J. Bradford DeLong's Blog, page 2146

Liveblogging World War II: December 3, 1940

Having cleared northern Greece of Italian troops, the Greek army crosses the border and invades Italian-occupied Albania.

Is There a Way to Pass the "Middle Class" Tax Cut Extensions?

I don't think it's wise to pass them unless they include organic pay-fors so that the total bill reduces the national debt after ten years.

But if you can find the pay-fors, here is what Reid, Pelosi, and Obama should do according to David Waldman:

State of the Nation: Just for fun, let's consider a way to get to an outcome where the tax cuts on the first $250,000 in earned income are extended, while the cuts on income above that level expire.... [I]t uses reconciliation to get the job done.... [R]econciliation instructions such as the ones adopted in the budget for fiscal year 2010 -- the ones that enabled the passage of the "fix" for the Affordable Care Act -- only expire at the first of either: 1) the adoption of a new budget resolution, which hasn't happened, or; 2) the end of the Congress that passed them, which also hasn't happened yet. But what about the fact that reconciliation instructions can only be used once a year? Well, that's not exactly true, either. A closer-to-correct statement would be that reconciliation instructions can only be used once per budget cycle. The last time they were used -- in early 2010 -- was in the FY2010 budget cycle. We're currently in FY2011, and the FY2011 budget cycle....

Pass the tax cut extensions for everyone, across the board. Send it to the president, and get it signed into law. Then come back with a reconciliation bill repealing the extension for the top brackets. Since current law at that point will score the repeal as a $700 billion savings over 10 years, you're good to go on the deficit reduction requirement. Move it under the FY2010 reconciliation instructions, and you're done....

And why involve reconciliation at all? That is, why not bring a bill extending the cuts just for the first $250,000 in income? One possible reason for worry is that the minority will have the right to offer a motion to recommit the bill that would add an amendment extending the cuts for all income. And the fear is that enough Democrats would bolt on that vote that when it's all said and done, you'd end up voting on an all-or-nothing package anyway....

[H]aving a legitimate path to passage in the Senate (thanks to reconciliation's protection from the filibuster), you might have considerably more sway in holding the House caucus together. A significant number of more conservative Democratic votes in the House will be uncomfortable with going out on a limb for a rollback if they think it'll just be killed in the Senate, anyway. Show them a path to passage, and minds might be changed.

Is it a risk? Yes. Does it require bold moves we're not used to seeing from the Democrats in Congress? Yes. Does that mean it's very unlikely to happen? Yes. Can it fall apart in the middle of the process and leave us stuck with across-the-board extensions? Yes. (But there's a way around that, too, if you're really adventurous.) But it does lay out a viable path to an end result of tax cut extensions for the middle class, without the added baggage of extensions for the rich.

Firestorm and Contagion: Ireland

Niamh Hardiman:

How Ireland got burned: Ireland’s recent €85bn bail-out package negotiated with the IMF and the EU is discussed in terms that verge on the apocalyptic. The rescue was supposed to serve as a break against the wildfire of market bondholder panic. And yet the upward trend in Portuguese bond rates has scarcely been slowed.... Spain is now where the line in the sand must be drawn. But we have heard this before. If Spain is vulnerable, why not Italy; and if Italy, why not Belgium, perhaps even France. Little wonder that the imagery of contagion, of financial plague, is brought into play.

The suddenness of the Irish deal has taken public opinion by surprise, causing shock that we have been plunged into this regime of austerity, and a smouldering anger about the terms on which the deal has been done. The terms of the bail-out will transfer all the hardships onto the taxpayers and citizens: reactions include the views that we have been held to ransom, we cannot afford this rescue package, it is a bad deal for Ireland.

Ireland’s fiscal crisis is largely caused by the collapse of the house price bubble and over-reliance on revenues from construction-related activities. This is bad enough, but by itself it would be difficult but manageable. The millstone around the neck of the Irish people is the vast scale of the crisis in the banking sector... reckless lending for property development and an inadequate regulatory regime.... When financial meltdown was imminent in September 2008, the government undertook to guarantee all of the banks’ losses, bondholders as well as depositors.... The true picture of what is entailed has been slow to emerge.... National Asset Management Agency (NAMA).... The total cost of Nama-type loan loss is now estimated at €66 billion. This is, in effect, half of [annual] GNP.... Mortgage and personal loan losses... may amount to an additional €25 billion....

