote this post taking a close look at the effects of the McCain plan, assuming--as public statements from the campaign stated--that under the plan, employer-provided health care benefits would be subject to payroll tax (as well as income tax.) A few days later, I discovered through an account by a third-party analysis that the campaign had apparently switched positions on this.

It would seem that the McCain people are trying to keep the plan as a moving target. That way, its flaws are harder to spot, and even fair and serious-minded critics (like us) get dizzy trying to understand what the plan is.

The confusion that the McCain campaign has kicked up around its own plan was enough to get Factcheck.org to criticize a UAW ad as being made on a "false assumption," when that assumption (the non-exclusion of benefits from the payroll tax) was part of the version of the McCain plan that was first publicized.

This shell game cannot hide the fundamental problem with the McCain plan: it would drive young and healthy workers to drop their employer-provided plans, leading to the eventual implosion of the employer-provided system, and leaving people on their own to purchase insurance in the individual market. In this market, many people with pre-existing conditions would not be able to purchase coverage. Sarah Palin herself would probably not be able to buy coverage on this market, given the fact that she has a child with Down syndrome. I discuss her case in more detail here and explain why McCain's proposed subsidy for high-risk pools is no where close to what would be needed to cover these people.

The Factcheck piece led me to this page on the McCain site about his health care plan. (This must be very new, because just a few weeks ago I checked again to see what the McCain site said about its health care plan, and I didn't see this page.)

There's a great deal of information on this page that is incorrect or deceptive, but here's what I found most confusing:

Importantly, younger and healthier employees with the McCain health care tax credit will have a bigger incentive to stay with the employers. For example, a 25-year-old employee in the 25 percent tax bracket with a $2,500 tax credit could either purchase a policy in the individual market for the same amount or stay with his employer plan and receive a $5,000 policy with an additional $1,250 to invest in a portable health savings account. Why would people choose worse insurance and less money? (bold and italics theirs)

The first statement is precisely the opposite of the truth. Younger and healthier employees have the greatest incentive to leave their employers, because they are low risk and thus able to buy plans more cheaply on the individual market than from their employers.

The part in bold italics just doesn't make sense. If the person in his example has a $5000 policy with his employer, to obtain that policy he would have to use his $2500 credit plus $2500 out of pocket, which is clearly more money, not less. Whether this is worse insurance or not depends on what a young, healthy single guy can get for $2500, but it may well be more than he get from his employer's $5000 policy.

I really don't understand what the text quoted above is trying to say. Can anyone explain it to me? Oh, Doug Holtz-Eakin, why do you torment me so?

(Palin Failin' at) Signaling Game

By now, in all economics graduate programs and some undergrad courses, students learn the Spence education signaling model. Michael Spence won the Nobel Prize a few years ago for this contribution. If students take an elective, they learn a little more advanced stuff about what might make a signal truly credible. Inspired by the Palin appearance on SNL, I'm going to adapt the interpretation of the signaling model to suggest why Sarah Palin just fell flat on her face

Suppose a voter does not know whether you're a lightweight or a heavyweight leader of great substance and judgement. Lightweights can do some of the things heavyweights can do - give speeches which are written for them for instance. But since speeches don't really separate out sheep from lions, voters might still be skeptical of a speech-giver.

So what's a real heavyweight to do? They should take a costly action or signal which,
(1) if the voter believed it came from a heavyweight would make voters more likely to vote for them relative to just giving the speeches AND
(2) this same action should be so costly for a lightweight that they prefer to keep on giving speeches.

This is the essence of a credible signal.

For example, you could on a foreign trip and meet with world leaders. There is big chance of falling on your face if you're a a pretender but a real heavyweight would be more likely to pull it off.

The problem with appearing on SNL and pretending to dance to a rap is that it fails condition (2). Obviously, total fluffheads can ham it up as well as if not better than serious leaders. SNL is useful for prominent politicians who are known to be smart but also want to prove they have sense of humor. If Gordon Brown could be funny on a comedy show, it would change his image so much for the better!

But Pailin?! We know she's an actress already. We need to know she's serious. Don't confuse SNL with Meet the Press. The fact that we can't imagine her on MTP proves what she is. And the fact that McCain chose her signals what a terrible decision maker he is and what a horrible President he would be.

(Apologies to Peggy Noonan for drawing on her article title.)

UPDATE: The NYT makes my point in an much more elegant way.

Paulson's socialism for the rich, Part 2

The Bush Adminstration's plan for partly nationalizing banks has no serious constraints on the structure of executive pay plans. That oversight is unfortunate, but not primarly because the average pay of executives is so high - the reason typically given.

Executives in financial firms earned tens of billions of dollars over the last half dozen years in large part by mislabeling cashflow as "earnings." Many of those cashflows came from selling various forms of insurance and then assuming the firms would never need to pay out claims. These forms of insurance were called "credit default swaps," "naked puts" and an endless variety of other names. What they had in common was cash arrived in the short run, even at the expense of the firm eventually. That mislabeling of cashflows as "earnings" is obvious now, as the banks report enormous losses.

Unfortunately, many of the executives who approved these transactions were responding to the incentives set out by their boards of directors: incentives to maximize current earnings and this and next year's stock price. Regardless of the average level of CEO and other bank executive pay, the U.S. taxpayers who own such a large chunk of the downside of these firms should make sure the firms do not keep paying executives to destroy value. Thus, the vast majority of executive compensation should be tied to long-term performance. Any reversal of performance -- particulalry if accompanied by fraud or accounting restatments -- should lead to a massive reduction in CEO pay and pensions.

The current financial mess had many causes. Improving corporate governance is only one part of the solution. At the same time, it is a necessary change that should benefit both private and public owners of all enterprises.

Obama's Job Credit

Dan Hamermesh has a nice post up at Freakonomics discussing how Obama's $3000 per job tax credit for companies who expand employment above current levels over the next 2 years is a great example of a well targeted economic policy:

Unlike inefficient subsidies that provide funds for an activity that would have been undertaken anyway, this kind of marginal tax credit only subsidizes new activity. The benefit per dollar of credit is greater with this approach; it is more target-effective.

Indeed, a number of studies evaluating the old N.J.T.C. suggested it had substantial effects in stimulating employment.

Moreover, the jobs created especially benefited low-wage workers: not surprisingly, since the cap on the credit per worker made it a more attractive percentage subsidy for hiring lower-skilled, lower-wage workers.

Theoretical work suggests it is especially likely to be successful in an economy that is sliding further away from full employment, as we now are.

Get Your Economists for Obama Gear!

On this site you can buy "Economists for Obama" T-shirts, bumper stickers, and the like, with the same logo we have in our banner. The person who set up the site and kindly supplied me with the logo assures me that all products are sold at cost.

