Rortybomb

The Game Theory of the Post-Platinum Coin Debt Ceiling

Jan 14, 2013Mike Konczal

In a statement given to wonkblog over the weekend, the Treasury department announced that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” Jay Carney followed up with the statement that there "are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default."

The administration decided against negotiating with the GOP over potential terms for raising the debt ceiling, even though they could have tried for the Grand Bargain they’ve been trying to get for the past several years. They’ve asked for a clean increase of the debt limit instead, threatening default. They’ve also now decided to commit to not sidestepping around the debt ceiling using legal measures, either by minting the platinum coin or declaring the debt ceiling unconstitutional via the 14th amendment.

The administration thinks that this move will strengthen their position. In general, having more choices makes you better off. But in strategic situations, removing some of your options can strengthen other options, by committing to following them through. Every game theory class has a reference to an army burning bridges and ships and otherwise removing their own escape routes, to tell their soldiers--and their opponents--that they’ll fight to the bitter end.

Since the platinum coin decision and subsequent statements seem compatible with game theory dynamics, it might be useful to diagram out the debt ceiling debate via an extensive-form game:

Removing the “avoid debt ceiling” option, in red above, is the administration’s way of saying that they want a “clean increase,” in green above, over anything else.

What are some ideas that can be drawn from viewing the debate as a game?

What Does a Clean Increase Give the Administration? For the White House, both the strategy of sidestepping the debt ceiling or the strategy of not negotiating and then having the GOP give up a clean increase would end the game. However, going for the clean increase has greater risks, as there’s a possibility of default.

So why try and force the game down this path? One reason could be that the administration is more worried about the costs of a defusing strategy than the pundits are. Maybe the Obama administration believes that the public will see this as a gross overreach of executive power.

A more likely explanation is that the administration thinks it is important to its own longer-term strategies for the GOP to play the ending move. Say Treasury had used the coin in the first round. This might have emboldened the more reactionary elements of the GOP. Taking the coin off the table forces the more sensible members of the GOP to take power back from those willing to default and move for a clean increase. This was basically Ezra Klein’s argument for not using the platinum coin.

Most liberal commentary is split over the second level of the diagram, the branches leading from the “don’t negotiate” option. There are those that think that this will force the more extreme conservatives to fold, further weakening them in the aftermath of the 2012 election and fiscal cliff. And there are those that think that breaching the debt ceiling has such a potential high cost for our economy, and don't see any reason to think the GOP will moderate to the center by February 15th, that it is not worth the risks.

The Administration Should Emphasize Default Pains... The stated strategy behind abandoning the platinum coin option is to use the threat of the “full default” to force a clean increase. One of the interesting things about the platinum coin and the 14th amendment in this game is that they have a dual strategic value. They could be used to shut down the debt ceiling in advance of having to stare down the House GOP, and they could also be kept as a last-minute option to prevent a default if the GOP doesn’t go for an increase. If the administration wants to commit to a “clean increase” strategy, then they have to remove it in both cases.

The leverage here for the administration is to emphasize the pain of default and the lack of other ways of mitigating them. The State of the Union speech is February 12th, or three days before the first day we could possibly breach the debt ceiling. There is significant opportunity there to emphasize to the public how bad the outcomes would be if there isn’t an increase, as well as to explain how impossible prioritization and workarounds are.

In the meantime, expect to see conservatives argue that the various workarounds available for the administration are sufficient and going through the debt ceiling wouldn't be that bad, contrary to the available evidence, to push back against the administration's strategy (and force them into "negotiate").

...While Downplaying IOUs and Other Shadow Currency. Several people are putting out the idea that instead of minting a platinum coin, the administration should begin to prepare IOUs, scrips, or other forms of shadow currency promising future payments once the debt ceiling is raised.

As NYC Southpaw notes, this is the equivalent of saying we will “postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order” that are almost certainly “a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.”

This is a weaker option than the platinum coin on every angle, inviting more legal challenges, uncertainty and constitutional issues while also inviting blowback for the administration in the form of how they are prioritized and the likely bank profits. (To use game theory terms, the platinum coin strictly dominated the IOU shadow currency strategy.)

Since it is weaker across the board, and the administration is trying to downplay both points at which this strategy could be deployed (under “avoid” as well as “workarounds”) expect little play on this topic in the weeks ahead.

Sequestration Complicates This. As many have noted, the debt ceiling will occur at the same time as the large spending cuts in the sequestration come into play. One doesn’t have to be cynical to think that the debt ceiling will be in the background of any sequestration negotiations. Removing the platinum coin tells us little about this will play out, though throwing in the debt ceiling might make a bad deal look better for the administration and Democrats.

Finally if the administration gets the better of the GOP on sequestration, it could make the GOP more likely to threaten default to compensate for what see as a loss of power. In theory, the payouts of one game shouldn’t affect a completely different game, but life is often more complicated than what game theory can tell us.

 

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In a statement given to wonkblog over the weekend, the Treasury department announced that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” Jay Carney followed up with the statement that there "are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default."

