Heritage Reacts to Simpson-Bowles Deficit Reduction Panel Proposal

November 10, 2010 · Posted in The Capitol · Comment 

The draft proposal issued Wednesday by the co-chairmen of href=”http://www.heritage.org/Research/Reports/2010/11/Bowles-Simpson-Commission-Co-Chair-Report-A-Good-and-Welcome-First-Step”>President Obama’s Deficit Reduction panel has both strengths and weaknesses.. Heritage Foundation analysts are still poring through this preliminary document, and we will have more to say in the days to come. Already, href=”http://www.heritage.org/Research/Reports/2010/11/Bowles-Simpson-Commission-Co-Chair-Report-A-Good-and-Welcome-First-Step”>we see the following:

One great flaw in the proposal is the massive tax increase proposed by the co-chairmen, former Sen. Alan Simpson (R-Wyo) and former Clinton Chief of Staff Erskine Bowles. They would hike taxes to 21% of America’s economic output (i.e., gross domestic product or GDP), well over the historical average of 18% of GDP. The debt and deficit problems America faces stem from too much spending, and not too little taxes. We need to cut spending, and not raise taxes.

The co-chairmen did not go far enough in proposing spending cuts. For example, the $ 100 billion in cuts to domestic spending are a good start, including their ban on earmarks. But, they should go further. href=”http://www.heritage.org/research/projects/solutions-for-america”>The Heritage Foundation seeks at a minimum an immediate freeze of Federal spending for fiscal year 2011 at the previous year’s level and cuts of $ 170 billion for 2012 (measuring from the CBO baseline). Heritage published a list of over $ 300 billion in spending cuts, so the options are available to reach or exceed the goal of cutting $ 170 billion. id=”more-46456″>

But perhaps the worst flaw in the co-chairmen’s proposal is the substantial reduction to defense spending. A strong defense of America and its interests is the first obligation of government. Instead of cutting defense spending, the country needs to provide for defense an average of $ 720 billion per year (to be adjusted for inflation) for each of the next five fiscal years.

We’d be remiss, of course, not to mention the strengths. The Heritage Foundation has long recognized, as the chairmen’s proposal also recognizes, that the ultimate solution to a government that is too large and spends too much is to get entitlement program spending — especially medicare, medicaid, and social security spending — under control.

Watch this spot for a more in-depth analysis in the days to come.

The Foundry: Conservative Policy News.

The New Congress Should Include Military Spending in Deficit Reduction

November 9, 2010 · Posted in The Capitol · Comment 

The prospect of balancing the federal budget forces choice, threatening political truces that luxury bought. It makes us better accountants, scrutinizing investments, separating needs from wants. It sharpens debate, forcing government agencies and their backers to remind taxpayers what they are buying.


Thanks to the deficit, military spending cuts are more likely today than at any time in the past decade. The $ 550 billion non-war DoD budget is obvious prey for deficit hawks. It is more than we spent at any time in the Cold War, even adjusting for inflation, though our wealth creation makes it a smaller slice of the economy. It is over a fifth of federal spending, more than half of the discretionary variety, and it roughly doubled in the past decade. With the tea party up in arms about spending and groping for a foreign policy, the right is reconsidering the pass it gives the Pentagon when it laments “big government.” With the pressure on to find savings, the left is worried that entitlements will unduly suffer if military spending does not.

To get the target off his department’s back, Secretary of Defense Robert Gates is trying to make it more efficient—shifting $ 10 billion a year in administrative costs into force structure—even as he asks for future budgets that grow faster than inflation. But even if the funds Gates hopes to squeeze out of administration went to deficit reduction instead of weapons, they would cover less than one percent of the deficit. And even that’s a reach. According to the Congressional Research Service, the efficiencies Gates has identified will cover only a fraction of his savings goal.

We can save real money on defense by doing less, rather than doing the same thing better. Judged by the objective it is supposed to serve—the defense of Americans—much of the defense budget is wasted. Our forces defend rich allies, freeing them to spend more on social welfare. The misconception that we can use military occupations to build stable governments out of foreign chaos has swollen the ground forces.

By avoiding the occupation of failed states and reducing commitments to defend healthy ones, we could plan for far fewer wars, allowing cuts to force structure, manpower, procurement spending, and operational costs. The resulting force would be more elite, less strained, and far less expensive

A report we recently released, “Budgetary Savings from Military Restraint,” is an initial attempt to outline this force. It lays out 19 cuts that would save $ 1.2 trillion over ten years. For example, because our strategy makes both conventional and counterinsurgency warfare less likely, we call for a one third cut to the end-strength of the Army and Marine Corps, once the wars in Iraq and Afghanistan end. Advances in strike technology and fewer missions would also allow a reduction of six fighter wing equivalents from the Air Force. Comparable technological advances have greatly increased the effectiveness of naval platforms, and restraint requires fewer of them. That allows the elimination of four carrier battle groups, four expeditionary strike groups, and a commensurate number of ships from the Navy.