By the way, here's a funny story: when daily readership on this site started to reach into the thousands, a friend suggested I put up advertising to make a little money, which maybe we could have used to pay for the Economists for Obama victory party. I tried this for about 10 minutes with Google's Adwords, but all the ads that came up for our site (matched to the words that appear on our blog) were for Republican hit pieces insisting that Obama is a Muslim terrorist sympathizer, etc. So, I decided the risk of leading our readers astray with such links wasn't worth the prospect of making a couple bucks and took the ads down.

Paulson's socialism for the rich

The credit system will crash if everyone is afraid to lend to a bank because a few defaults may put that bank out of business. Thus, it is crucial to increase most banks' capital so lenders know banks are not at the edge of shutting down.

This logic led the Bush Adminstration to invest in some banks. At the same time, the investment is wasted if it flows out of the banks as dividends.

In capitalism, the first line of defense against poor loans is supposed to be the capitalists - not the taxpayers. Congress should have required regulated banks to suspend dividends for at least a year. The Treasury should have insisted (and perhaps still can, in future purchases) that banks suspend their dividend until they have paid off the Federal investment. Such a policy is fair, it reduces moral hazard, and it should save taxpayers money.

The Financial Crisis for Dummies

That could have been the title of this entertaining and informative episode of the This American Life radio program from last week. Very highly recommended.

A New Falsehood from McCain

During the debate, McCain said many, many things that were untrue about the economy and his and Obama's economic proposals. Here's one I hadn't heard before:

Right now, because of previous agreements, some made by President Clinton, the goods and products that we send to Colombia, which is our largest agricultural importer of our products, is -- there's a billion dollars that we -- our businesses have paid so far in order to get our goods in there.

Is Colombia really the largest buyer of our agricultural exports? Not even close.

It's number 12. Motivated more out of random intellectual curiosity than by a desire to ridicule McCain for getting wrong a fact of key importance to American farmers, I present to you the Top 15 U.S. Agricultural Export Destinations for calendar year 2007, measured in terms of value in US$:

Country
World Total 89,907,538,204
1 Canada 14,003,843,443
2 Mexico 12,703,911,353
3 Japan 10,104,053,574
4 European Union 8,770,156,617
5 China 8,313,857,408
6 South Korea 3,517,712,913
7 Taiwan 3,112,112,657
8 Egypt 1,801,450,233
9 Indonesia 1,541,886,706
10 Turkey 1,488,891,146
11 Russian Federation 1,328,541,016
12 Colombia 1,221,724,921
13 Hong Kong 1,167,847,169
14 Philippines 1,112,163,369
15 Thailand 869,590,833

UPDATE: Factcheck.org points out that McCain is wrong, but then the "fact checkers" are themselves way off with the actual figures. Here's what I wrote them:

You write:

McCain was way off when he said that Colombia is "our largest agricultural importer of our products." To be sure, Colombia is an important trade partner. According to statistics from the Department of Agriculture, Colombia imported slightly more than $1.4 million worth of U.S. agricultural products in 2007. But that's not even close to the nearly $1.9 billion worth of agricultural products exported to Canada. And there are dozens of other countries that import more U.S. farm products than Colombia does.

The $1.4 million figure is obviously way to low--that's the value of a few shipments of goods. I think you must have looked at the USDA tables and not noticed that the $1.4 million figure is in 1000s. I can't tell where the $1.9 billion number comes from, but it's roughly monthly exports, not annual exports.

In this post I have a short writeup and link to a simple Excel table from the USDA which shows the top 15 destinations for U.S. ag exports in calendar year 2007:
http://econ4obama.blogspot.com/2008/10/new-falsehood-from-mccain.html

Colombia is #12. We all make mistakes, of course, but one would hope that a fact check site would triple check its figures and not be generating new misinformation.

My Take on the Final Debate

My general impression was that Obama came across as cool and gracious, while McCain seemed like a particularly nasty guy tonight, and I can't believe that his snide sarcasm appeals to anyone except his hard core supporters.

McCain was even more prolific than usual with his falsehoods about economic policy, and he didn't have a meaningful reply when Obama said this:

the fact of the matter is that if I occasionally have mistaken your policies for George Bush's policies, it's because on the core economic issues that matter to the American people, on tax policy, on energy policy, on spending priorities, you have been a vigorous supporter of President Bush.

I wish Obama had been able to drive this point home a bit more: on economic policy, what McCain proposes is the Bush administration on steroids. We've had eight years of tax cuts for those who need them least and corporations, and McCain is proposing more of the same.

Here's a video which undermines McCain's attempt to say that he stood apart from Bush:

Debate Fact Check Highlights

Here are some economics-related points from Think Progress and the Washington Post's fact checks:

9:40 p.m.
McCain just recyled a frequent claim, that Obama has voted to raise taxes on people making $42,000 a year. It's based on Obama's vote this year in support of a non-binding Democratic budget resolution that would allow the Bush tax cuts to expire in 2011 and 2013.

Independent analysts have asserted this claim is misleading since the resolution did not actually call for raising taxes, but set budgetary targets based on the premise that the tax cuts would expire. Obama has separately promised that he would extend the Bush tax cuts for any family making less than $250,000.

9:58 p.m.
John McCain made two assertions on corporate taxes, one that small businesses pay 50 percent of the taxes and the other that U.S. corporations are among the highest taxed in the world. Both are wrong.

All corporate income taxes--including giant corporations and the smallest of businesses--account for only about 14 percent of federal revenues raised in the year, according to the Congressional Budget Office. Most federal taxes are paid by individuals, while fees and other taxes make up the rest.

While the official corporate tax is high, compared to other countries, there are so many loopholes in the code that many companies pay little or no taxes. The General Accounting Office reported recently that more than half of U.S. corporations paid no federal income taxes during the boom years of the late 1990s, and those that did were able to shelter much of their income, generally by claiming deductions and credits.

The GAO report showed that 61 percent of U.S. corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits.

An estimated 94 percent of U.S. corporations reported tax liabilities amounting to less than 5 percent of their total income in 2000. Indeed, small corporations were more likely to avoid taxation than large ones, the GAO said.

10:15: Throughout the night, McCain has repeatedly invoked “Joe the Plumber.” For the record, the plumbers union — the United Association — has endorsed Obama, saying that his policies would “help us keep existing jobs and work to develop new, higher paying jobs here in America.”

10:04: McCain bragged that he would give every family a $5,000 tax credit to buy insurance. Unfortunately, McCain’s credit depreciates over time and would not cover the average health care premium of $12,000.