The administration decided against negotiating with the GOP over potential terms for raising the debt ceiling, even though they could have tried for the Grand Bargain they’ve been trying to get for the past several years. They’ve asked for a clean increase of the debt limit instead, threatening default. They’ve also now decided to commit to not sidestepping around the debt ceiling using legal measures, either by minting the platinum coin or declaring the debt ceiling unconstitutional via the 14th amendment.

The administration thinks that this move will strengthen their position. In general, having more choices makes you better off. But in strategic situations, removing some of your options can strengthen other options, by committing to following them through. Every game theory class has a reference to an army burning bridges and ships and otherwise removing their own escape routes, to tell their soldiers--and their opponents--that they’ll fight to the bitter end.

Since the platinum coin decision and subsequent statements seem compatible with game theory dynamics, it might be useful to diagram out the debt ceiling debate via an extensive-form game:

Removing the “avoid debt ceiling” option, in red above, is the administration’s way of saying that they want a “clean increase,” in green above, over anything else.

What are some ideas that can be drawn from viewing the debate as a game?

What Does a Clean Increase Give the Administration? For the White House, both the strategy of sidestepping the debt ceiling or the strategy of not negotiating and then having the GOP give up a clean increase would end the game. However, going for the clean increase has greater risks, as there’s a possibility of default.

So why try and force the game down this path? One reason could be that the administration is more worried about the costs of a defusing strategy than the pundits are. Maybe the Obama administration believes that the public will see this as a gross overreach of executive power.

A more likely explanation is that the administration thinks it is important to its own longer-term strategies for the GOP to play the ending move. Say Treasury had used the coin in the first round. This might have emboldened the more reactionary elements of the GOP. Taking the coin off the table forces the more sensible members of the GOP to take power back from those willing to default and move for a clean increase. This was basically Ezra Klein’s argument for not using the platinum coin.

Most liberal commentary is split over the second level of the diagram, the branches leading from the “don’t negotiate” option. There are those that think that this will force the more extreme conservatives to fold, further weakening them in the aftermath of the 2012 election and fiscal cliff. And there are those that think that breaching the debt ceiling has such a potential high cost for our economy, and don't see any reason to think the GOP will moderate to the center by February 15th, that it is not worth the risks.

The Administration Should Emphasize Default Pains... The stated strategy behind abandoning the platinum coin option is to use the threat of the “full default” to force a clean increase. One of the interesting things about the platinum coin and the 14th amendment in this game is that they have a dual strategic value. They could be used to shut down the debt ceiling in advance of having to stare down the House GOP, and they could also be kept as a last-minute option to prevent a default if the GOP doesn’t go for an increase. If the administration wants to commit to a “clean increase” strategy, then they have to remove it in both cases.

The leverage here for the administration is to emphasize the pain of default and the lack of other ways of mitigating them. The State of the Union speech is February 12th, or three days before the first day we could possibly breach the debt ceiling. There is significant opportunity there to emphasize to the public how bad the outcomes would be if there isn’t an increase, as well as to explain how impossible prioritization and workarounds are.

In the meantime, expect to see conservatives argue that the various workarounds available for the administration are sufficient and going through the debt ceiling wouldn't be that bad, contrary to the available evidence, to push back against the administration's strategy (and force them into "negotiate").

...While Downplaying IOUs and Other Shadow Currency. Several people are putting out the idea that instead of minting a platinum coin, the administration should begin to prepare IOUs, scrips, or other forms of shadow currency promising future payments once the debt ceiling is raised.

As NYC Southpaw notes, this is the equivalent of saying we will “postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order” that are almost certainly “a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.”

This is a weaker option than the platinum coin on every angle, inviting more legal challenges, uncertainty and constitutional issues while also inviting blowback for the administration in the form of how they are prioritized and the likely bank profits. (To use game theory terms, the platinum coin strictly dominated the IOU shadow currency strategy.)

Since it is weaker across the board, and the administration is trying to downplay both points at which this strategy could be deployed (under “avoid” as well as “workarounds”) expect little play on this topic in the weeks ahead.

Sequestration Complicates This. As many have noted, the debt ceiling will occur at the same time as the large spending cuts in the sequestration come into play. One doesn’t have to be cynical to think that the debt ceiling will be in the background of any sequestration negotiations. Removing the platinum coin tells us little about this will play out, though throwing in the debt ceiling might make a bad deal look better for the administration and Democrats.

Finally if the administration gets the better of the GOP on sequestration, it could make the GOP more likely to threaten default to compensate for what see as a loss of power. In theory, the payouts of one game shouldn’t affect a completely different game, but life is often more complicated than what game theory can tell us.

 

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Price Point

The Platinum Coin is as Absurd as the Problem It Solves, and That's a Good Thing

Jan 10, 2013Tim Price

President Obama can beat Republicans in the debt celing standoff by turning their own tactics against them.

President Obama can beat Republicans in the debt celing standoff by turning their own tactics against them.