Congressmen that want immediate cuts that require less strategic upheaval might find some of our other recommendations more attractive. Here are six such items that are ripe for reduction even under the current strategic posture. These recommendations would save $ 441 billion over ten years:

  1. Nuclear Weapons: We have far more nuclear weapons than deterrence of any adversary requires. We should reduce the number of deployed warheads to 500, eliminating 50 percent of delivery platforms, including the bomber leg of the triad. A total savings of $ 66 billion in the DoD budget and $ 21 billion from the DoE budget.
  2. Cancel the Littoral Combat Ship and develop a less expensive alternative: LCS is now three times its initial price and will perform a mission that cheaper alternatives could handle. We should stop building LCS and instead refurbish 14 Oliver Hazard Perry class frigates, while researching an alternative platform. Net savings are $ 14 billion.
  3. Terminate the V-22 Osprey: The V-22 (shown above) is wildly expensive, has a spotty safety record, and cannot carry enough weight to allow the Marines it drops off to properly defend themselves. That means that its effective range is that of the helicopters that will supply them. Established rotary-wing aircraft—the MH-60 and CH-53—can handle the V-22’s missions. Stopping production and using these alternatives would save $ 15 billion.
  4. Cut the Pentagon civilian workforce: Fewer missions and the smaller force we envision will ultimately require less civilian personnel. Through a hiring freeze, we can gradually cut the ranks of civilian personnel by roughly 30 percent, saving $ 105 billion.
  5. Reduce expenditures on command, support, and infrastructure: DoD estimates 40 percent of the budget is overhead costs. That includes rents, depreciation of equipment, facilities, maintenance, utilities, headquarters staff, IT and other defense-wide support programs. We endorse an aggressive version of Secretary Gates’ efficiency initiative (consolidating the geographic combatant commands, for example), but would give the treasury the balance, saving $ 100 billion over ten years.
  6. Reduce intelligence spending by 15 percent: Adjusting for inflation, intelligence spending has more than doubled since 1998, growing to over $ 80 billion. There is considerable evidence that this growth is excessive, creating organizational confusion and mountains of reports written by contractors and read by almost no one. Cutting 15 percent of this spending would save $ 120 billion.

Big Peace

Can the market trust gradual deficit reduction?

October 26, 2010 · Posted in The Capitol · Comment 

There’s a critique of the Affordable Care Act that argues that it doesn’t save money. This critique is wrong. It doesn’t save money if the bill is changed and its cost controls are repealed. But as written, our best estimate is that it saves money — and it’s as likely to save more than projected as it is to save less.

There’s another critique, however, that is more persuasive: It saves money slowly. That frustrates me, too. But if you want to go faster, you need to figure out a way around the roadblocks that Jon Cohn describes:

Uwe Reinhardt, the Princeton economist, always reminds people that every dollar of wasted spending in health care is also a dollar of somebody’s income. Take it away and that person is going to be unhappy. And while not every health care interest group has the credibility of the medical profession, everyone has money to finance advertising, organizing, and contributions — not to mention well-connected lobbyists who know how to deliver messages in Washington.

This doesn’t make cost control hopeless. It just makes cost control really, really slow. In most cases, you have to settle for reducing future earnings — that is, allowing incomes for these groups to grow more slowly than they otherwise would. And that’s precisely what the Affordable Care Act does.

This is also true for things like entitlements like Social Security and pricey tax-based entitlements like the mortgage-interest deduction. But a world in which most of your savings have to be phased in slowly is a world in which Congress has to be credible when it tells the public and the bond market that future congresses won’t simply overturn its decisions.

Congress’s record actually is pretty good on this front. The Social Security changes recommended in the early 1980s are being phased in on schedule. The vast majority of the budget cuts made in the ’90s were implemented with little fanfare. But there’s been an effort in the past few years to use the sad case of Medicare’s doctor payments — where a policy that people expected would mean tiny cuts proved flawed and required giant cuts that would’ve disrupted Medicare — to undermine confidence that Congress can uphold any cost containment, and of course the current conservative fad for repealing the cost controls in the health-care law further suggests that the mere fact that legislation passed doesn’t mean the bonds market can relax.

I’ve said it before and it’s still true: If Republicans were really worried about the market’s confidence in our finances, they’d have strengthened the cost controls in the Affordable Care Act and, whatever else they wanted to do to the bill, loudly embraced things like the excise tax and the Independent Payment Advisory Board. As it is, they’ve steadily tried to persuade the market to ignore the cost controls we’ve passed and assume instead that Congress won’t follow through when it promises to pare back the tax breaks for employer-provided health care or allow a commission to actually get Medicare’s spending under control.

That’s good politics, but it comes at the cost of telling the bond market that it can’t trust us even when we do pass cost controls. And that might mean that, down the road, the bond market demands deficit reduction happens quickly, rather than gradually, and that will be much more painful.

Ezra Klein

Will Divided Government Lead to Deficit Reduction? Will It Lead to Anything?

