Voter Preferences

This column in Slate collects the American voters views, according to polls, on economic policy. No wonder that policy is stalemated. Two snippets:

But the polled American is not sure whether the government should be doing so much to aid the economy in the first place. And, for her, all bets are off if the tax compromise becomes known as Stimulus 3.0 (or 2.0). She barely liked the 2009 stimulus when Congress passed it, and she certainly does not like it now. (The financial regulatory reform bill? She's made her peace with that.) Yet, in an enduring example of the polled American's propensity for containing multitudes, she likes virtually all of the elements of stimulus, such as the tax breaks, unemployment insurance, infrastructure investment, and bolstered food stamps—a case of the parts besting the sum, apparently. And she thinks the country needs more of those provisions. She also supports an increase in the minimum wage.

and

So how does the polled American think we should tackle the deficit issue? He knows that programs need cuts—tax hikes alone can't, and shouldn't, pull the country out of this mess. But he wants Washington to leave Social Security and Medicare well enough alone. And he hesitates to bring the ax to energy, health, or education programs. That said, he supports several provisions proposed by the president's debt commission—like shrinking the federal workforce, cutting federal salaries, closing overseas bases, and ending the tax deduction on home mortgage interest. And one program to really trim is America's generous foreign aid. The polled American thinks the government ships a quarter of our budget overseas, and thinks we should spend only $1 of every $10 helping out other nations. (In reality, the foreign aid amounts to less than 1 percent of the federal budget.)

This last part is great. Voters want to reduce the amount of foreign aid the government gives to a level ten times higher than we do! I don't think this can be done even standing on a chair.

Note also this article from Bloomberg that reports polling on the deficit. Americans want the deficit reduced. But the public also wants

...Congress to keep its hands off entitlements such as Medicare, Medicaid and Social Security, a Bloomberg National Poll shows. They oppose cuts in most other major domestic programs and defense. They want to maintain subsidies for farmers and tax breaks like the mortgage-interest deduction. And they’re against an increase in the gasoline tax.

I want to lose weight without cutting down my caloric intake. Not having great success with that program either.

No wonder policymakers can get nothing done. We would be better off, perhaps, if policy could be made in secret and then we voted after the fact based on results. I think that leads basically to dictatorship.

I Agree with Krugman

Paul Krugman argues that President Obama should just let the tax cuts expire and I agree.

Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. They have been filibustering Democratic attempts to separate tax cuts that mainly benefit a tiny group of wealthy Americans from those that mainly help the middle class. It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do?

The answer is that they should just say no. If G.O.P. intransigence means that taxes rise at the end of this month, so be it.

Krugman thinks it is a bad deal. I think they should just let them expire based on budget realities. What would be best would be to couple this with a cut in payroll taxes. That would lower the cost of employing people and would mitigate any effect on unemployment.

But I expect the President will give in to satisfy his campaign pledge about not raising taxes on the middle class.

The Next Crisis?

I hate to be alarmist, but the prospects of a crisis in state and local finance seems almost inevitable. "Creative" efforts to avoid taxing to cover current expenditures have created a looming debt crisis. And politics seems to militate against any efforts to deal with the crisis. As this New York Times article reports:

The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recentlystopped paying for certain organ transplants for people in its Medicaidprogram. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week. While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.

This is another instance of placing the burden of current expenditure on future taxpayers. But the states and localities have less leeway to continue borrowing, and the federal government seems unlikely to bail them out.

Consider:

Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.

or:

Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.

and then the most transparent kicking of the can:

New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christiedeferred paying the $3.1 billion that was due to the pension funds this year.

It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.

The problem is not so much the magnitude -- the economy will recover -- but the structural problems of our politics. There is no political gain to dealing with current problems.

Unemployment Extension versus Bush Tax Cuts

Can the Republican position on tax cuts be any more cynical? Compare their argument for extension with their refusal to extend unemployment insurance unless it is paid for. Here is Representative John Shadegg of Arizona speaking with Mike Barnicle on MSNBC (from Slate):

He's fine with unemployment benefits as long as they do not add to the deficit. Then Barnicle questioned the validity of the position, given that Shadegg supports giving a $700 billion tax break to the wealthiest Americans without paying for it. Barnicle also argued that unemployment insurance provides an "immediate benefit" to the economy, unlike tax cuts for the rich.

"No!" Shadegg said. "Unemployed people hire people? Really? I didn't know that." He continued: "The truth is the unemployed will spend as little of that money as they possibly can."

Any argument, no matter how stupid, is acceptable to make sure that the very rich get their tax cut.

Meanwhile, Diane Rogers makes the sensible wish:

So I make one open wish today, regardless of how politically-unrealistic I’m told this wish is: that policymakers could consider doing at least the “non-crazy” thing with the Bush tax cuts and stop proposing that any of them be permanently extended. Instead of frantically trying to “decouple” the high-end Bush tax cuts from the “middle-class” ones, we should be thinking about the best way to eventually “decouple” ourselves from all of them.

Unfortunately, I do not think our politics will allow this to happen. We suffer from a simple basic problem. Old people vote, young people do not. So the political system, responsive as it is, transfers wealth from the future to the present. It is not just budgets. Think about climate policy. We pollute now to maintain high consumption at the expense of the future climate. Politicians refuse to impose a carbon tax. Why? Because the beneficiaries of saving the earth, younger people, don't vote (I know that future generations cannot vote, but if young people voted at even half the rate of old people, we would have climate legislation).

I doubt we can fix any of our problems until young people vote.

Eichengreen on the Irish Bailout

Barry Eichengreen has an important, and terrifying, article on the Irish bailout.

The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

The big problem is the unwillingness of anyone to force bondholders to take a haircut. But if the debt is not restructured, the problem is not solved, just postponed.

One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.

And so it goes.