Not since Samuel L. Jackson announced his desire to have the snakes removed from his passenger flight has a single sentence thrilled the Internet as much as Chuck Todd’s question at yesterday’s White House press briefing: “Do you guys have a position on this trillion-dollar coin business?” At the same time, one could hear the collective groan of critics who hoped the whole coin idea would stay buried in online obscurity rather than become a topic of discussion for people with actual influence. It’s understandable that the silliness of the trillion-dollar coin rubs its opponents the wrong way, but it’s that very silliness that makes it the perfect response to the ridiculous state of American politics.

The precise origins of the trillion-dollar coin are a matter of debate (some credit blog commenter “beowulf” for the idea, while others trace its inspiration to nuclear energy magnate Montgomery Burns), but in the last week it’s become a preoccupation of the economic blogosphere. The particulars have been covered in exhaustive detail elsewhere (see The Atlantic’s Matthew O’Brien for a good overview), but the short version is this: due to a loophole in commemorative coin law, the Treasury Department technically has the power to mint a platinum coin with a face value of $1 trillion, deposit that coin in the Federal Reserve, and use the funds to pay its debts if Congress fails to raise the debt ceiling in time to avoid default.

I don’t intend to get into the legal foundation for the platinum coin approach (though experts including Harvard professor Laurence Tribe and the co-author of the law believe it’s sound) or even to suggest that the president might actually go for it. No matter what garbled signals his press secretary sends, Barack Obama is a serious man who doesn’t like stunts. After spending more than four years cultivating an image as the only grown-up in the room, he’s probably not going to step out into the Rose Garden, pull an oversized novelty coin from his pocket, and announce that he just ended the debt ceiling standoff before it started. But that’s too bad, because he totally should.

Non-legal arguments against the coin share a common theme: it’s stupid, and its supporters are sinking to the GOP’s level. Kevin Drum of Mother Jones writes, “This whole thing is not just a ridiculous idea, it's a bad idea too.” Ross Douthat at The New York Times argues that it would be “trying to match the Republicans irresponsibility for irresponsibility, in a constantly escalating game of ‘can you top this?’” Republicans, Drum notes, “seem willing to set the country on fire to please their increasingly fever-swampish base, and eventually they'll pay a price for that at the polls,” so Democrats should just sit back and wait for them to self-destruct. One might have thought that happened in November, when they lost the presidential election, several Senate seats, and the popular vote in the House, but two months later, they’re still in control of the House and still threatening to trigger a global depression out of spite. How’s that working out?

Even supporters of the trillion-dollar coin admit that it’s all very silly, but that’s sort of the point. Republicans’ debt ceiling antics are utterly ridiculous; under the guise of curtailing future spending, they’re threatening to refuse to make good on debts the U.S. already owes because of spending Congress already authorized. They’re so concerned about the health of the U.S. economy that they claim they’re willing to destroy it. It may all be empty posturing, but it only gets them what they want if Obama agrees to play straight man to the clowns and accept a pie in his face for the good of the republic. And as we’ve seen time and again during the president’s first term, pretending that elected Republicans are grown-ups who take their responsibility to govern seriously doesn’t cause them to live up to expectations. Instead, it seems to embolden them to behave even more radically, since they know they can count on someone else to keep the country afloat while they’re busy running around with their pants on their heads.

So yes, President Obama could continue to act as if Republicans are negotiating in good faith and either allow them to extract more painful, unnecessary budget cuts or risk the possibility that they’ll reject his overtures and destroy the U.S.’s credit rating for no particular reason. Or he could flip the script so that the joke’s on them for once. As Jamelle Bouie writes, “The $1 trillion coin is a ridiculous idea. But it’s no less ridiculous than the debt ceiling, and in the big scheme of things, it’s far preferable to defaulting on our obligations.” Minting the coin wouldn’t lower the president to the GOP’s level; it would prevent the GOP from dragging the entire country down with it. If the U.S. had a functioning government and a healthy political debate, we wouldn’t be talking about the debt ceiling or the coin, but it doesn’t, so we are. Pretending that everything’s just fine on Capitol Hill won’t bring Mr. Smith back to Washington, but acknowledging and heightening the absurdity could hasten the exit of the current gang of malcontents and allow more reasonable and responsible leaders to take their place. So if you take policy seriously, it’s time to treat politics as farce. 

Tim Price is Deputy Editor of Next New Deal. Follow him on Twitter at @txprice.

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On Bookshelves Now: Two New Books From Roosevelt Fellows

Jan 9, 2013

With the new year have come new releases: Roosevelt Institute Fellows Susan Crawford and Georgia Levenson Keohane both have books that just hit the shelves.

With the new year have come new releases: Roosevelt Institute Fellows Susan Crawford and Georgia Levenson Keohane both have books that just hit the shelves. Get your copy now of Crawford's Captive Audience and Keohane's Social Entrepreneurship for the 21st Century.

Captive Audience explores why Americans are now paying much more but getting much less when it comes to high-speed Internet access. It explores how telecommunications monopolies have affected the daily lives of consumers and America's global economic standing. Check out some excerpts: 

Merger Made Comcast Strong, U.S. Web Users Weak

How AT&T and Verizon Manipulate Your Smartphone

U.S. Internet Users Pay More for Slower Service

Social Entrepreneurship for the 21st Century charts the social entrepreneurship revolution across the nonprofit, private, and public sectors, examining how innovative change makers are testing new solutions to entrenched social, economic, and environmental problems. Click here to get a sneak peek!