Ireland is now committed to an IMF-EU rescue package worth €85bn over the coming years, to fund both government spending and to support the costs of sorting out the crisis in the banks. It all happened very quickly, and indeed one government minister said they were bounced into it... interest rate... 5.87%... fiscal contraction... €15bn... National Pension Reserve Fund... to be used as part of the bail-out package... the banks’ bondholders are not to be required to bear any losses....

How did it come to this? And given the size of the intervention, why have the bond markets not been assuaged? Ireland was meant to be the firebreak in asserting the primacy of political commitment to the Euro over market irrationality. But this did not work. Instead Ireland got burned....

The European fire-fighters seem to be at least one step behind the game on both of these issues.... Harsh and even punitive fiscal measures to address what are really financial and not fiscal crises will further depress growth in the European periphery. The only realistic prospect for generating new growth in the Eurozone is if Germany were to engage in demand-enhancing measures, not the fiscal contraction to which is now seems committed...

Kevin O'Rourke:

Letter from Dublin: It had been clear for a long time that the blanket guarantee given to the liabilities of Ireland’s rotten banks, in September 2008, had saddled the State with a debt that was too big for it to handle. Ten successive quarters of declining real GNP, and one attempt too many to draw a line under the losses of our banks, made our exclusion from international capital markets inevitable. But to know something is one thing; to see it actually happen is something entirely different....

I yield to no-one in my loathing of the men and women who have done this to my country. What has been the intellectual low-point of the last couple of years?... [T]he biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence in the creditworthiness of the Irish State, we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny? The latter decision is the one that sank the country. It was the last great act of hubris of the Celtic Bubble, and was immediately denounced by one of the heroes of the crisis, my old UCD colleague Morgan Kelly.  On the night the guarantee was announced, Kelly pointed out that while it was the right policy if the Irish banks were facing a liquidity crisis, it was a terrible policy if they were insolvent, which was in fact the case. As they always do when confronted with someone smarter than them, the Dublin establishment circled the wagons, and Kelly was dismissed as an irresponsible young troublemaker of no consequence. He has been proved right, of course, but the establishment is still at it, making the same fundamental mistake of thinking that a solvency crisis is just a liquidity crisis....

The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway....
 
Who knows what the political consequences of all of this will be? The southern Irish are a conservative lot... political change in normal times is slow; but when it does come, it may come in a rush.... [W]e are about to have a general election, and if Brussels thinks that this deal is not going to be the big issue in that election, then they are even more out of touch than we already think they are. It is no longer even certain that the budget will be passed in December. Brussels may not have a Plan B, but they had better prepare one nonetheless....
 
Iceland is an obvious model for us. In a referendum, her voters have already rejected a proposal to pay back their banks’ creditors, who will take major losses. Now they have elected a constitutional assembly charged with drafting a new constitution. Ireland probably needs this more than does Iceland; I wish I were more confident that we will follow the latter’s example.

Barry Eichengreen:

The Irish bailout: he Irish “rescue package” finalized over the weekend is a disaster.... It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

The Irish “program”... kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent.... Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable.... A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency. But the more successful it is at reducing wages and costs, the heavier its inherited debt load becomes. Public spending then has to be cut even deeper. Taxes have to rise even higher to service the debt of the government and of wards of the state like the banks.

This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.

Irish public debt would then have topped out at maybe 100% of GDP. And the Irish program would have had a hope of working. As it is, the program will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.

In fact, this is exactly what the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB and the German government.

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.

But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, recent events make clear, leadership is in short supply.

DeLong Smackdown Watch: The Deficit Hawks of Obama's OMB

A number of messages have arrived by email, carrier pigeon, anonymous phone call, and other means protesting that my Battered but Not and Beaten talk is unfair to the deficit hawks of Obama's OMB. They claim that the deficits hawks' position was more nuanced than I allow, and that it was:

Enacting temporary stimulus that was fully paid for over ten years was a better economic policy than an unpaid-for stimulus: you don't risk any adverse short-term effects on production from an erosion of confidence in the long-run fiscal stability of the government, and you don't make our long-term deficit problems worse.

Proposing a temporary stimulus that was fully paid for over ten years was a better political strategy than an unpaid-for stimulus: the key blockers of further stimulus were the center block of the Senate, who wanted to see a path not just to recovery but to solving the long-run deficit problem as well. Propose a short-term stimulus that makes the long-term deficit problem worse and you can kiss their votes and thus any hopes of passage of a bill goodbye.

