Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
The end of the 2012 fiscal cliff drama was largely predictable. Faced with the prospect of large and immediate tax increases, Congress acted to raise income tax rates only on relatively well-off people — and also to allow payroll taxes to increase for all working Americans. The messy compromise raises revenue, although it does not bring our medium-term deficits under control, and it is unlikely to push the economy back into recession.
Perspectives from expert contributors.
Unfortunately, the legislation that passed the Senate late on New Year’s Eve and the House on Jan. 1 sets up another fiscal-cliff-type experience – with a fight over extending the debt ceiling looming in about two months. And the outcome then could well be a significant slowdown in the economy and a struggle that might end up in front of the United States Supreme Court.
About the end of February, the Treasury Department will have exhausted its legal authority to borrow. Congressional authorization will be needed to allow additional federal government debt to be issued; this is the debt ceiling.
The last time the United States came close to hitting the debt ceiling, in summer 2011, a game of chicken was played on Capitol Hill and with the White House – with many Congressional Republicans insisting that the debt ceiling would not be extended unless there were matching spending cuts.
This led to the Budget Control Act of 2011, which created the now-infamous sequester mechanism: if politicians could not agree on ways to limit spending (and raise taxes), automatic spending cuts would kick in for both domestic and military programs of the government.
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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”
The aggregate amount of regulation is difficult to quantify, but we learn something about it from the number of businesses that choose to have exactly 49 employees.
Perspectives from expert contributors.
I noted last week that government regulations are not as easily quantified as taxes and spending, because regulation has no budget and no obvious accounting method. Some laws are not enforced, while others have little impact because people would follow them even without the force of a law. The most useful regulatory budget would put a lot of weight on the laws that actually matter.
The economists Luis Garicano, Claire Lelarge and John Van Reenen are developing a method to quantify the aggregate importance of employer regulations. They note that small employers are naturally more common than medium-size employers, which are themselves more common than large employers.
Moreover, the frequency of employers of various sizes appears in many situations to follow a “power law” of statistics. If you tell these economists how many employers in a given region have, say, 22 employees, the authors can, with the power law, accurately predict the number of employers with 23 employees.
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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”
The Holy Grail for budget hawks is the “grand bargain” – some combination of tax increases and entitlement reforms that will get the deficit on a sustainable track, permanently. On paper, it always looks simple – relatively small adjustments to the growth path of revenues or big spending programs like Medicare or Social Security compound over time into big savings.
Perspectives from expert contributors.
The problem, of course, is getting Congress to act, because of what economists call a time-inconsistency problem. The Congress that raises taxes and cuts benefits will suffer politically, while the benefits of lower deficits will accrue to future Congresses.
Historically, what has moved Congress to enact big deficit-reduction packages was the prospect of quick improvement in terms of inflation, growth and interest rates. Given that deficit reduction today is very unlikely to improve any of these in the near term, deficit hawks lack any real payoff from a grand bargain.
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Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“
Some of the most vivid political rhetoric of 2012 reflects a debate that has lasted centuries. Who are the makers and who are the takers? Much economic theory revolves around efforts to distinguish the two. The conceptual effort is motivated by noble intent: presumably, a good economic system encourages making (creating more to go around) and discourages taking (redistributing what others have made).
Perspectives from expert contributors.
Yet it is surprisingly hard to create a consensus about these labels, and past disagreements, still unresolved, lurk in the background. History is shaped by contending claims over who is more productive than whom. Powerful groups like to describe themselves as makers rather than takers, partly to glorify themselves and partly to discourage take-backs.
Some ambiguity derives from our basic relationship to nature. Humans started out as takers, not makers, hunting and foraging for food. Even in the harvesting of crops, back-breaking labor counts for little compared with the gifts of soil, sunshine and rain. Modern economic systems still largely rely on fossil fuels, gifts from the past.
Because we don’t have to bargain or trade directly with nature, we don’t consider it a participant in our economic system. Rather, we compete with other humans for access to nature’s bounty. In the competition for territory, resources and political power, taking has proved as indispensable to economic success – if not more so – than making.
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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
The job of head of enforcement at the Securities and Exchange Commission is now open. The Obama administration should press for the appointment of Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, to this position. Unfortunately, the administration has given no indication it will do so, leaving the impression that it is likely to be business as usual for the next four years, with regulators who are less than tough on the industry.
Perspectives from expert contributors.
(I have also endorsed Mr. Barofsky as a chairman of the S.E.C.; clearly, I want him at the commission one way or another.)
The departing director of the division of enforcement at the S.E.C. is Robert Khuzami, a former general counsel for the Americas at Deutsche Bank, a job he held from 2004 through early 2009. Although Mr. Khuzami was once a distinguished prosecutor, his appointment to the S.E.C. turned out to be a mistake because Deutsche Bank was so deeply involved in the securitization morass that led to the financial crisis of 2008.
(For more details, I recommend this Web page, with information collated by UniteHere, a trade union. You should also read this assessment by Yves Smith on her nakedcapitalism blog.)
Mr. Khuzami has vigorously defended his record and insisted it would have been “unwise” to press Wall Street firms and their executives for admissions of guilt. Whether the S.E.C. failed to prosecute the executives who made the key decisions because it had no case or because of Mr. Khuzami’s views, we may never know.