9:52: McCain said that if we start drilling offshore now it will lower the price of a barrel of oil. But his top economic adviser, Douglas Holtz-Eakin, admitted in June that “new offshore drilling would have no immediate effect on supplies or prices.” (UPDATE: The Energy Information Administration says expanded drilling “would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”)

9:23: McCain says “I would fight for a line-item veto.” A line-item veto was signed into law years ago and ruled unconstitutional in 1998.

9:21: McCain’s across-the-board, hatchet-like spending freeze is still a counterproductive pro-cyclical measure as we head into a recession, reminiscent of Herbert Hoover’s austerity budgets that deepened the Great Depression.

9:16: McCain calls opposition to tax cuts for the rich “class warfare,” but in 2002 McCain said he couldn’t “in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us.”

9:16: John McCain has suggested that the example of Ireland justifies his plan for a cut in the corporate income tax. In fact, Ireland raised close to 4 percent of GDP in revenue, far more than the 2.2 percent of GDP currently raised by the American corporate tax rate.

9:14: McCain suggested that his tax plan would help small businesses. But in reality, McCain’s tax plan would disproportionately benefits large corporations, giving $46 billion dollars to the Fortune 200. (UPDATE: Loopholes in the tax code allow two-thirds of U.S. corporations to pay no taxes at all.)

9:11: McCain is portraying his tax plans as primarily benefitting small business owners. FactCheck.org has previously called McCain’s claims in this regard ”bunk”. In fact, only a minority of small business owners would benefit from McCain’s proposals.

9:07: McCain says Fannie Mae and Freddie Mac “caused the subprime loan situation.” But as McClatchy noted this weekend, “private sector loans, not Fannie or Freddie, triggered crisis.” The original meaning of a “subprime” mortgage was a mortgage not up to Fannie/Freddie standards. Fannie and Freddie got into the subprime game late, and most subprime loans had nothing to do with Fannie or Freddie.

Holtz-Eakin vs. Goolsbee, Bush, and McCain (!)

I haven't had time yet to listen to this radio interview with McCain economic adviser Doug Holtz-Eakin and Obama economic guru Austan Goolsbee. Here is a transcript of a piece of the program in which Doug Holtz-Eakin attacks the Treasury's move to take ownership stakes in banks, saying "It's not the way things should be done in the United States."

This position puts him at odds with the Bush administration, most economists who have followed the issue closely, and even his own boss, John McCain, who said yesterday "I think it's pretty clear that we had to take that action."

(For a survey of economists' views on the move , see this article in the WSJ a few days ago.)

Obama's 95% "Illusion"

Wall Street Journal editorials are so filled with distortions that if we tried to rebut them everyday we wouldn't have time to write about anything else. But I've received several requests to explain what's wrong with this piece, so here goes:

The title of the editorial is "Obama's 95% Illusion," which seems to cast doubt on Obama's assertion that he would cut taxes for 95% of working families. Politifact--by far the most rigorous of the fact checking sites--declared that yes, Obama's proposals would cut taxes for 95% of working families. (You can read their analysis here.) So the first thing to realize is that the WSJ editorial writers are starting with a statement that is true and then seeking ways to lie or redefine terminology and claim that it is not.

The WSJ tries to argue that a reduction in your tax bill due to a tax credit does not constitute a tax cut. But this is an arbitrary language game. I'm pretty sure that when the child tax credit was expanded back in 2001, the WSJ heralded this as a tax cut. What they really hope to do now is to redefine the term "tax cut" to exclude anything Obama is proposing. At the end of the day, if you get a tax credit, you write a smaller check to the government. For people not trying to deliberately distort the issue, this is a tax cut.

Next the WSJ plays the usual conservative game of mixing up overall taxes and income taxes. You hear this kind of claim all the time on Fox and conservative websites: "X% of people don't pay taxes." It's not true. Yes, many tax filers don't owe any income tax. But anyone with a salaried job pays other taxes, particularly payroll taxes.

The WSJ says "Taken together, however, these tax credit payments would exceed payroll levies for most low-income workers." This is almost certainly false, by any reasonable definition of "low-income worker." This Tax Policy Center table shows that under Obama's proposals, average effective tax rates would go negative, meaning that they would actually receive get money back from the government, only for those making less than $10K a year.

Finally, the editorial makes the discredited claim that Obama's tax plan would hike marginal rates for low-income workers, and they include the figure from AEI's Alex Brill and Alan Viard screed as an illustration. Jonah explained the dishonesty in their piece in this post last August. Since then, an objective analysis of the effects of the candidates' proposals on marginal rates has been published by TPC. Their analysis shows that with Obama's proposals in 2009, the effective marginal tax rate would increase for only 15% of households, and an even smaller percentage of those making under $30K. (See Table 1.) In fact, under Obama's proposals, 61% of all households would face a lower effective marginal tax rate, precisely the opposite of what the hacks at the WSJ would have you believe.

(Note that I'm loosely using the term "households" to refer to what are actually tax units.)

More of the story: never believe anything you read in a Wall Street Journal editorial. For trustworthy analysis of tax proposals, the non-partisan Tax Policy Center is the only place to go.

New Obama Tax Cut Calculator

The Obama people have come out with their own tax cut calculator: TaxCut.BarackObama.com

You might be wondering how this calculator differs from the one we link to, which is based on the Tax Policy Center numbers. The Obama site has this helpful FAQ which explains:

Why are the results different from those reported by the Tax Policy Center, or what I saw on other sites like obamataxcut.com?

The Tax Policy Center (TPC) took a different approach to analyzing the candidates' tax plans. Their analysis is not a 'calculator' of how your own tax bill would change next year, given your personal characteristics (as our tax calculator is). Theirs is rather a calculation of how groups of people in broad income categories would fare under the candidates' policies. TPC includes the effects of other features of the tax code, such as corporate tax cuts, that we left out since the tax calculator calculates only how individuals' income taxes change (see below).

We also calculate the change in your taxes assuming that you have the income that you input—an obvious choice in our context—whereas their calculation takes existing data on individual behavior and assumes that the individuals in this data change their behavior in response to tax cuts. While not all of TPC's assumptions accurately reflect the impact of Obama's plan, both approaches are legitimate and important. They're simply separate exercises. The difference between TPC's "average tax change" figures and the individual outputs here can be explained by these differences. This also explains the differences between this calculator and obamataxcut.com, which is based on TPC's representative taxpayer tables.

That's clear enough. The FAQ has a lot more details, which is a good indication that the calculator is not rigged but is an attempt to give you an honest estimate of how your taxes would change under Obama's proposals.