October 26, 2010 · Posted in The Capitol · Comment 

At first blush “divided government” seems like a recipe for endless gridlock. At second blush this isn’t really correct. A lot of significant legislation, from No Child Left Behind to the creation of a Medicare prescription drug benefit to the Balanced Budget Agreement of 1997, the 1996 Telecommunication Act, “welfare reform,” etc. happened in the 1990s and 2000s under conditions of divided government. And David Mayhew’s book Divided We Govern surveys the 1946-2002 period and finds that this is generally the case. It’s not that divided government is the same as unified government, but either way entrepreneurs in congress and in the executive branch have found ways to pass lots of important laws across the partisan divide.

Jackie Calmes writes in the New York Times, however, that she thinks it’s unlikely a new GOP majority in the House of Representatives would lead to a bipartisan coalition for deficit reduction. She paints this picture in fairly broad terms whereby “incumbents otherwise inclined to make deals are now wary, Republicans say privately, mindful of colleagues who lost primary challenges from Tea Party candidates.”

I think we should assume that Calmes is right, but I would put forward another hypothesis about this. There’s unlikely to be a bipartisan deficit reduction deal because conservatives don’t care about the deficit. Dealmaking is possible when people from both sides care about aspects of an issue. No Child Left Behind, for example, appealed to key Democrats like Ted Kennedy and George Miller who thought it was an important tool for focusing educational resources on poor kids and minorities. Many conservatives liked the fact that teacher’s unions didn’t like it. Bipartisan appeal = bipartisan legislative outcome. Similarly, there’s strong support in both parties for a “don’t let major banks collapse” agenda, so the Fannie/Freddie nationalization and TARP got done even under difficult circumstances for cooperation.

But conservatives don’t favor deficit reduction. They favor tax cuts. When the budget was in surplus, both George W. Bush and Alan Greenspan defined the existence of the surplus as a problem for public policy—one that should be solved with tax cuts. You can’t compromise without some element of common purpose.


Wonkbook: Election tops $2 billion; divided gov. does not mean deficit reduction; market believes in inflation

October 26, 2010 · Posted in The Capitol · Comment 


We’re one week out from the election, and divided government seems a serious possibility. The optimistic spin on that goes something like this: Remember the 90s? Democrats and Republicans didn’t like each other, per se, but they came together and took tough votes to reduce the deficit. This has led to more than a bit of Clinton-nostalgia among the very conservatives who once loathed the man.

Divided government, some say, is actually the only time we can really reduce the deficit. Deficit reduction is a second-order priority for both parties. When they control government, they work first on the things they want government to do, rather than the things they want government to stop doing. It’s only when neither party can achieve any affirmative objectives that deficit reduction stands a chance.

And maybe that’ll prove true again. But as Jackie Calmes argues in today’s New York Times, it might not. For one thing, compromise has become a dirty word. “If I haven’t been clear enough yet,” Rep. Mike Pence told conservative radio host Hugh Hewitt, “let me say again: No compromise.” For another, the election is likely to wipe out a lot of the conservative Democrats who would’ve been party to a deal, and it’s taken down a few of the establishment Republicans who would’ve joined them at the table. There is nothing intrinsic to divided government that will reduce the deficit. That’s particularly true if the only compromises are to increase the deficit — for instance by extending the Bush tax cuts. Reductions will require compromise. But compromise is likely to be in short supply come January.

Welcome to Wonkbook.

Top Stories

House and Senate campaign spending will pass $ 2 billion this year, reports Dan Eggen: “The Public Campaign Action Fund, a watchdog group, will release a study Tuesday predicting that House candidates alone could spend nearly $ 1.5 billion by the time the dust settles on Election Day. The calculation is based on previous elections in which about half of a campaign’s money was spent in the final month of the contest. Senate campaigns are also on track to exceed the $ 550 million mark from 2006, bringing the likely total to $ 2 billion or more by the time the ballots are counted. The surge is driven in part by the unusually broad battlefield in the House, where an estimated 90 seats are in play, almost all of them held by Democrats.”

A divided government does not necessarily mean more deficit reduction, writes Jackie Calmes: “In interviews, a number of Democrats and Republicans agreed on one thing: For all the pre-election talk that a divided government could force the parties to work together, especially on cutting annual deficits, the opposite could just as well be true.”

“Democrats are all but certain to lose a number of seats and perhaps their majorities. Most of the casualties will be fiscally conservative Democrats from Republican-leaning areas, leaving a smaller, more solidly liberal caucus less inclined to support cost-saving changes in future Social Security benefits, for example. Republicans’ ranks will almost certainly be strengthened by a wave of conservatives, including Tea Party loyalists, who are opposed to raising any taxes and to compromising with Democrats generally — a stand Congressional Republican leaders have adopted. And incumbents otherwise inclined to make deals are now wary, Republicans say privately, mindful of colleagues who lost primary challenges from Tea Party candidates.”