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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”
As Democrats and Republicans haggle over federal taxes and spending, another important policy tool gets less attention: regulation.
Perspectives from expert contributors.
Government has a variety of ways it can achieve its objectives, including subsidies, taxes and regulation. For example, the government might attempt to help disabled people by subsidizing handicapped-accessible buildings. Or it could levy an extra tax on buildings that are not handicapped-accessible. Or it could simply refuse to permit structures to be built, or used in various situations, without being handicapped-accessible.
All three strategies are likely to affect building activity, increase the prevalence of handicapped-accessible buildings and in so doing help people with disabilities, as intended. The first strategy is ordinarily called government spending; the second, taxation; and the third, regulation.
Private-sector activities to comply with regulation do not appear in the government budget, whereas private-sector interactions with tax and spending programs do, in terms of the amount of money they pay or receive. (Regulation does need a government budget for enforcement, but so do taxes and spending, and enforcement is distinct from the private sector’s compliance activities.)
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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”
At the root of much of the dispute between Democrats and Republicans over the so-called fiscal cliff is a deep disagreement over the welfare state. Republicans continue to fight a long-running war against Social Security, Medicare, Medicaid and many other social-welfare programs that most Americans support overwhelmingly and oppose cutting.
Perspectives from expert contributors.
Republicans in Congress opposed the New Deal and the Great Society, but Republican presidents from Dwight D. Eisenhower through George H.W. Bush accepted the legitimacy of the welfare state and sought to manage it properly and fund it adequately. When Republicans regained control of Congress in 1994 they nevertheless sought to repeal the New Deal and Great Society programs they had always opposed.
Energized by their success in abolishing the principal federal welfare program, Aid to Families With Dependent Children, in 1996, Republicans tried to abolish Social Security as well, through partial privatization during the George W. Bush administration, and they more recently have attempted to change Medicaid into a block grant program with funds going to the states and to turn Medicare into a voucher program.
In the 40th anniversary edition of his book, “Capitalism and Freedom,” Milton Friedman advised conservatives to use crises as opportunities to advance their agenda. “Only a crisis – actual or perceived – produces real change,” he contended.
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Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“
Whether Democrats and Republicans come to budgetary agreement before the end of the year, it seems likely that some Americans are going to be thrown off a fiscal cliff. Even President Obama’s proposals call for cuts in discretionary spending that will disproportionately affect low-income children.
Perspectives from expert contributors.
The chasm between pro-family rhetoric and anti-family policies is widening. We are told to raise more children in order to prevent the aging of our population. We are told that education is the key to national economic success in this “age of human capital.” But what we see is a growing political effort to reduce public spending on children.
As Eduardo Porter recently explained, proposed cuts to federal spending will leave government as little more “than a heavily armed pension plan with a health insurer on the side” — not an entity likely to offer a helping hand to families struggling to support and educate the next generation.
Provisions now teetering on the edge of possible elimination include those that increased eligibility for the child tax credit and the earned income tax credit, which augment the after-tax income of families with children. Funds for Head Start, Early Head Start and child-care assistance will almost certainly be squeezed. Cuts in federal support for college attendance (both Pell grants and tax breaks) are likely to kick in, worsening student debt.
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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.
It’s the season of holiday cocktail parties, demanding intelligent chit-chat over Chardonnay. In such data-free environments it is always safe to say, “Medicare spending is out of control!” Wise heads will nod, because it is a credo with wide currency.
Perspectives from expert contributors.
After all, as I explained in my previous post, traditional Medicare, which still attracts about 75 percent of all Medicare beneficiaries, affords its enrollees free choice of providers and therapy. In the jargon of health-policy wonks, it is “unmanaged.” Thus, it would not be surprising if unmanaged Medicare spending were, indeed, out of control.
But some caution is in order. A really wise guy in the crowd, one familiar with relevant data, might challenge you with: “Oh, really? In what sense is Medicare spending out of control?”
That query might have been prompted by the following data.
Kaiser Family Foundation Read more…
Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
In a desperate attempt to prevent implementation of the Volcker Rule, representatives of megabanks are resorting to some last-minute scare tactics. Specifically, they assert that the Volcker Rule, which is designed to reduce the risks that such banks can take, violates the international trade obligations of the United States and would offend other member nations of the Group of 20. This is false and should be brushed aside by the relevant authorities.
Perspectives from expert contributors.
The Volcker Rule was adopted as part of the Dodd-Frank financial reform legislation in 2010. The legislative intent was, at the suggestion of Paul A. Volcker (the former chairman of the Federal Reserve Board of Governors), to limit the kinds of risk-taking that very large banks could undertake. In particular, the banks are supposed to be severely limited in terms of the proprietary bets that they can make, to lower the probability they can ruin themselves and inflict great damage on the rest of society. (For a primer and great insights, see this commentary by Alexis Goldstein, a leader of Occupy the S.E.C.)
The Volcker Rule is almost finished winding its way through the regulatory process, and a version should be implemented soon. But in a last-ditch attempt to block it, the United States Chamber of Commerce has sent a letter to the United States Trade Representative asserting:
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