James Heckman on Obama: "It's not class warfare; it's about a future-oriented society"

The organizers of this new site, Obama for a Sound Economy, emailed some notable people for their views on Obama's economic program and then posted their responses. The most significant one is this from Jim Heckman, U of Chicago professor and Nobel laureate:

I do not think it's class warfare [Obama's economic policies], I think it's empirical economics. The real issue is the empirical content of the supply side economics dogma. It's pretty threadbare. The "real business cycle" theory is simply inconsistent with empirical evidence. That does not prevent it from being taught as gospel to students (it's really gospel not empirical evidence). I would first and foremost talk to Ray Fair (Yale) and Mark Watson (Princeton) about the evidence for the supply side model. What is ironic is that those who preach supply side practice a crude version of Keynesian economics that ignores all of those incentive effects claimed to be so important by the supply side theorists. The real question apart from the current turmoil is the longer run. Denying the value of investment in knowledge; in infrastructure; in basic science and education at all levels has been and will continue to be harmful to our long run health. In my mind Obama's eyes are fixed more on things that will improve the US economy in the next century. The basic data on the current crisis is still being revealed, but it's clear that the absence of serious regulatory oversight contributed mightily to the current problems. It's not class warfare; it's about a future-oriented society.

This is interesting because Heckman is hard to pin down on a simple left-right scale. He is widely viewed as a conservative, but he has been convinced by the empirical evidence showing high returns to early childhood education and consequently become a prominent advocate of programs along the lines of Obama's Zero-to-Five proposal. (Here's a PDF with a more detailed description.)

Economists for McCain Against McCain Mortgage Proposal

From Huffington Post:

Many of the professional economists who formally endorsedJohn McCain's economic plan are expressing bewilderment with his most recent proposal to rectify the home mortgage crisis.

...[R]oughly a dozen of McCain's economist supporters said they disagreed with the Senator's recent proposal -- for the government to buy distressed mortgages at face value from banks and renegotiate them with homeowners. Several viewed it as a gimmick, driven mostly by political circumstance. Only one pro-McCain economist spoke up in favor of the plan.

McCain Announces He Will Cut ... What, Exactly?

From today's new McCain stump speech:

I will freeze government spending on all but the most important programs like defense, veterans care, Social Security and health care until we scrub every single government program and get rid of the ones that aren't working for the American people. And I will veto every single pork barrel bill Congresses passes.

Let's leave aside the fact that a spending freeze in the middle of a recession is, um, not usually thought to be a brilliant idea. Instead, let's focus on how much spending is left over after accounting for "programs like defense, veterans care, Social Security and health care". Here's what Table 3.2 — Outlays by Function and Subfunction: 1962–2013 of the 2009 Federal Budget says about estimated FY2009 spending on those categories, plus net interest, which can't be cut:

• Defense: $675,084 billion (this is category 050; since the Bush Administration has refused to count Iraq war spending in the budget in past years, I'm assuming this number doesn't include the war, though I could be wrong on this point).
  
• Veterans benefits and services: $91,875 (category 700)
  
• Social Security: $626,442 (category 650)
  
• "Health care" includes Health (category 550) and Medicare (category 570). Estimated 2009 spending amounts:
  
  
  
  • $299,393 for Health
    
  • $413,324 for Medicare
    
  
  
• Net interest: $260,231 (category 900)

Adding up all those categories yields a total of nearly $2.4 trillion. Total federal outlays for 2009 are estimated to be a bit $3.1 trillion. McCain has already ruled out cutting 76% of the federal budget, leaving only about $700 billion left for McCain to cut. Below is a list of the spending functions that make up the remaining $700 billion. Keep in mind that when McCain says, as he does in his speech, that "I'm going to make government live on a budget just like you do," these are the only programs he says he's willing to even consider cutting. 

• International affairs: $38 billion.
  
• General science, space and technology: $29 billion
  
• Energy: $3 billion
  
• Natural resources and environment: $36 billion
  
• Agriculture: $19 billion
  
• Commerce and housing credit: $4 billion (this includes deposit insurance and so will rise some)
  
• Transportation: $84 billion
  
• Community and regional development: $23 billion
  
• Education, training, employment, and social services: $88 billion
  
• Income security: $402 billion (this includes about $119 billion for forms of retirement and disability outside the SS system; the rest is: unemployment compensation, $43 billion; housing assistance $41 billion; food and nutrition assistance, $62 billion; and other income security, $133 billion). Some of this will certainly rise automatically due to the recession.
  
• Administration of Justice: $51 billion (this is federal law enforcement, federal prisons, and federal courts)
  
• General government: $21 billion (this is the stuff that keeps the government making its payroll, etc)

Economists Against Economists Against Obama

John McCain's campaign recently released a letter signed by 90 economists, titled "100 Economists Warn That With Current Weak Financial Conditions Barack Obama's Proposals Run A High Risk Of Throwing The US Into A Deep Recession'". 

I'll leave aside the McCain campaign's inability to mark to acutal sample size and note that the letter includes several eminent scholars. It also includes some folks not known for simultaneous independence and influence; entertaining examples include chief McCain economic policy adviser Doug Holtz-Eakin (I guess they needed him just to get to 90), American Enterprise Institute President Chris DeMuth, and former Secretary of State George Shultz. As an influential friend wrote me earlier today, "in the context of the NBER or scott Adams surveys....[t]his is just an existence proof--there exist [90] economists who are pro- McCain." For more on those surveys, click here and here.

In the meantime, Greg Mankiw explains why he didn't sign the letter:

Some blog readers may ask, why didn't I sign? I am not particularly fond of Obama's proposed tax hikes or his apparent retreat from free trade. (See this article of mine.) But I thought the statement in the group letter that "his proposals run a high risk of throwing the economy into a deep recession" was a tad too hyperbolic for my tastes.

I disagree with plenty, though certainly not all, of what Mankiw has written about public policy. And I think anyone who would agree to be George Bush's chief economic adviser after having a chance to watch him in action ought to develop a different associational threshold.

But I've noticed that as the McCain campaign has gotten loopier, Mankiw has both blogged about the presidential campaign less and made statements like the one above. Kudos to Mankiw for calling out his side in this case.

Taxes and Patriotism

I'm not usually a fan of Tom Friedman. In fact, Matt Taibbi's skewering of The World is Flat is perhaps my favorite book review of all time, and Ed Leamer's review in the Journal of Economic Literature is one of the funniest things ever published in that august journal. But Friedman is spot-on in this column:

Criticizing Sarah Palin is truly shooting fish in a barrel. But given the huge attention she is getting, you can’t just ignore what she has to say. And there was one thing she said in the debate with Joe Biden that really sticks in my craw. It was when she turned to Biden and declared: “You said recently that higher taxes or asking for higher taxes or paying higher taxes is patriotic. In the middle class of America, which is where Todd and I have been all of our lives, that’s not patriotic.”