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The Treasury is selling bonds with negative interest rates, suggesting the market believes the Federal Reserve will succeed in boosting inflation, report Aline von Duyn, Michael Mackenzie, and Nicole Bullock: “’The Fed has been sending the message that its cheque book is ready and it will do what it takes to reflate the economy,’ said Jan Loeys, head of global asset allocation at JPMorgan Chase. ‘What no one knows is whether inflation will start to show in two weeks or two years.’”

This is “something I never in my wildest dreams thought I would see in my lifetime,” says Brad DeLong.

Neil Irwin “interviews” Fed chair Ben Bernanke based on recent public statements:Q: What do you mean, inflation levels consistent with your mandate? Doesn’t the Fed always try to get inflation lower? A: FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below…Recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running rates that are too low relative to the levels that the committee judges to be most consistent with the Federal Reserve’s dual mandate in the longer run…A means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve’s holdings of longer-term securities.”

Got tips, additions, or comments? E-mail me.

’90s video interlude: Material Issue’s “Diane”.

Still to come: Foreclosure processors could be criminally charged; TARP’s inspector general says Treasury is lowballing the cost of the AIG bailout; the medical lobby is blocking release of some of the best data on American health care; Obama does not like having his record on immigration reform questioned; and a water buffalo takes a swim.


Fannie and Freddie have suspended foreclosures emanating from a suspect Florida lawyer, reports Nick Timiraos: “Fannie and Freddie had previously stopped referring new cases to the Law Offices of David J. Stern, of Plantation, Fla., earlier this month. On Monday, Fannie said its latest move would affect all cases that ‘are not already subject to a foreclosure pause’ by banks and other firms that service mortgages owned by Fannie, said a company spokeswoman. Freddie Mac said late Monday it had also suspended new referrals and current activity.”

Andy Kroll’s profile of David J. Stern: http://bit.ly/9Q6SbC

Criminal investigations of foreclosure processors are moving ahead, reports Ariana Eunjung Cha: “Law enforcement authorities on both state and federal levels are probing whether individuals at these foreclosure companies and at the banks that hired them committed an array of possible crimes – mail and wire fraud, money laundering, conspiracy and racketeering. No charges have been filed. These officials say they are taking a well-tested approach in their investigations: press low-level employees to implicate higher-up executives. Already, investigators have obtained in sworn testimony detailed descriptions of what took place inside the foreclosure companies.”

What would happen if a state went bankrupt? http://bit.ly/b2qkvr

TARP’s inspector general says Treasury’s estimate of the AIG bailout’s costs is too optimistic, reports Brady Dennis: “The report complained that the Treasury’s recent $ 5 billion loss estimate on its TARP investment in AIG – which is far below previous estimates and was announced last month after a complex restructuring deal with the insurance giant – ‘does not account for the volatility in AIG’s stock price, which may result in losses or gains that are either greater or less than the projected amounts.’ The change in the estimated losses is largely a result of the methods used to value Treasury’s changing types of AIG stock. The core of the restructuring deal involves Treasury swapping more than $ 49 billion of preferred shares in AIG for 1.7 billion shares of common stock.”

Bernanke says the Fed is investing Bank of America and Ally’s handling of foreclosures: http://bit.ly/cqNFWh

China is a not a beleaguered developing nation, writes Gideon Richman: “If China was simply a medium-sized country, the world could shrug off its currency policies. But it is now the world’s largest exporter, the world’s largest manufacturer and its second-largest economy. And yet it is the only major trading nation to use capital controls to prevent its currency rising to market levels. It is that anomaly that is at the heart of current global economic tensions. Even the Americans are not asking China to move to a fully-convertible currency overnight. The country’s banking system is probably still too unsophisticated to cope with the flows of ‘hot money’ that would generate.”

We should amend, not end the mortgage interest deduction, writes Daniel Indiviglio: http://bit.ly/9BDTmU

The US benefits from Chinese currency policy, writes John Cochrane: “What’s the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.”

Intimidating animals relaxing interlude: A water buffalo finds its way into a family’s swimming pool.

Domestic Policy

Medicare data could offer a window into the US’s cost problem, but is kept secret, report Mark Schoofs and Maurice Tamman: “Known as the Medicare claims database, it is a computerized record of the bills Medicare pays for medical treatment, and it is widely considered the single best source of information on the U.S. health-care system… But the Medicare data come with a severe limitation: While the services and earnings of hospitals and other institutional providers can be publicly identified, such information is kept strictly confidential for doctors and other individual providers. The reason is that the American Medical Association, the doctors’ trade group, successfully sued the government more than three decades ago to keep secret how much money individual physicians receive from Medicare.”