Given that the Congress was unwilling to enact short-term fiscal stimulus on anywhere near the magnitude needed to deal with the recession, the only strategy that had any chance of success at all was to pivot to long-term--not short-term, long-term--deficit reduction and hope that the Confidence Fairy would in fact show up.

Liveblogging World War II: December 2, 1940

Time:

BATTLE OF BRITAIN: Coventrizing - TIME: Moonlight and roses were Britain's lot last week. The roses were burning industrial cities; the moonlight a pallid, accursed illumination for bearers of death and destruction. Last fortnight's blasting of Coventry was followed last week by the "coventrizing" of Birmingham and by other blastings at Liverpool, Bristol, Southampton. Coventry's known victims rose to 422 when a mass burial of 172 unidentifiable corpses in a common grave (see cut) was followed three days later by a second mass burial of 250.

Having failed to knock out the R. A. F., or to terrorize London into surrender, or to storm across the Channel with a land invasion, it appeared that in the early autumn Germany had begun training masses of airmen in night bombing, a slower but safer method of attrition from the air. The Nazis' new, long-range grand strategy was to exhaust Britain's munitions—her machines, ships, guns, shells, bombs—by three kinds of action of which city blasting was only one. The other two were: 1) intensified attack over & under the sea on British merchant convoys bringing munitions (and food) from the Empire and the Americas; 2) extension of the war to new fronts from Gibraltar to Aden, to force greater British outlays of materiel, money, men and effort. But the city blasting, because it was in their midst, seemed to the British the most oppressive.

Chamberlain's Town. Birmingham has a population of 1,055,000 and is Britain's Pittsburgh. Third city in the British Isles, it is the centre of the iron & steel industry. Down upon Birmingham three evenings last week and again this week swept German bombers in waves of hundreds like those that shattered Coventry. As at that tragic town, they began soon after dusk by dropping fire bombs to set fires to guide the explosive carriers. These came in wide waves that converged from all angles, at many levels, upon the heart of the city, where the Town Hall (once inhabited by the late Neville Chamberlain as Lord Mayor) made a splendid landmark.

Birmingham's anti-aircraft batteries far outnumber Coventry's, yet they could do little to drive off the great swarming bats of death. But Birmingham covers four times the area of Coventry, so the concentration of damage was not so great. The German pilots evidently had orders to try for various specific arms and chemical and explosives factories. To strike at these some of the new Junkers 88s (improved from the Ju. 87 Stukas, these carry two tons of bombs, can bomb either dive or level) screamed in low. The British would not admit that they had scored any high percentage of hits on important factories. They even missed Birmingham's huge central railroad station, not far from the downtown office-building section where damage was most appalling. As in Coventry, residential sections suffered the greatest loss of life and—so far as industrial production went—the most upsetting effects, in dislodging workmen. Unlike more compact Coventry's, Birmingham's light, water and gas services were not knocked out, even temporarily...

Liveblogging World War II: December 1, 1940

Joseph P. Kennedy resigns his post as ambassador to the Court of St. James.

Diane Lim Rogers Applies the Soft Bigotry of Low Expectations to the U.S. Congress

DLM is, of course, 100% correct:

EconomistMom.com » Blog Archive » Can We Do the Non-Crazy Thing with the Bush Tax Cuts?: I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire.  (The even “righter” thing would have been to never have enacted them in the first place.)  I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have....

What a juxtaposition to have President Obama’s deficit-reduction commission release its final report while the Administration “negotiates” with Congress on whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed).... [T]he permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years–without interest costs and without the associated extension of Alternative Minimum Tax relief....  Extending the upper bracket cuts along with the rest would raise the ten-year cost to close to $3 trillion.... So the Administration and Congress are debating over whether we should commit to over $2 trillion, versus closer to $3 trillion, in deficit-financed Bush tax cuts.

Meanwhile, the President’s fiscal commission has recommended that federal revenues be increased as part of a package of policy changes that would get deficits down to economically sustainable levels by 2015 and beyond.... [T]he central message on tax policy from all of the various commissions, task forces, and study groups that have reported recently is pretty simple:  beyond the next couple years, we need more revenue, not less.

That’s why I think it’s crazy to be arguing about which portions of the Bush tax cuts should be permanently extended.  The first-best debate should be over whether to extend any of them at all, because whether it comes to our short-term tax policy needs (stimulate demand in the economy) or our longer-term tax policy needs (raise more adequate revenue in pro-growth ways), the Bush tax cuts are far from the best (even tax) policy to address those needs....