What an awful statement. Palin defended the government’s $700 billion rescue plan. She defended the surge in Iraq, where her own son is now serving. She defended sending more troops to Afghanistan. And yet, at the same time, she declared that Americans who pay their fair share of taxes to support all those government-led endeavors should not be considered patriotic.

I only wish she had been asked: “Governor Palin, if paying taxes is not considered patriotic in your neighborhood, who is going to pay for the body armor that will protect your son in Iraq? Who is going to pay for the bailout you endorsed? If it isn’t from tax revenues, there are only two ways to pay for those big projects — printing more money or borrowing more money. Do you think borrowing money from China is more patriotic than raising it in taxes from Americans?” That is not putting America first. That is selling America first.

Sorry, I grew up in a very middle-class family in a very middle-class suburb of Minneapolis, and my parents taught me that paying taxes, while certainly no fun, was how we paid for the police and the Army, our public universities and local schools, scientific research and Medicare for the elderly. No one said it better than Justice Oliver Wendell Holmes: “I like paying taxes. With them I buy civilization.”

I can understand someone saying that the government has no business bailing out the financial system, but I can’t understand someone arguing that we should do that but not pay for it with taxes. I can understand someone saying we have no business in Iraq, but I can’t understand someone who advocates staying in Iraq until “victory” declaring that paying taxes to fund that is not patriotic.

How in the world can conservative commentators write with a straight face that this woman should be vice president of the United States? Do these people understand what serious trouble our country is in right now?

Breathtaking Lies from McCain About His Own Tax Proposal

Lies from McCain are nothing new, but I was stunned last night to hear McCain tell a boldfaced lie in the debate about the essential feature of his own tax plan:

I've got some news, Sen. Obama, the news is bad. So let's not raise anybody's taxes, my friends, and make it be very clear to you I am not in favor of tax cuts for the wealthy.

This isn't anywhere close to true, even if you look at it while upside down, backwards, squinting, and high on crystal meth--unless maybe McCain is trying to tell us that he is actually opposed to his own tax proposals.

The Tax Policy Center's tables show that under McCain's proposals, taxpayers earning over $1 million would get tax cuts averaging $335,792 in 2012. That's using the proposals McCain lays out in his stump speech, and comparing his proposal to current law.

Even if you ignore what McCain says his proposals are and instead use what his adviser Doug Holtz-Eakin says should be McCain's plan, AND you take the "tax cuts extended baseline," the McCain plan would entail tax cuts averaging $58,632 for those making over $1 million, according to this TPC table.

Simple Obama and McCain Tax Cut Graphs

Here is a simple summary graph showing average tax cuts by income group for those making under $200K under the candidates' proposals. These numbers all come from the non-partisan Tax Policy Center's analysis. See Jonah's earlier post for more detailed graphs and discussion. For taxpayers making over $200K, McCain proposes large tax cuts, while those making $250K and up would see substantial tax increases under Obama. We encourage you to use the tax calculator, which is also based on the Tax Policy Center's analysis, for a somewhat more precise estimate of the change in your taxes under each candidate's proposal. I am curious to know which graph is easier for people to read and would appreciate hearing your opinion in comments.

3 Columns!

After a bit of a struggle, I finally managed to switch the layout to a 3 column format, which I think is a substantial improvement. I still haven't figured out how to add in a new vertical line separating the 2nd and 3rd columns. If there are any Blogger whizzes among our reader, I'd appreciate your advice on this. The elite econ4obama graphic design consultant team is also working on some other changes.

More on the McCain Health Care Plan, from Krugman and the WSJ

There's a great column by Paul Krugman today which explains the big problem with the McCain health care proposal: many people would end up not being able to buy insurance at all.

I'm surprised he didn't mention a point I brought up in this post: Would Sara Palin Be Able to Buy Insurance Under McCain's Plan?

The Wall Street Journal today also has an article quoting McCain advisor Doug Holtz-Eakin as saying that McCain would fund his health care program by cutting Medicaid and Medicare. It also clears something up for me:

The federal government imposes two taxes on wages, generally: an income tax, which funds the government's general operations, and the payroll tax, paid for by employers and employees, which funds Social Security and Medicare. If Sen. McCain were to apply both of these to the value of health benefits, he could fully pay for his new tax credits. That is what aides have in the past suggested he would do.
...
Mr. Holtz-Eakin said the campaign never intended to apply the payroll tax to health benefits.

Now I understand why Jonah, Lerxst, and I had some trouble figuring out whether McCain is proposing to apply the payroll tax to health benefits: apparently, Holtz-Eakin either kept the details of the plan a secret, or he changed his mind at some point. As far as I can tell, there's nothing on the campaign website which explains this fairly important point. The article gives me the impression that no one in the campaign other than Holtz-Eakin--not even McCain itself--understands what McCain is proposing for health care.

Revisions to McCain Economic Advisors List

Given the obvious importance of economic policy right now, I have added some detail to this earlier list of McCain's economic advisors. The list of Obama economic advisors is still here.

KeatingEconomics.Com

That's the site the Obama campaign has launched going after McCain on his role as one of the Keating Five in the savings and loan scandal. At noon tomorrow, a 13-minute documentary will be released on the site, and it already has this trailer:



The parallels to the current crisis are crystal clear, and it's evident that McCain learned nothing from the experience, even after being reprimanded by the Senate ethics committee. He has brought the same approach to the crisis we're now facing. Unbelievably, his staff is jam packed with Fannie Mae and Freddie Mac lobbyists, and one of his chief economic advisers is Phil Gramm, a "candidate for lead perp" in the current scandal, mastermind of one of the key deregulation steps that led to the crisis (the Commodities Futures Modernization Act), and now a lobbyist and vice president of a foreign investment bank.

I was wondering how long it would take for the Obama campaign to bring up McCain's dark S&L scandal past. It's about time!

Obama vs. Mccain: Fannie Mae and Freddie Mac Connections

A viral email that is going around claims that 3 former Fannie Mae executives are Obama's chief economic advisors.

That is false. Here is a thorough debunking from Snopes.com.

The email names Franklin Raines, Jim Johnson, and Tim Howard. The first two are former Fannie CEOs, and Howard was a former CFO (chief financial officer).

Key points: (1) the whole substance of the connection between Obama and Raines was that Raines "had gotten a couple of calls from the Obama campaign" in which they talked about "general housing and economy issues, " (2) Jim Johnson was originally part of the team vetting potential VP running mates but resigned after a month, and (3) there's no connection at all between Tim Howard and Obama.

(For our list of people who are actually Obama's economic advisors, see this page.)