Federal workers are planning a march to defend their jobs: http://wapo.st/9Sih4K

Obama defended his record on immigration, reports Carrie Budoff Brown: “Eddie “Piolin” Sotelo, the influential host of Univision’s “Piolin por la Manana,” questioned how the president could even ask for the Latino vote, saying the community believes ‘you haven’t worked that hard’ to pass a bill. The question drew a sharp response from Obama: ‘With all due respect, even though I’m in your studio. The notion that we haven’t worked is just not true. There is a notion that somehow if I had worked hard enough, we could have magically done it. That’s just not the way our system works.’ The White House’s post-election strategy on immigration reform rests on whether Latinos turn out to vote next week, Obama said.”

Arizona has received millions in outside contributions to help fight lawsuits against its immigration law: http://bit.ly/9o3w9S

The gun lobby is limiting the ATF’s ability to perform oversight: http://wapo.st/9IYfry

America’s infrastructure problem is a failure of leadership, writes Bob Herbert: “A survey to be released this week by the ITT Corporation, which makes and sells water infrastructure equipment, shows that nearly 70 percent of respondents agreed with the statement ‘I generally take my access to clean water for granted.’ But a similar percentage said they would be willing to pay a modest additional amount every month to upgrade their water system and ensure their long-term access to clean water. If public officials would provide honest leadership on this and other infrastructure issues, making a sound case for the investments that are needed and the benefits that would accrue from rebuilding America’s infrastructure, the public would be likely to sign on.”

Star Wars interlude: “The Imperial March (Darth Vader’s Theme)”, Beethoven-ized.


GOP presidential candidates face pressure to reject the scientific consensus on global warming: http://politi.co/aQoJIG

Republicans will likely seek an energy compromise with Congressional Democrats, reports Darren Samuelsohn: “Some of their ideas will no doubt be controversial, including opening up Alaska’s Arctic National Wildlife Refuge to oil drilling. But after several bruising years fighting with Democrats over caps on greenhouse gas emissions, they are just as likely to pitch some suggestions that would be prime fodder for compromise, including tax breaks and incentives for investment in nuclear power, clean coal and renewable energy.”

95 percent of consumer products are guilty of “greenwashing”: http://bit.ly/aZTbho

California’s climate change law will likely survive a ballot challenge, reports Evan Halper: “Proposition 23, which would put the new emissions standards on hold, is trailing 48% to 32% among likely voters, according to the survey… The push to suspend the global warming law has been bankrolled in large part by out-of-state oil refining companies that stand to see profits decline as a result of the state’s new regulations. The ballot measure would suspend implementation of the new air pollution rules until unemployment drops to 5.5% or less for a full year. State analysts say that could take many years, as the unemployment rate has stayed that low for a sustained period only three times since 1970.”

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: David Smith-AP.

Ezra Klein

Wonkbook: TARP firms favoring GOP; fiscal commissions hits tax deductions; Christina Romer warns against deficit reduction

October 25, 2010 · Posted in The Capitol · Comment 


On Sunday, I rewatched an old episode of the West Wing. “Enemies Foreign and Domestic,” it was called, and one of the subplots involved a computer-chip manufacturer who’d just discovered a serious defect. The company was doing the right thing and recalling the product, but that left it, and its 90,000 workers, in jeopardy. Leo wants a bailout. President Bartlett doesn’t. And though, for awhile, the arguments gets made in economic terms, eventually Bartlett rounds on Leo. “They were huge contributors!” He yells. “Huge!”

The company gets some government help, but it comes at a cost. You can never donate to me, or any other candidate, again, Bartlett tells the CEO. “You can vote, but that’s it.”

The Obama White House is probably wishing it had added a similar clause to TARP. Not only are the bailed-out companies giving significant amounts of money — more than $ 1.4 million, at last count — but they’re giving most of it to Republicans. That leaves Democrats in an unhappy position: The voters blame them for the bailout (most Americans don’t know TARP was conceived and signed by the Bush administration), and the bailed-out companies are funding the other guys. They’ve managed to end up on the wrong side of both the people and the powerful. What would Bartlett have done?

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Top Stories

Bailed out companies are giving considerable sums to midterm campaigns — and mostly to Republicans, reports T.W. Farnham: “Senate Minority Leader Mitch McConnell (Ky.) was a fierce critic of the federal bailout of General Motors and Chrysler last year, saying he could not ‘ask the American taxpayer to subsidize failure.’ But GM doesn’t seem to hold a grudge. The political action committee formed by the company, which is now largely owned by taxpayers, cut McConnell a $ 5,000 campaign check in September, a small piece of the $ 190,000 it donated to campaigns in the past month… Among companies with PACs, the 23 that received $ 1 billion or more in federal money through the Troubled Assets Relief Program gave a total of $ 1.4 million to candidates in September, up from $ 466,000 the month before. Most of those donations are going to Republican candidates.”

The deficit commission will likely focus on tax deductions, reports Damian Paletta: “Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015…At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter. The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending.”

Obama is being too hard on pomegranate juice? http://bit.ly/dqISko

Now is not the time for deficit cuts, writes Christina Romer: “The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. France’s recent plan to gradually raise its retirement age to 62 from 60 is a classic example of such ‘backloaded’ reduction. President Obama’s proposal to eliminate the Bush tax cuts on high incomes is another: it would raise revenue by only $ 30 billion in 2011, but by more than $ 600 billion over the next decade. History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect.”