I think most Americans who are paying attention to today’s fiscal policy news are probably shaking their heads and/or cussing and/or laughing in a dark-humor sort of way.  It seems both ridiculous and tragic that our leaders can proclaim their intent to get our fiscal house in order out of one side of their mouths, while arguing to keep (forever) their favorite piece of the fiscally-reckless and economically-ineffective Bush tax cuts out the other.... So I make one open wish today... 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...

Obama should veto any extensions of the Bush tax cuts, and press for a short-term stimulus that has a reasonable bang-for-buck ratio.

Laugh If You Must, But It Is Published in a Refereed Journal

Life in Academia Watch

In my email inbox:

Evans Hall is due for a replacement of a 40 year old heating system over the curtailment period. The inclusive dates are Saturday, December 18, 2010 through Thursday, January 6, 2011. While space heating will be unavailable, there will be hot water in the restrooms and break room.

Those of you who will be working on December 20, 21, 22 or January 3-6 are likely to encounter very cool temperatures in the building. I encourage you to dress appropriately and in layers, wear hats, scarves, gloves. No space heaters are permitted due to their energy consumption.

There is a possibility that the work may be completed sooner. In the event that it is not and temperatures are very low within the building (esp in January), I will, on a case by case basis, entertain requests from staff to work from home if you are not otherwise requesting vacation during the affected periods....

XXXX XXXX


Director of Administration

Ezra Klein on Simpson-Bowles

Ezra Klein works really hard to find four things in Simpson-Bowles that he likes:

Here are the four best and five worst parts of the plan:

The good:

A payroll tax holiday in 2011: Simpson and Bowles embrace... a payroll-tax holiday in 2011. Actually, "embrace" might be a strong word. They say Congress should "consider" it. Still, a nod toward the need for policies speeding recovery is better than ignoring that need altogether.

Process, process, process: The Simpson-Bowles recommendations correctly identify congressional inertia as the central impediment... they make spending that busts the caps ineligible for... Reconciliation... instruct OMB to cut appropriations spending across-the-board by the amount that Congress has overspent unless Congress takes another vote to stop them... they strengthen the Independent Payment Advisory Board by applying it to all health-care providers sooner. They push tax reform through a "failsafe" that automatically increases taxes if Congress doesn't rework the system by 2013...

Defense spending and tax expenditures are major problems: The most positive impact the commission has had on the debate has been to move two formerly sacrosanct categories of spending onto the table....

A two-sided deal on Social Security: I don't particularly like the commission's Social Security recommendations, but I do like their vision of a deal that's more than just cuts and taxes....

Note that he really does not like their SS proposals--and they have no defense proposals. Their tax expenditure proposals don't reduce the deficit. And the "process" proposals have already been rejected by Repulicans who say that PAYGO should not apply to Republican proposals. So we are down to one good.

The bad seem to be to be much worse:

The bad:

The tax section: In an odd bid for Republican support, the commission caps revenues at 21 percent of GDP.... The commission's mandate was to balance the budget, not decide the size of government. This overstepped it.... No mention of a carbon tax or a value-added tax, both of which are preferred by many, if not most, tax-policy experts.

The 2012 start date: Simpson and Bowles start their cuts in 2012, as they assume the economy will have recovered by then. But what if it hasn't? A better approach would've been using an economic indicator as a trigger....

Raising the retirement age: If we want to cut Social Security benefits, we should cut Social Security benefits. Raising both the early and full retirement ages mainly penalizes those who hate their jobs or can no longer physically fulfill them. That's not the right way to reform Social Security.

Hobbling government: Among the plan's worst ideas is to cut congressional and White House budgets by 15 percent. Given the role of government and the complexity of modern life, members of Congress are probably understaffed even now. Taking staff away from them just means they'll either be more ignorant about the bills they're voting on, less responsive to their constituents.... The same goes for the plan's other aggressive cuts to the government.... "Washington needs to learn to do more with less, using fewer resources to accomplish existing goals without risking a decline in essential government services," the report says. But that's magical thinking. Companies and governments typically do less with less....

Cowardice on health-care reform: The plan's health-care savings largely consist of hoping the cost controls (IPAB, the excise tax, and various demonstration projects) in the new health-care law work and expanding their power and reach. But the commission "does not take a position" on the new law.... Given that health-care costs are the single most significant driver of our long-term budget problem, the commission's decision to hide from the big questions here is quite disappointing, particularly given their self-styled focus on making hard decisions and telling unpopular truths.