In stark contrast, McCain has numerous close connections to Fannie Mae and Freddie Mac, starting with his campaign manager Rick Davis, who was paid several hundred thousand dollars to lobby on their behalf. See our writeup here and more discussion here. Another highlight is Freddie Mac William Timmons, who heads up McCain's presidential transition team.

What follows is detailed listing of McCain's other deep ties to Fannie Mae and Freddie Mac, taken from Mark Halperin's page:

Six of his advisers and fundraisers lobbied for Freddie Mac including:

· McCain’s Current Chief of Staff Mark Buse,
· top McCain adviser Charles Black,
· Carlos Bonilla,
· Al D’Amato,
· Juleanna Glover Weiss
· Susan Molinari.

Thirteen of them lobbied for Fannie Mae including:

· McCain’s Congressional Liaison John Green,
· Head of VP Search Team AB Culvahouse,
· Wayne Berman,
· Kirk Blalock,
· Alberto Cardenas,
· Kirsten Chadwick,
· Richard Holht,
· Kate Hull,
· Aleix Jarvis,
· Tom Loeffler,
· Peter Madigan,
· Allison McSlarrow
· Aquiles Suarez. [John McCain.com, Senate Lobbying Disclosures]

According to the New York Times, “More than Mr. Obama, Mr. McCain’s circle of advisers and contributors includes current and former lobbyists or directors for the companies, although since July he has called for a ban on any lobbying by the two firms. Among the companies’ past advocates are Mr. McCain’s campaign manager, Rick Davis, a longtime lobbyist; Mr. McCain’s confidant and adviser Charlie Black, whose firm worked for Freddie Mac for several years ending in 2005, and the deputy campaign finance chairman, Wayne L. Berman, a vice president for Ogilvy Worldwide and a former Fannie Mae lobbyist.” [New York Times, 9/10/08]

McCain Campaign Manager Rick Davis Led Efforts To Fight Off Regulations For Fannie And Freddie. “Davis previously was head of the Homeownership Alliance, a coalition of banks and housing industry interests led by Fannie and Freddie to stave off regulations. The group was formed to counter another organization, FM Watch, an alliance of financial institutions and lobbying associations that wanted to even the playing field against Fannie Mae and Freddie Mac, by challenging the implicit government guarantee that allowed the two firms to borrow funds at lower interest rates.” [New York Times, 9/10/08]

* Davis and Homeownership Alliance Fought Against Effort to Impose “Burdensome Regulatory Process” on Fannie & Freddie. “It shouldn’t have come as a surprise to anyone when the Homeownership Alliance announced its opposition last week to legislation by Rep. Richard Baker, R-Baton Rouge, to strengthen regulatory oversight for Fannie Mae and Freddie Mac, the two giant agencies that buy home mortgages to expand homeownership opportunities. Rick Davis, president of the Homeownership Alliance, said that ‘we are concerned that Rep. Baker’s bill would break the first rule of any legislation related to housing — that is, to do no harm to the greatest housing system in the world.’ He said the bill ‘presents the potential for a burdensome regulatory process that could lead to less consumer choice, reduced availability of financing and higher prices for home purchases and multi-family construction.’ What Davis didn’t say is that Fannie Mae and Freddie Mae are both members of his alliance, which also includes the National Association of Home Builders and National Association of Real Estate Brokers. Baker, chairman of the House Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, has said that Fannie Mae and Freddie Mac have gotten so big, and have piled up so much debt, that more oversight is needed. If either of them failed, it could do major damage to the U.S. economy, he said.” [Times Picayune, 4/15/01]

19 McCain Fundraisers & Advisers Lobbied For Fannie Mae Or Freddie Mac. Nineteen McCain advisers and fundraisers lobbied for Fannie Mae and Freddie Mac.

McCain Senior Adviser Wayne Berman Continues to Lobby for Fannie Mae. Wayne Berman has lobbied for Fannie Mae and Freddie Mac from 2004 through the 2nd quarter of 2008. Their firm earned over $100,000 from Freddie Mac in 2004 and over $1 million from Fannie Mae. [Senate Lobbying Disclosures]

Head of McCain’s VP Search Team Lobbied for Fannie Mae. McCain tapped Arthur B. Culvahouse Jr., the former Reagan administration official, to head his search for a running mate. Currently a partner at O’Melveny & Myers, Culvahouse lobbied on behalf of Fannie Mae in 1999, 2003 and 2004, according to Senate records. [Politico.com, 7/16/08; Senate Lobbying Disclosures]

Top Adviser Charlie Black Lobbied for 10 Years for Freddie Mac. Black is “one of McCain’s top advisors,” and “at the helm of McCain’s campaign.” Black joined McCain’s campaign of March 2007, but did not stop lobbying until March of 2008. He is described as, “schooled at the knee of Jesse Helms and so entrenched in the ways of Washington that he has enjoyed access to Republican presidents since Ronald Reagan.” Black lobbied for Freddie Mac from 1999-2004, earning the firm he co-owns $820,000. [The News & Observer (Raleigh, North Carolina), 8/31/08; Senate Lobbying Disclosures]

Former McCain Co-Chair and Current Bundler, Loeffler Lobbied for Fannie Mae. Loeffler lobbied for Fannie Mae in 1999. His firm earned $40,000 from Fannie Mae that year. [Senate Lobbying Disclosures, 1999; New York Times, 7/16/08; Newsweek, 5/26/08]

Super-Lobbyists Wayne Berman & John Green Serve in High-Level McCain Campaign Positions. In March 2008, the McCain campaign announced that John Green “a founding partner of what is now Ogilvy Government Relations” would take a leave from lobbying to join the campaign full-time as its Capitol Hill liaison. John Green’s colleague Wayne Berman, a Bush “Super Ranger” serves co-chairman of McCain’s national finance committee, as well as the campaign’s vice chairman and as a senior adviser. Additionally, Berman also handles congressional outreach and “talks to lawmakers on McCain’s behalf.” Berman and Green both lobbied for Fannie Mae from 2004-2007, earning over $1 million from Fannie Mae. They also lobbied for Freddie Mac earning over $100,000 for their firm in 2004. [New York Times, 2/7/08; Financial Times, 11/27/07; Washington Post, 11/20/07; The Hill, 7/19/07; The Politico, 3/4/08; John McCain Supporters, http://www.johnmccain.com/Supporters/ ; Senate Lobbying Disclosures ]

McCain’s Current Chief of Staff Lobbied for Freddie Mac. McCain’s current Senate Chief of Staff Mark Buse lobbied for Freddie Mac from 2003-2004, earning $460,000. [Senate Lobbying Disclosures]

McCain Getting Economic Advice from Former Fannie & Freddie Directors. McCain’s economic adviser Aquiles Suarez worked as Fannie’s director of government and industry relations. His finance co-chairman Frederic V. Malek is a former Freddie Mac board member. [Politico.com, 7/16/08]

Canvassing in Virginia

Yesterday I went to Virginia to canvass for Obama. I joined a group of other Spanish speakers at a Latinos for Obama rally with comedian George Lopez, who gave an impassioned and funny speech to motivate the crowd. Lopez is the son of Mexican immigrants, and his signature shtick is to make fun of himself and the idiosyncrasies of Latinos, which he worked to great effect in riffing on the discomfort that some feel with an African-American candidate. He said that he signed on to campaign for Obama after the candidate called him at home to ask for his help, and he joked that his grandmother answered the phone and said, "That black guy is on the phone for you. Tell him never not to call you here!" Lopez also said "For anyone who's worried about voting for a black guy, look, I'm darker than he is," (true) and "He says his dad was from Kenya, but I think he looks Dominican," (also true) and then gave a moving vision of what it will be like, after eight years of Bush, to wake up the day after the election with new hope for the country under President Obama.