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Rortybomb

Should President Obama Announce No Prioritizing Payments in the Debt Ceiling, or Start Minting Platinum Coins Daily?

Jan 9, 2013Mike Konczal

Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

The Real Problem With a Trillion Dollar Platinum Coin

The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

Thoughts?

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Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

The Real Problem With a Trillion Dollar Platinum Coin

The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

Thoughts?

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Millennial Pulse

To Reduce the Deficit, End Redistribution to the Rich

Jan 2, 2013Joe Landry

Instead of cutting aid to the poor, the president and Congress should focus on reforming costly tax expenditures.

Instead of cutting aid to the poor, the president and Congress should focus on reforming costly tax expenditures.

While we often hear critics decrying the redistributive effects of American social spending, government aid does not always benefit households of limited means. Often, aid looks more like a million-dollar vacation home or a luxury health insurance plan than housing vouchers and food stamps. American social spending is more complex than a simple redistribution from high- to low-income households. Over time, the country’s tax and transfer system has adopted provisions that reward specific high-income households. These programs contribute to deficit growth and detract from spending targeted at alleviating poverty among working families.

The most generous social welfare programs are currently administered through the tax code. A list of itemized deductions on households’ income tax returns serves as the only indication of these benefits. Income tax deductions, exclusions, deferrals, and credits, known collectively as “tax expenditures,” amount to more than $1 trillion of federal spending (according to estimates by the Tax Policy Center), not including lower tax rates on capital gains and dividends to encourage investment.

Tax expenditures are the functional equivalent of direct spending. Consider two households with identical incomes of $200,000. Household A purchases a home with a mortgage. Household B rents an apartment. Household A likely receives $5,000-10,000 (depending on mortgage size and APR) through the mortgage interest deduction when filing taxes. Household B receives $0. This, in effect, is a subsidy for homeownership. If the IRS collected taxes without any exclusions or deductions and then distributed payments to those who purchased mortgages, we would most likely categorize this disbursement as a form of direct spending.

Beyond simply diminishing revenues, tax expenditures disproportionately favor high-earning households, thereby reducing progressivity of federal income taxes. One reason for this imbalance is that high-income households have relatively high marginal income tax rates. Consider the exclusion of $10,000 of earned income for two individuals. Taxpayer A is taxed at a rate of 20 percent. Taxpayer B is taxed at a rate of 35 percent. Excluding $10,000 means removing this sum from taxable income. Decreasing taxable income by $10,000 for both of these individuals will yield $2,000 for Taxpayer A and  $3,500 for Taxpayer B. Thus, two taxpayers who engage in identical behavior receive disparate rewards because of income differences.

High-earning households are also more likely to engage in behaviors incentivized through the tax code. This means that, in addition to gaining more from each dollar deducted from tax obligations, high-earning households also deduct more than their middle- and low-income peers. Having more resources, the top 20 percent of households are more likely to purchase homes and contribute to retirement savings plans than households in the bottom 20 percent. They are more likely to hold jobs that offer employer-provided health insurance. Further magnifying the divide, high-income households on average possess more expensive employer-provided health insurance. In subsidizing purchases of homes, retirement plans, and health insurance for all households, tax expenditures disproportionately assist those originally more likely to engage in these behaviors. Consequently, high-income households are in better positions to take advantage of tax deductions.

So if tax expenditures waste essential potential revenues on affluent households, why are they so difficult to reform? General support for simplifying the tax code is not difficult to find. What is difficult, however, is reducing or eliminating particular benefits that households already possess. Tax expenditure reform would be tantamount to a tax hike on households that itemize deductions. For this reason, politicians enthusiastic about tax code simplification become reticent when faced with the task of eliminating specific loopholes.

The first step to simplifying the tax code successfully is treating tax expenditures as spending. This distinction demands that Congress scrutinize expenditures to the same degree that it scrutinizes antipoverty spending. Congress should consider whether particular deductions or exclusions successfully incentivize a desired behavior. Further, it should assess whether social rewards from altered behavior exceed revenue lost. For example, it would be difficult to argue that any social gain from deducting mortgage interest on second homes for families earning more than $250,000 exceeds revenues lost. By simultaneously reducing revenues for means-tested entitlements and subsidizing home purchases of wealthy taxpayers, such a provision merely exacerbates income and wealth inequality. This provision is not worth revenue losses that it engenders.

While tax expenditures for high-income families would not survive this level of scrutiny, some expenditures for low-income families achieve desirable ends. This social value justifies revenues lost. For example, the Earned Income Tax Credit (EITC) supports low-wage workers with supplemental income, reducing the poverty rate for these workers and their families. EITC successfully incentivizes work, achieving a valuable social aim and warranting a degree of spending. Other existing expenditures might also be continued for lower- and middle-income households. For example, Congress might continue the mortgage interest deduction for low- and middle-income households on the margin of being able to afford homeownership. But Congress should only adopt such extensions if a clear argument can be made that social gains exceed revenues lost.

