Friday, October 31, 2008

Betting on Bradley?

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

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

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

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

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

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

(updated by lerxst to correct misspelling of Bradley)

Obama Econ Adviser Jason Furman on Bloomberg TV

The Economist Magazine Endorses Obama

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

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

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

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

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

Thursday, October 30, 2008

NYT on Obama and McCain Tax Plans

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

McCain Endorses Obama's Signature Retirement Policy Proposal

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

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

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

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

For the Economist Who Has Everything: Econ4Obama Gear

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

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

Wednesday, October 29, 2008

Buying Milk

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

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

Obama Responds to "Socialist" Charge (with Humor)

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

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

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

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

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

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

FAQ on Taxes

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

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

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

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

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

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

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

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

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

That's John McCain in 2000.

Not Even A Good Hack

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

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

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

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

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

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

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

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

Attacking all vs. some protectionists

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

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

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

Tuesday, October 28, 2008

Reader Mailbag: Various Questions

A reader writes in the following:

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

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

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

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

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

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

On your second point, see these two posts:

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

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

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

McCain and Palin Wrong on Corporate Taxes

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

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

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

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

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

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

Tax Policy Center Analyzes McCain and Obama's New Proposals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Updated Obama and McCain Tax Calculator Link

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

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

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

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

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

Monday, October 27, 2008

Bailing out Shareholders

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

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

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

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

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

Jonah The Economist

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

Almost Everyone...

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

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

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

Shame On Doug Holtz-Eakin

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

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

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

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

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

Newspaper Endorsements

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

Sunday, October 26, 2008

Reality Seeps In

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

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

(emphasis mine)

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

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

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

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

McCain has Depreciated a Valuable Asset: His Reputation

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

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

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

Today his tax policies are incoherent.

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

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

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

Greg Mankiw Tackles the Theory of Tax Incidence

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

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


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

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

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

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

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

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

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

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

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

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

The Special Needs of School Choice

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

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

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

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

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

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

Saturday, October 25, 2008

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

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

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

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

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

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

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

Maybe He's Hoping for a Raise?

Palinomics: What does it MEAN?

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

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

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

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

Friday, October 24, 2008

McCain Taxes "Cuts" or "Delays"?

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

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

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

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

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

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

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

Rogoff and Redistribution

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

But where are the economists?

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

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

Rogoff on the inheritance tax:

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

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

Rogoff on inequality:

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

On labor's share of income:

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

SPIEGEL: So Marx was right after all?

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

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.

Thursday, October 23, 2008

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,

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

Wednesday, October 22, 2008

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" ( 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?"

Tuesday, October 21, 2008

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.

Monday, October 20, 2008

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.