Afterwards, we went canvassing door-to-door canvassing, using a list of Spanish-speaking voters supplied by the campaign. It was an interesting experience chatting with voters about the election. My brief anecdotal impression was that among less well-off Latinos, support for Obama was extremely strong, while it was more mixed among the more affluent. One woman we spoke to said that everyone she knew in her very middle middle-classs neighborhood of apartment blocks was for Obama.

Here are a couple shots from the rally, one of George Lopez and the other of a couple Latinas for Obama:

Very Funny Saturday Night Live Spoof of VP Debate

Top Economists Overwhelmingly Favor Obama Plan: 80% Say He Has Better Grasp of Economics

The Economist magazine surveyed members of the prestigious National Bureau of Economic Research (NBER) and responders overwhelmingly think Obama far surpasses McCain in his grasp of economics and think Obama's plan is superior. (h/t to Freakonomics). These numbers are truly staggering! Sorry Marty! (former head of NBER and McCain supporter)

As with the Scott Adams poll, economists overwhelmingly choose to self-identify as Democrats and support Obama. This is no fluke and NBER is the cream of the crop.

(By the way, apparently the Economist is one of Palin's faves!)

UPDATE: (Don Pedro) Thanks to Lerxst for posting this while I was out canvassing in Virginia! I've taken the liberty of changing the title. I also want to highlight key excerpts from the Economist writeup:

Even among Republicans Mr Obama has the edge: 46% versus 23% say Mr Obama has the better grasp of the subject. “I take McCain’s word on this one,” comments James Harrigan at the University of Virginia ..

“John McCain has professed disdain for ‘so-called economists’, and for some the feeling has become mutual,” says Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology Sloan School of Management. “Obama’s team is mainstream and non-ideological but extremely talented.”

Mr Obama, says Jonathan Parker, a non-aligned professor at Northwestern’s Kellogg School of Management, “is a pragmatist not an ideologue. I expect Clintonian economic policies.”

Twice as many economists think Mr McCain’s plan would be bad or very bad for long-run growth as Mr Obama’s. Given how much focus Mr McCain has put on his plan’s benefits for growth, this last is quite a repudiation.

Last Weekend to Register Voters in Virginia

I'll be out there this weekend signing people up. For those in Northern Virginia, here's a list of places to go.

Sarah Palin Debate Flow Chart

Palin Lies on Taxes, and McCain's 477 Votes to Raise Taxes

PALIN: I would like to respond about the tax increases. We can speak in agreement here that darn right we need tax relief for Americans so that jobs can be created here. Now, Barack Obama and Sen. Biden also voted for the largest tax increases in U.S. history. Barack had 94 opportunities to side on the people's side and reduce taxes and 94 times he voted to increase taxes or not support a tax reduction, 94 times.

Now, that's not what we need to create jobs and really bolster and heat up our economy. We do need the private sector to be able to keep more of what we earn and produce. Government is going to have to learn to be more efficient and live with less if that's what it takes to reign in the government growth that we've seen today. But we do need tax relief and Barack Obama even supported increasing taxes as late as last year for those families making only $42,000 a year. That's a lot of middle income average American families to increase taxes on them. I think that is the way to kill jobs and to continue to harm our economy.

IFILL: Senator?

BIDEN: The charge is absolutely not true. Barack Obama did not vote to raise taxes. The vote she's referring to, John McCain voted the exact same way. It was a budget procedural vote. John McCain voted the same way. It did not raise taxes. Number two, using the standard that the governor uses, John McCain voted 477 times to raise taxes. It's a bogus standard ...

Biden is 100% correct. As we've noted before, the claim that Obama voted to raise taxes 94 times is bogus. I was glad to see Biden point that if you by the same methodology the Republicans use to come up with the 94 figure, McCain has voted to raise taxes 477 times.

After I heard Jason Furman use the 477 number during the Democratic Convention, I looked up some of McCain's votes for tax increases. These have included votes to increase excise taxes for public charities, increase insurance taxes, increase taxes on vaccines, increase taxes on phone cards, and increase taxes on airline tickets.

Biden's Best Moment of the Debate

Just before this, I was saying that I wished he would mention his work on the Violence Against Women Act, which is one of his most important legislative accomplishments.

A Graph to Ponder as the National Debt Surpasses $10 Trillion

Fact Checking the WP's Fact Checker on the VP Debate

(Why do I bother?) I've put the two most egregious errors from the Washington Post's Fact "Check" of the VP Debate in italics below:

(1)

Sen. Joseph Biden asserted that Sen. John McCain opposed the comprehensive nuclear test ban and that virtually every other Republican supported it. That is false. President Clinton never submitted the test ban for formal ratification because it faced overwhelming Republican opposition in a GOP-controlled Senate.

Umm, no. This account from the Arms Control Association explains that Clinton submitted the treaty for ratification in 1997, and it was rejected on October 13, 1999. Here is McCain's press release from the day before announcing that he would vote against the treaty.

(2)

Biden said that McCain said he would not "sit down with the government of Spain." This is an overstatement. Biden is referring a recent interview McCain gave to a radio station, in which McCain did not appear to recognize the name of the Spanish prime minister.

"I'm willing to meet with any leader who is dedicated to the same principles and philosophy that we are for human rights, democracy and freedom and I will stand up to those who are not," McCain said, in comments that riled the Spanish government.

In fact, McCain adviser Randy Scheunemann insisted that McCain knew exactly he was talking about, saying

In this week's interview, Senator McCain did not rule in or rule out a White House meeting with President Zapatero, a NATO ally. If elected, he will meet with a wide range of allies in a wide variety of venues but is not going to spell out scheduling and meeting location specifics in advance. He also is not going to make reckless promises to meet America's adversaries. It's called keeping youtr options open, unlike Senator Obama who has publically committed to meeting some of the world's worst dictators unconditionally in his first year in office.