As President Obama and congressional leaders continue to negotiate long-term deficit reduction, the first programs that they trim should be those subsidizing high-income households. More than any other social spending category, tax expenditures for high-income households constitute frivolous spending. Both presidential candidates in 2012 supported reducing tax expenditures for high-income families. Governor Romney suggested setting a maximum deduction, while President Obama proposed setting deductions at lower tax rates. Each of these plans would limit tax expenditures for high-income households to some extent. In order to further decrease tax expenditures’ regressive effects, these proposals could be combined with reforms that target payments toward lower- and middle-income households. This would include restricting the mortgage interest deduction to primary residences and limiting exclusions for luxury health insurance beyond provisions already included in the Affordable Care Act.

Now it is time for the president and Congress to fulfill their promise to simplify the tax code, beginning with those at the top of the income scale. While tax expenditure reform for high-income households will not solve our fiscal problems single handedly, it represents an essential path forward for reducing the deficit without exacerbating the economic hardship of low-income Americans.

Joe Landry is a member of the Roosevelt Institute | Campus Network and a senior at Washington and Lee University in Lexington, VA, majoring in American History and minoring in Poverty and Human Capability Studies. This summer, he worked with Dr. Harlan Beckley, Director of the Shepherd Poverty Program at W&L, researching the historical and comparative context of current American social spending. Their research can be found here.

Money lighting cigar image via Shutterstock.com.

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President Obama: Stay Progressive in the Fiscal Showdown Talks

Dec 18, 2012Richard Kirsch

President Obama must remember the message of election night and back away from cutting Social Security benefits.

President Obama must remember the message of election night and back away from cutting Social Security benefits.

That didn’t last nearly as long as I had hoped. I put on my Obama baseball cap – the one I picked up from a street vendor walking to the inauguration four years ago – a few weeks before the November election. I’ve worn it every day since, to both celebrate his victory and cheer on the president for keeping to a progressive promise in the fiscal negotiations. Part of that promise was telling the DesMoines Register that Social Security benefits should not be cut. But it looks like my cap is going back on the shelf if reports that Obama is willing to cut Social Security benefits prove to be true.

There are three things to keep in mind about the president agreeing to cuts in Social Security benefits. The first is that Social Security’s benefits are slim, while retirement savings for most Americans are even thinner. The second is that if we are going to address Social Security’s eventual shortfall, there’s a simple progressive alternative to cutting benefits. The third is that this concession is giving in to the corporate deficit hawks, each of  whom has huge personal retirement accounts. Let’s take them – very briefly – one at a time.

Social Security is what American seniors survive on. As Dean Baker reports, “The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year.”

And most people don’t have savings to fall back on. Half of Americans have less than $10,000 in savings and nearly half of baby boomers are at risk of not having enough savings to pay for basic necessities and health care.

Point number two is if you are going to tackle the eventual Social Security shortfall – which has nothing to do with the fiscal talks since Social Security doesn’t contribute a dime to the deficit – there is a simple, progressive alternative to cutting benefits. Lifting the cap on payments into Social Security for income of greater than $110,100 would only impact 6 percent of wage earners and would extend the life of the trust fund for almost 75 years.

Finally, let’s look at the corporate CEOs who blithely talk cuts in Social Security, like Goldman Sach’s CEO Lloyd Blankfein, who told CBS News, "You're going to have to do something, undoubtedly, to lower people's expectations of what they're going to get." It’s easy for a guy who has $12 million in retirement assets to dismiss a cut in benefits of $1,000 and more as just lowered expectations. Other CEOs leading the campaign to cut benefits include Honeywell’s David Cote, with $78 million in his retirement account, and GE’s Jeffrey Immelt, with $55 million stashed away for his later years.

Hopefully the president will back away from cutting Social Security benefits. If not, we need Democratic leaders like Senate Majority Leader Harry Reid to keep to his pledge to keep Social Security out of the fiscal talks. And if a fiscal package with the cuts is presented, Democrats in both houses should offer an amendment, substituting lifting the cap on 6 percent of upper-income Americans for cutting benefits for all our retirees. That’s the kind of choice we need Congress to face.

But Mr. President, let’s not get to that choice: I really like wearing my Obama cap. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Are High College Costs Redistributive?

Dec 11, 2012Mike Konczal

Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

Tuition as Redistribution

But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

(Net room and board and other costs has a similar dynamic.)

 Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

 

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Aaron Bady has a fantastic piece on the boosters who argue that MOOCs and other forms of online education will fundamentally transform higher education, addressed as a response to Clay Shirky. There's a few important moves to watch when people make this line of argument. Many who prize the "disruptive innovation" of higher education usually concede that what it will mostly do is provide a cheaper but poorer alternative to the large number of non-elite public institutions that educate the majority of those who seek higher education. The talk is all "Watch out Harvard and Yale! This online education company is going to take you down like Napster took down the record companies." Then it quickly reverts to the idea of providing "access," which gets much of its power through the ongoing dismantling of mass public higher education.