Got tips, additions, or comments? E-mail me.

The G-20 — China included — has agreed to try and even out currency imbalances, reports Howard Schneider: “The statement from the finance leaders of the Group of 20 nations was a carefully worded bargain across a range of issues. It put China on the record as seeking to bring down its massive trade surplus and let its exchange rate fluctuate more. It also hinted that any move by the U.S. Federal Reserve to further ease monetary policy would be measured so as not to disrupt currency values or capital flows in emerging market nations… The plan envisions a greater role for the International Monetary Fund in overseeing whether exchange rates and trade balances are moving as intended.”

’90s power pop interlude: Matthew Sweet and John Hiatt play “Girlfriend”.

Still to come: The top Republican on the House Financial Services Committee is chiding financial lobbyists for donating to Democrats; Business Week walks you through the foreclosure crisis; Britain imposes a carbon tax; some states moving towards unicameral legislatures; state health exchanges could vary wildly; and Sears caters to a new, undead clientele.


The top Republican on the House Financial Services committee is attacking financial lobbyists for being too soft on financial regulation — and donating too much to Democrats: “When Republican Rep. Spencer Bachus of Alabama stepped in front of 100 financial services lobbyists at the Capitol Hill Club last month, he asked for an equal chunk of their campaign cash — and made clear he was watching closely. It is hard to believe, he told the crowd, that some in their industry were still giving more to Democrats than Republicans after, he said, Democrats hammered them with over-reaching Wall Street reform legislation, people familiar with the presentation said.”

Alice Rivlin’s deficit group, however, is likely to go further: http://bit.ly/9fdO5J

Confused by the foreclosure crisis? Business Week’s cover story is the most comprehensive overview I’ve seen: “Wall Street’s unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD). J.P. Morgan predicts that bondholders will absorb most of the estimated $ 1.1 trillion loss—but may succeed in foisting about $ 55 billion on banks.”

Thrifty homeowners are seeing generous refinancing packages: http://nyti.ms/c7URpv

Rick Wagoner did more to save GM than Steve Rattner, writes Malcolm Gladwell: “What Wagoner meant in his testimony before the Senate, in other words, was something like this: “At G.M., we are finally producing world-class cars. We have brought our costs, quality, and productivity into line with those of our competitors. We have finally disposed of the crippling burden of our legacy retiree costs. We have expanded into the world’s fastest-growing markets more effectively than any other company in the United States. But the effort required to bring about that transformation has left our balance sheet thin—and, at the very moment that we need a couple of years of normal economic activity to refill our coffers, auto sales have fallen off a cliff. Do you mind giving us a hand until things get back to normal?” This is not arrogance. It happens to be something very close to the truth. “

Obama’s caution has discredited fiscal stimulus with voters, writes Paul Krugman: “What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act: the unemployment rate would probably be close to 12 percent right now if the administration hadn’t passed its plan. But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed. The tragedy here is that if voters do turn on Democrats, they will in effect be voting to make things even worse.”

We should privatize the mortgage market, writes Dwight Jaffee: http://bit.ly/dqIAKc

We need a fiscal policy to match the Fed’s monetary easing, writes Alan Blinder: “The two main thoughts that are probably going through Mr. Bernanke’s head today are, first, ‘I sure wish I could get some help from fiscal policy,’ and second, ‘I probably can’t, so I’d better do whatever I can.’ He’s right on both counts. In a more rational world, it wouldn’t be this way. Fiscal policy, which packs the power, would be doing the heavy lifting-by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don’t live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that’s the Federal Reserve. The fiscal army is AWOL.”

Adorable animals acting like children interlude: Two cats play patty-cake.

Domestic Policy

How states set up health exchanges will have a major effect on coverage, reports Robert Pear: “Massachusetts and Utah provide a glimpse of the future, and they offer radically different models for other states. The battle over health care is shifting to the states, and the design of insurance exchanges will be one of the most pressing issues for state legislators when they convene early next year…The Utah Health Exchange organizes the market, allowing consumers to compare a wide variety of health plans sold by any insurers that want to participate. In the Massachusetts exchange, known as the Connector, the state serves as an active purchaser, soliciting bids from insurance companies and negotiating prices and benefits in an effort to secure the best value for state residents.”

Health insurers have switched their campaign donations from Democrats to Republicans: http://wapo.st/9w4OGU

Some employers are adjusting health plans as health care reform takes effect, reports Ricardo Alonso-Zaldivar: “Two provisions in the new law are leading companies to look at their plans in a different light. One is a hefty tax on high-cost health insurance aimed at the most generous coverage. Although the ‘Cadillac tax’ doesn’t hit until 2018, companies may have to disclose their exposure to investors well before that. Karen Forte, a Boeing spokeswoman, said concerns about the tax were partly behind a 50 percent increase in insurance deductibles the company just announced…Bigger questions loom over the new insurance markets that will be set up under the law.”