McCain's Temperament

I have paid almost zero attention to questions of McCain's character because I don't think how people behave on a personal level tells you much about their approach to policy and governing. By most accounts Bush is a nice guy, but that hasn't stopped him from being a disastrous president. Plus I know that most of what people perceive about a politician's character--both positive and negative--is just the product of spin and journalists' whims. I recall vividly how the press tagged Howard Dean as "angry" during the 2003-04 primary campaign, while in person he was gracious and subdued.

All that said, when you take this encounter with Obama yesterday, the video below with clips from his recent interview with the Des Moines Register, and the anecdotes in this profile--many drawn from McCain's own accounts--it's hard not to worry that McCain's temperament would be a major factor in how he would function as president. I learned from the profile that "McNasty" is not a slur dreamed up by political opponents in recent years (as I imagined) but rather his nickname since high school. Here's also a list on a conservative blog with his top ten temper tantrums.

Obama Media Everywhere

I'm spending the day at home preparing for a class and trying desperately not to get distracted by campaign news. Unfortunately, I just discovered that Channel 73 on my Dish Network is now the Obama Channel, with a continuous stream of ads and videos from the campaign. Here is one recent ad, about McCain's tax plan:



The Obama people also have a put up this new site: JohnMcCainRecord.com

Make-Believe Maverick

This long biographical profile of McCain is very revealing. Here's how it starts:

At Fort McNair, an army base located along the Potomac River in the nation's capital, a chance reunion takes place one day between two former POWs. It's the spring of 1974, and Navy commander John Sidney McCain III has returned home from the experience in Hanoi that, according to legend, transformed him from a callow and reckless youth into a serious man of patriotism and purpose. Walking along the grounds at Fort McNair, McCain runs into John Dramesi, an Air Force lieutenant colonel who was also imprisoned and tortured in Vietnam.

McCain is studying at the National War College, a prestigious graduate program he had to pull strings with the Secretary of the Navy to get into. Dramesi is enrolled, on his own merit, at the Industrial College of the Armed Forces in the building next door.

There's a distance between the two men that belies their shared experience in North Vietnam — call it an honor gap. Like many American POWs, McCain broke down under torture and offered a "confession" to his North Vietnamese captors. Dramesi, in contrast, attempted two daring escapes. For the second he was brutalized for a month with daily torture sessions that nearly killed him. His partner in the escape, Lt. Col. Ed Atterberry, didn't survive the mistreatment. But Dramesi never said a disloyal word, and for his heroism was awarded two Air Force Crosses, one of the service's highest distinctions. McCain would later hail him as "one of the toughest guys I've ever met."

On the grounds between the two brick colleges, the chitchat between the scion of four-star admirals and the son of a prizefighter turns to their academic travels; both colleges sponsor a trip abroad for young officers to network with military and political leaders in a distant corner of the globe.

"I'm going to the Middle East," Dramesi says. "Turkey, Kuwait, Lebanon, Iran."

"Why are you going to the Middle East?" McCain asks, dismissively.

"It's a place we're probably going to have some problems," Dramesi says.

"Why? Where are you going to, John?"

"Oh, I'm going to Rio."

"What the hell are you going to Rio for?"

McCain, a married father of three, shrugs.

"I got a better chance of getting laid."

Dramesi, who went on to serve as chief war planner for U.S. Air Forces in Europe and commander of a wing of the Strategic Air Command, was not surprised. "McCain says his life changed while he was in Vietnam, and he is now a different man," Dramesi says today. "But he's still the undisciplined, spoiled brat that he was when he went in."

The whole article is worth reading. There's even some economic policy towards the end.

She Couldn't Even Remember Exxon-Valdez?

When asked by Katie Couric to name another Supreme Court decision (beside Roe) that she disagreed with, Palin drew a blank. Its kind of shocking that she couldn't even remember the Exxon Valdez case which came down in June ---just three months ago. I think we might need a bit more agile thinking than that in a Veep.

Here's Palin talking about the verdict:

Some links on the crisis

Over at PrawfsBlawg, I have a post that links to several useful things concerning the crisis.

A thought for after the bailout - Some melamine in your lead?

30 shopping days till Halloween and 80+ till Christmas. Just a friendly reminder of yet another area of regulatory failure by the Republicans - food, drug and product safety. Yet another area in which underfunding of regulatory and oversight agencies has shifted risk and burdens from firms and the government to consumers.

Last Spring, more than 150 companies including Wal-Mart and the Grocery Manufacturers Association called on the government to better fund the FDA.

From the Federal Times (3/30/2008):

The Office of Information and Regulatory Affairs [OIRA], a division of the Office of Management and Budget, is responsible for approving new regulations. But the president’s two appointees to run the office — first John Graham, and now Susan Dudley — have been vocal critics of government regulation. (***SOUND FAMILIAR??? MY INSERTION***)

And many of the administration’s picks of leaders to run safety agencies have been executives from affected industries. “So there’s a real fox-in-the-henhouse mentality,” said Rick Melberth, director of regulatory policy for OMB Watch, a nonprofit watchdog group that has been critical of Bush administration policies. (**MORE LOW-HANGING FRUIT HERE**)

One example is the administration’s most recent pick to run the Labor Department’s Mine Safety and Health Administration: Richard Stickler, a former coal company executive. His nomination was opposed by many members of Congress, who criticized Stickler’s ties to the industry and the poor safety record at the mines he managed. Many of those mines had accident rates above the national average.

And a year ago, the president nominated Michael Baroody to fill a Consumer Product Safety Commission (CPSC) vacancy. Baroody had spent nearly a decade working as a lobbyist for the National Association of Manufacturers, a trade group that opposes strong regulations on consumer products.

Even Big Pharma has lobbied the Bush Administration for increased funding of the FDA, and Wal-Mart has worked with the CPSC for stricter safety regulations for its suppliers. Barack Obama has been a consistent leader on issues of consumer safety. He strongly opposed the nomination of Michael Barody in a letter to Senate Commerce Committee Chairman Daniel Inouye. Barody’s name was eventually withdrawn. As the second ranking Republican on the Commerce Committee, John McCain has not sponsored a single piece of legislation or even cast a single vote on consumer protection issues. How’s that for a perfect record?

From the standpoint of consumer food and product safety, the Republican’s aggressive anti-regulatory bent subjects Americans to health risks every day. Last year, the U.S. imported 907,000 tons of milk protein from China to be used in processed foods. Can we rely on voluntary recalls by large corporations like Cadbury, Mars and Kraft to protect us from tainted products? Halloween’s coming. Do you know where your candy comes from?