Note that, given that online education's success will be a function of the weakness of public education, there's a huge incentive for for-profit higher education firms to participate in that dismantling project. And sure enough, there's a great new article by Sarah Pavlus at the American Independent, "University of Phoenix fought against community college expansion." There's "so much money to be made online, and [for-profit schools] didn’t want community colleges coming in at a much lower tuition rate,” she writes. Public institutions are attempting to innovate and provide better services to citizens, but for-profit schools are trying to stop them to bolster their own bottom lines.

This is why the debate about the actual quality of online education is important. Online education can succeed not by providing a better service at a cheaper price, but instead by just providing "access" if public education slowly becomes unavailable. If there's no public option, then the quality issue becomes moot - then it is just about providing the now missing access to meet the large demand our country has for higher-level education.

Also watch for when online education boosters make an argument of higher education decline rather than online success. They do a rhetorical move to argue that the problems in the non-profit private education institutions extend to public ones. Kevin Carey, for instance, argues that "college spending is the driving force behind affordability or lack thereof in the long run" before noting several paragraphs later that "Inflation-adjusted per-student spending at private research universities, in particular, increased sharply." He quickly notes that "private universities set the aspirational standards for the industry as a whole," but public higher education cost inflation is driven mostly by declining public support, not a competitive war with private schools.

As Josh Mason pointed out, this is the equivalent of saying that since the private savings vehicle of 401(k)s have turned out to be a bit of a bust, we should scale back the public retirement vehicle of Social Security. That's not the case at all! And, if anything, we should view the public option as a version that works.

Tuition as Redistribution

But maybe higher tuition isn't a real problem. Maybe higher costs are driven by the rich paying more to help out the poor in a private form of egalitarian redistribution. A few weeks ago, Evan Soltas at Bloomberg wrote a version of this argument, which Matt Bruenig picked up on his blog (and here as well). Soltas argues that the huge rise in the advertised ("sticker") price of colleges is misleading, because the actual cost people pay ("net cost") is much lower and has been increasing at a lower rate. Soltas argues that "what has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships." Bruenig and Soltas both emphasize that the rich pay more while the poorest pay less. They use data from the most recent Trends in College Pricing.

There are a few critical points to bring up about this analysis. Contrary to Soltas, this is driven as much, if not more, by public policy, specifically the effect of of a significant expansion in public funding, notably in Pell Grants and military grants. (I believe Soltas' graph also uses data that includes the extensive network of tax credits, which add up to a lot of money; the cross-section graphs in Bruenig's graphs does not.) From Trends in Student Aid:

This is one way of providing public funding. Another would be to drive down tuition directly. I took up the idea of supporting public provisioning directly, instead of coupons that provide targeted support, in my recent New America paper. If there are market imperfections, incumbents can capture some of the subsidy while driving up the price for all those who aren't getting the coupons. Public provisioning, in these cases, lowers the cost for everyone.

Now if you look at the net price by income, you also see those in the top income bracket, here being those with incomes over $100K a year, paying more than the poor, those under $33,000. From Bruenig's piece:

Soltas argues that "the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate." He argues that differences in price reflects an institutional goal of cross-subsidization, where private firms make the rich pay more to compensate the poor. This didn't strike me as obvious from the data or other resources. In general, price discrimination should be thought of as a transfer from consumers to producers' surplus. Meanwhile, businesses usually don't cross-subsidize, and as we saw from the Pell Grant information, a big driver of this is poor people's payments beng compensated through public funding.

Just to confirm that higher tuition wasn't redistribution, I emailed one of the authors of the study, Sandy Baum, who told me that "very few students pay more than the actual cost of their education. Affluent students are generally subsidized less than low-income students, but they aren't actually paying any part of the cost of education for low-income students. Taxpayers generally are subsidizing Pell Grant recipients. But that's quite different from students paying more than their educational costs to cross-subsidize low-income students."

Another technical note worth making: Bruenig's graph also assumes that the poor are attending the same institutions as those who are better off. But they are almost certainly attending schools part-time instead of full-time, and cheaper institutions compared to more expensive ones. One can see this by just looking at the sticker cost of tuition. The sticker price by income has large differences that are slowly increasing.

(Net room and board and other costs has a similar dynamic.)

 Making sure that the poor can access education through grants could work as a plan over the future, though we must understand that it is a plan, specifically government planning. There are other plans we could do as well.

 

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Another Reason to Kill the Debt Ceiling: Conservative Think Tanks' Responses to Default

Dec 5, 2012Mike Konczal

House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

But that was the reaction from the number-crunching analysts. What about the bosses?

2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

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House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

Here's one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren't afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn't get his way.

For instance, here's bad cop Sen. Pat Toomey (R-PA) saying that the markets "would actually accept even a delay in interest payments on the Treasuries," especially "if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this." Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

Here's where the think tanks are fascinating. You could image them saying "our partner Toomey is nuts, we can't control him, and you better do what he says or there's going to be real damage." But that's not what they did. It's best to split the work they did on the debt ceiling in two directions:

1. Technical Default Ain't No Thang. The first is arguing, like Toomey, that a "technical default" wouldn't matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody's report arguing a "short-lived default" would hurt the economy? Pethokoukis: "I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense." Default doesn't matter because Pethokoukis doesn't want taxes to go up, and there's no economic sense because of an interview he read in the Wall Street Journal.