Health care reform has failed to fix American health care’s provider-pricing problem — and thus its cost problem, writes Alec MacGillis: “Health-care providers in the United States have tremendous power to set prices. There is no government ‘single payer’ on the other side of the table, and consolidation by hospitals and doctors has left insurers and employers in weak negotiating positions. ‘We spend fewer per capita days in the hospital compared with other advanced countries, we see the doctor less frequently, and we swallow fewer pills,’ said Jon Kingsdale, who oversaw the implementation of Massachusetts’s 2006 health-care law. ‘We just pay a lot more for each of those units than other countries.’ The 2010 law does little to address this. Its many cost-control provisions are geared toward reducing the amount of care we consume, not the price we pay.”

A few states are considering moving to unicameral legislatures, reports Keith Johnson: “In Maine, members of the state’s House of Representatives passed a bill last year that would shrink the legislature to one chamber from two. A Pennsylvania legislator introduced a bill this year to do the same. The speaker of the House in Kentucky also floated the idea. Over the past year, officials in half a dozen other states have discussed attacking the size of government by cutting the size of the legislature. The current election campaigns across the country have further fired the debate…At the height of the Depression, Nebraska decided to save money by getting rid of its second legislative chamber. It worked.”

Secret campaign spending is incompatible with democracy, writes E.J. Dionne: http://wapo.st/bR0rC8

James Fallows worries that the Juan WIlliams imbroglio will harm NPR: “I have known and frequently worked a variety of people at National Public Radio, and I do want to say something about them. The worst aspect of the Williams-NPR imbroglio is that it has allowed Fox and its political allies to position NPR as something it is not, and in the process to jeopardize a part of American journalism we can’t afford to lose…[NPR] has reporters at state houses and in war zones. At last count, it has something like 17 foreign bureaus and 16 domestic. In much of the country, especially away from the coasts, it’s a major source of local information and news. It claims that its total audience is some 27 million people a week; with all allowances for counting differences, it reaches a lot more people than Fox does.”

Niche marketing interlude: Sears’ store for zombies.


The British government has quietly enacted a carbon tax: “The government today quietly imposed a £1B-per-year (US$ 1.58B) carbon tax on around 4,000 of the largest businesses and public sector bodies in the UK as part of its spending review. The move was not announced as part of chancellor George Osborne’s (pictured at left) speech to parliament. Instead, it was left to a statement by the Department of Energy and Climate Change in which it detailed its spending review settlement and confirmed the Carbon Reduction Commitment (CRC) would be reformed so that the Treasury keeps revenue raised through the carbon pricing scheme.”

New EPA regulations will force efficiency improvements for trucks, reports Ken Thomas: “The plan is expected to seek about a 20 percent reduction in greenhouse gas emissions and fuel consumption from longhaul trucks, according to people familiar with the plan. They spoke on condition of anonymity because they did not want to speak publicly before the official announcement, expected Monday. Overall, the proposal is expected to seek reductions of 10 percent to 20 percent in fuel consumption and emissions based on the vehicle’s size. Large tractor-trailers tend to be driven up to 150,000 miles a year, making them ripe for improved miles per gallon.”

Research funding and a carbon price are both effective emissions-reduction tools, writes David Leonhardt: “The debate between these two camps — pro-research and pro-carbon price — can often sound hostile. But there is actually a lot of agreement. Finding more money for clean-energy research is a crucial part of dealing with climate change. So is raising the cost of emitting carbon. My guess is that the policy that seems more like a free lunch — research funds — will need to come first and the harder stuff will, unfortunately, have to wait.”

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: NBC.

Ezra Klein

Video: French throw national tantrum over small reduction to pension “birthright”

October 20, 2010 · Posted in The Capitol · Comment 


If they shake that magical money tree hard enough, a few more Euros are bound to fall out. Non? For Gilly and many other Frenchmen and women, social benefits such as long vacations, state-subsidized health care and early retirement are more than just luxuries: They’re seen as a birthright — an essential part of the […]

View the video »

Hot Air » Top Picks

Higher Taxes = Deficit Reduction? Maybe in a Static Economy

September 21, 2010 · Posted in The Capitol · Comment 
style=”float: right; margin-bottom: 10px; margin-left: 10px;”> href=”http://blog.heritage.org/wp-content/uploads/WASHINGTON-POST.jpg”> class=”alignnone size-full wp-image-39720″ title=”WASHINGTON-POST” src=”http://blog.heritage.org/wp-content/uploads/WASHINGTON-POST.jpg” alt=”” width=”375″ height=”240″ />

A href=”http://www.washingtonpost.com/wp-dyn/content/article/2010/09/20/AR2010092005699.html?hpid=topnews”>Washington Post article today reports that letting the Bush tax cuts expire would nearly close the fiscal gap. This static logic misses two key dynamic aspects of the economy: (1) the political incentives that higher taxes bring about, and (2) the economic incentives of such policy.