Others went even further, arguing that the real defaulters are those who, umm, don't want to default on the debt. Here's the conservative think tank e21 with a staff editorial arguing that "policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced." All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: "Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias." S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

Heritage wrote a white paper saying that you could just "hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month," and that "refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt." Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: "Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short." Cato also jumped in with the technical default crowd here.

But that was the reaction from the number-crunching analysts. What about the bosses?

2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here's the president of AEI, Arthur C. Brooks, in July 2011: "The battle over the debt ceiling...is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism...No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance."

Even better, the president of the Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: "We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps....Congress should not raise the debt limit without getting spending under control."

So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There's no reason to assume all the same players won't play an even worse cop this time around.

There's no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

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Should Plummeting Interest Rates Change Deficit Hawks' Arguments?

Dec 5, 2012Mike Konczal

Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

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Several deficit reduction plans came out at the end of 2010, including a proposal of the co-chairs of the Simpson-Bowles comission and another by Pete Domenici and Alice Rivlin. Since then, the economic recovery has been sluggish, with unemployment stubbornly high. The Republicans threatened what they called a "technical default" during the debt ceiling fight, a move which led to a ratings downgrade for the United States and months of subpar growth. Rather than balancing the budget, the deficit was 8.7 percent of GDP in 2011, and is projected to be 7.3 percent of GDP for 2012.

What else has happened? Borrowing costs for the United States have plummeted. While real interest rates for borrowing 10 years out were still positive in late 2010 when these plans came out, they have since gone negative and stayed there. Investors are paying us to borrow money for the next 10 years.

If you were concerned about our nation's deficits in late 2010 and you follow this crucial market signal, you should be significantly less worried now, right? It's important to note that this fall in our borrowing costs hasn't been incorporated into any of the debt discussion happening right now, discussions which still use frameworks created in 2010.

Take Version 2.0 of the Domenici-Rivlin Plan, released on Monday. Defenders argue that this plan calls for stimulus right away, and even has an "economic growth" checkbox in its slideshow to prevent immediate austerity. However, there are two big things in Version 2.0 that don't incorporate collapsing interest rates.

1. It Cuts Its Stimulus Plan by 80 Percent. When I brought this up on Twitter, several people noted that Version 2.0, much like Version 1.0, contains stimulus. However, it wasn't noted that it recommends significantly less stimulus in the second version, even though borrowing costs are significantly cheaper and getting to full employment is equally crucial for dealing with our deficits.

The first version recommends a payroll tax holiday of $650 billion. The new version calls for an income tax rebate of just $120 billion dollars (line 34). That's 80 percent less stimulus than in the original version, even though the price of providing stimulus has plummeted. Is getting to full employment suddenly less of a priority? We are still quite a ways away from there.

2. It Reuses "Down Payment" and Credibility Theories. A popular theory in 2010 was that any short-term stimulus needed to be paired with long-term deficit reduction. Why? Not for political reasons, like that being the only way to get either through Congress. It was because of strictly economic reasons. Without deficit reduction, the upfront stimulus would panic the financial markets, raising interest rates and canceling out the stimulus. (This ignores that rates would rise because the economy was getting stronger, but forget that.)

Here's Version 1.0, recommending "a short-term jump-start to growth and a commitment to long-term deficit reduction that makes stimulus credible." In Version 2.0 we get a similar claim: "Of course, this and any other policies that add to the short-term deficit should be paired with a long-term debt reduction agreement rather than be enacted in isolation." The authors also think that removing the fiscal cliff requires a "down payment" to satiate the markets for the time being.

Once again, it isn't clear what macroeconomic theory is animating the "of course" here other than a vague sense of credibility. To whatever extent that theory made sense in 2010, it's significantly less, ahem, credible now. The end of 2010 saw an increase in stimulus through extensions of the Bush tax cuts, unemployment insurance, and the payroll tax without any long-term deficit reduction, and there's no evidence it caused a market panic. Indeed, one of the sadder moments for President Obama's economic team was them walking through confidence fairy arguments during the debt ceiling fight in summer 2011, the logical end results of this credibility argument.

If we can pass stimulus right now, why don't we do it? Certainly Version 2.0 doesn't think Medicare changes must go with, say, their plans to adjust the COLA of Social Security. I'd say it's because making it clear that these are two separate issues with very different solutions keeps the Very Serious People from using manufactured short-term crises and mass unemployment to reengineer social insurance programs to do the things they want them to do. Regardless of whether you like those ideas, there's no reason to hold our current unemployed hostage in the process. And unfortunately for them, the capital markets for U.S. debt, one of the most liquid and transparent markets in the history of modern capitalism, agree. I'm still not hearing good reasons to ignore this big market movement from those still worried about the deficit as the major priority.