1. Political Incentives. With higher revenues initially coming in from higher taxes, there would be a stronger political incentive to increase spending. That is, taxpayers have no guarantee that their higher tax payments would actually go to deficit reduction. If history is any lesson, it is more than likely that Congress would lever up on the higher tax revenues, expanding the government even more with borrowed funds. The net result: Deficits would remain, but now there would be an even higher level of overall debt. id=”more-43351″>

2. Economic Incentives. Why is there a call to put a tax on carbon? Because some believe that we should use less carbon. If the tax works and people use less carbon, what happens to the revenue from a carbon tax? It decreases. Similarly, if you place higher taxes on labor and capital income, you get less labor and capital income. Therefore, the dynamic revenues from the higher tax rates would actually be less than expected. Furthermore, the economic harm from discouraging the very activities that contribute to the growth of the economy (i.e., create income by using our resources to produce, save, invest, and innovate) would put the economy on a slower growth path that would weaken the U.S.’s competitive position in the global economy.

It is critical that the government implement policies that take account of the way incentives— and therefore decisions—change. In a dynamic economy, these small decision changes create feedback effects that can snowball and change the growth path of the entire economy.

A slower growing economy hurts everyone, as the recent economic recession so detrimentally demonstrated. Unfortunately under the new tax policy, this slower growth would no longer be considered recessionary; we and our children would view it as “normal,” never realizing all the growth opportunities that would have led to higher incomes, more job opportunities, and new goods and services to enjoy. In an ever-changing and adapting economy, these are the opportunity costs that should be considered.

The Foundry: Conservative Policy News.

Russian Government Announces 20 Percent Reduction in Number of Bureaucrats

September 21, 2010 · Posted in The Capitol · Comment 

By Daniel J. Mitchell

I’ve already commented on Cuba’s surprising announcement to slash the number of government workers. And I’ve complained about the federal workforce expanding in the United States. This is not what one would expect when comparing policy developments in a communist nation and a (supposedly) capitalist nation. Well, Russia wisely is following the Cuban approach on this issue (I never thought I would type those words!) and plans to get rid of 100,000 bureaucrats over the next three years.
Russia will cut its army of bureaucrats by more than 100,000 within the next three years, saving 43 billion rubles ($ 1.5 billion), Finance Minister Alexei Kudrin said on Monday. “We assume more than 100,000 federal state civil jobs will be cut within three years. The government has already included a schedule for cutting the number of federal civil servants in the draft budget for the next three years and coordinated it with ministries and agencies,” Kudrin told President Dmitry Medvedev, who in June ordered a 20 percent cut in the number of bureaucrats. Under the government plan, ministries and agencies will have to sack five percent of their staff in 2011 and 2012, and 10 percent in 2013. …In the last three years, the number of bureaucrats in the federal government had increased by nearly 20,000, in regional governments by 60,000 and at municipalities by 50,000, he said.

Cato @ Liberty

The Virtuous Circle of Crime Reduction

September 15, 2010 · Posted in The Capitol · Comment 

FBI statistics show that 2009 was a big down year for crime, continuing the trend for the past 15 years:

Crime rates decline 1

Falling crime amidst a recession is described by some as some kind of paradox, but as Jamelle Bouie laid out earlier this week there’s never been a historical association between macroeconomic performance and crime rates. One way to think about it is this. It’s true that crime is generally associated with communities that contain a lot of poor people. But if people in general becoming poorer led to higher crime, then Portugal (or for that matter New Zealand) would be much more violent than the United States, which is clearly not the case.

Mark Kleiman offers what I think is a compelling hypothesis:

One explanation that appeals to me is that there’s a strong positive feedback built in to crime rates; the fewer crimes, the more cops and the more cells per crime, so crime declines and crime increases both tend to feed on themselves.

There are likely also other sources of positive feedback. Competition between rival drug gangs can exist at a lower-violence or higher-violence equilibrium.

This is all one reason why I think European voters are correct to be alarmed by rising crime in many countries on the other side of the Atlantic. The mere fact that the level of violence continues to be fairly low shouldn’t give people false comfort. Each increase in crime increases the burden on the police, the judiciary, and the penal system and makes it less effective at controlling future crime. And as the United States learned in the seventies and eighties, once crime’s spiked it’s quite difficult to bring it down again. Anti-crime politics is frequently paired with ugly racial or ethnic animosities, which is unfortunate, but it’s a very important policy issue nonetheless.

Indeed, in the US I think it’s an aspect of inequality that doesn’t get nearly enough attention. Part of what happens when you occupy the low rungs on the income ladder is that you can only afford to live in the highest-crime areas. That’s a meaningful drag on quality of life, but it’s also a pretty pure positional thing. Merely decreasing income dispersal doesn’t do much to solve it, you need to actually make progress on bringing down the overall quantity of crime and ensuring that progress is made even in the poorest cities and neighborhoods.

Matthew Yglesias

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