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FDR's 47 Percent: Will the Democrats Finally Heed Their Voices?

Dec 3, 2012David Woolner

President Obama should use the fiscal cliff to shift the debate away from deficits and take on the inequality that's undermining our democracy.

It has been well said that "the freest government, if it could exist, would not be long acceptable, if the tendency of the laws were to create a rapid accumulation of property in few hands, and to render the great mass of the population dependent and penniless…"

President Obama should use the fiscal cliff to shift the debate away from deficits and take on the inequality that's undermining our democracy.

It has been well said that "the freest government, if it could exist, would not be long acceptable, if the tendency of the laws were to create a rapid accumulation of property in few hands, and to render the great mass of the population dependent and penniless…"

We believe in a way of living in which political democracy and free private enterprise for profit should serve and protect each other—to ensure a maximum of human liberty not for a few but for all…

Today many Americans ask the uneasy question: Is the vociferation that our liberties are in danger justified by the facts?

...Their answer is that if there is that danger it comes from that concentrated private economic power which is struggling so hard to master our democratic government.—Franklin D. Roosevelt, 1938

In his remarks on the so-called “fiscal cliff,” and in numerous campaign speeches, President Obama has repeatedly remarked that “we can’t just cut our way to prosperity,” and that “if we’re serious about reducing the deficit, we have to combine spending cuts with revenue. And that means asking the wealthiest Americans to pay a little more in taxes.” The president has also said that he is “not wedded to every detail” of his current plan to reduce the deficit and that he is open to compromise. But he also has made it plain, as he did in his recent remarks at the White House, that he will refuse to accept any approach that isn’t balanced; that he is “not going to ask students and seniors and middle-class families to pay down the entire deficit while people like me making over $250,000 aren’t asked to pay a dime more in taxes.”

For the millions of Americans who remain out of work, or are struggling with hourly wages that when adjusted for inflation stand where they were in 1978, this is welcome news. But the president’s focus on taxes and the deficit is only part of the story. What the country really needs, according to most economists, is more stimulus, for the best way to reduce the deficit is to expand the economy, which would of course result in more government revenue.

The president has certainly made reference to this, and he has included a modest $50 billion in stimulus spending in his recent budget proposal to Congress, but for the most part the public discourse on how to avoid the “fiscal cliff” and fix our economy has been centered not on jobs or the vast structural inequality that now separates the top 1-2 percent from the rest of us, but on the deficit. This is unfortunate, for it means, in essence, that the country’s economic agenda is still very much in the hands of the conservative right; that we are still focused not on the cause of our economic woes—a collapsed economy brought on by the worst financial crisis since the Great Depression—but on the by-product: the vast fall-off in federal, state, and local revenue that naturally came about as a result of this collapse.

A far better exercise would be to move away from the right’s obsession with the deficit and open up a conversation with the American people about a far more critical issue facing the nation: the ever-widening gulf between the rich and the rest of us and the very real consequences that this disparity in income has had on our economy and indeed on the very nature of our democracy.

Roughly three-quarters of a century ago, when faced with a similar set of circumstances—including a conservative right that was fond of labeling his policies socialist—Franklin Roosevelt did not shy away from addressing the conditions that led to the collapse of the world’s economy. He well understood—as did the millions of Americans who lived in or on the threshold of poverty—that “the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.” He also understood that “the Federal debt, whether it be twenty-five billions or forty billions, can only be paid if the Nation obtains a vastly increased citizen income…The higher the national income goes the faster will we be able to reduce the total of Federal and state and local debts. Viewed from every angle, today's purchasing power—the citizens' income of today—is not at this time sufficient to drive the economic system of America at higher speed.”

Taking note of this—and in a reference to the bottom half of the U.S. population that today sounds all too familiar—FDR observed in a speech on the perils of monopoly that:

47 per cent of all American families and single individuals living alone had incomes of less than $1,000 for the year; and at the other end of the ladder a little less than 1 1/2 per cent of the nation's families received incomes which in dollars and cents reached the same total as the incomes of the 47 per cent at the bottom…

This clearly was unacceptable, he went on, for:

No people, least of all a democratic people, will be content to go without work or to accept some standard of living which obviously and woefully falls short of their capacity to produce. No people, least of all a people with our traditions of personal liberty, will endure the slow erosion of opportunity for the common man, the oppressive sense of helplessness under the domination of a few, which are overshadowing our whole economic life.

Hence, for Roosevelt it was economic plight of the average American—not the deficit—that was the key not only to the restoration of our economy, but also to the health and well-being of our democratic system of government; even to our very way of life.

The debate over the so-called fiscal cliff and the showdown between President Obama and Congress over what to do about it has attracted a great deal of attention from the media. But rather than fall into another round of endless bickering with the budget hawks about the deficit, the president should use this opportunity to remind the American people—as FDR did all those years ago—that an economy and a political system built on fundamental inequality is simply not sustainable. If we really want to help the 47 percent our highest priority should be to adopt policies based on the fundamental idea that “political democracy and free private enterprise for profit should serve and protect each other,” not just the wealthy few at the top.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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