Summary of the President’s Chamber of Commerce speech
The President did not break major new substantive ground in his speech today to the U.S. Chamber of Commerce. I assume the press coverage will instead focus on the optics and political framing – the President is reaching out to business leaders, no longer taking an antagonistic tone as he did during his first two years.
Let’s do a quick review of the speech, which is at least a useful summary of the President’s top line economic message.
We know what it will take for America to win the future. We need to out-innovate, out-educate, and out-build our competitors. We need an economy that’s based not on what we consume and borrow from other nations, but what we make and sell around the world. We need to make America the best place on earth to do business.
And this is a job for all of us. As a government, we will help lay the foundation for you to grow and innovate. We will upgrade our transportation and communications networks so you can move goods and information more quickly and cheaply. We will invest in education so that you can hire the most skilled, talented workers in the world. And we’ll knock down barriers that make it harder for you to compete, from the tax code to the regulatory system.
Now, I understand the challenges you face. I understand that you’re under incredible pressure to cut costs and keep your margins up. I understand the significance of your obligations to your shareholders. I get it. But as we work with you to make America a better place to do business, ask yourselves what you can do for America. Ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation. That’s what I want to talk about today – the responsibilities we all have to secure the future we all share.
The President lays out what he calls the responsibilities of government. Thee are his words, not mine:
- to encourage American innovation;
- to provide our people and our businesses with the fastest, most reliable way to move goods and information;
- to invest in the skills and education of our people;
- to cut the spending that we just can’t afford;
- to break down barriers that stand in the way of the success of American businesses – he cites trade, corporate taxes, and outdated and unnecessary regulations.
He then describes what he thinks are the responsibilities of American businesses. Again these are the President’s words:
- to recognize that there are some safeguards and standards that are necessary to protect the American people from harm or exploitation;
- to share the benefits of a growing economy with American workers and not just go to greater profits and bonuses for those at the top;
- to create new jobs and manufacturing in the U.S. rather than overseas.
Finally, he jawbones the business leaders:
Now is the time to invest in America. Today, American companies have nearly $2 trillion sitting on their balance sheets. I know that many of you have told me that you are waiting for demand to rise before you get off the sidelines and expand, and that with millions of Americans out of work, demand has risen more slowly than any of us would like.
But many of your own economists and salespeople are now forecasting a healthy increase in demand. So I want to encourage you to get in the game. And part of the bipartisan tax deal we negotiated, businesses can immediately expense 100 percent of their capital investments. As you all know, it’s investments made now that will pay off as the economy rebounds. And as you hire, you know that more Americans working means more sales, greater demand, and higher profits for your companies. We can create a virtuous cycle.
I wouldn’t be surprised if “Now is the time to invest in America” becomes a new tag line for the Administration and its allies. It serves a dual purpose: to justify the President’s proposed government spending increases, and to jawbone private firms. Anything is better than “Winning the future.”
(photo credit: The White House / Pete Souza)
How to repeal ObamaCare
Senate Minority Leader McConnell will offer an amendment to repeal the health care laws. Senate Democratic leaders and the White House are taking a “Move it along, nothing to see here” approach. They correctly point out that, even if Senator McConnell holds all 47 Republicans, as appears likely, he cannot reach the 60 vote threshold he would need to waive a budget point of order that will be raised against his amendment by Democrats. If such a point of order did not exist, Republicans would still need 60 votes to overcome a filibuster of a repeal amendment, and there’s no way they can get to 60.
Is Senate Majority Whip Durbin therefore correct, when he dismisses the McConnell amendment as a meaningless political stunt?
“These Republicans are duty-bound to offer this repeal amendment,” Durbin told reporters. “They did it in the House; they’re going to do it in the Senate; and we’ll just deal with it.”
Leader McConnell is undoubtedly thinking longer term. The path to repeal is straightforward and, while difficult, achievable:
- Keep up the pressure in 2011 and 2012:
- maintain and strengthen Republican unity toward full repeal;
- repeatedly attack the bill legislatively on all fronts, knowing that most votes will pass the House and fail in the Senate;
- continue legal pressure through the courts; and
- tee up repeal as a key partisan difference in the 2012 Presidential and Congressional elections;
- In 2012 win the White House, hold the House majority, and pick up a net 3 Republican Senate seats to retake the majority there; and
- In 2013, use reconciliation to repeal ObamaCare, requiring only a simple majority in the Senate.
Reconciliation is a procedural tool primarily used to change spending and revenues, deficits and debt. Repeal of the subsidies, the individual mandate, the insurance provisions, and the Medicaid expansions would, in each case, directly affect spending and revenues, so it would be a straight-up-the-middle use of reconciliation for deficit reduction. Democrats who argued in 2009 that it was OK to use reconciliation to create these provisions would find those same rulings working against them in 2013. A few minor odds and ends could not be repealed in reconciliation. That is strategically unimportant.
At the moment Democrats are hanging their hat on the CBO-scored deficit reduction associated with the two laws. This CBO score means that a straight repeal amendment faces a Budget Act point of order and therefore needs 60 votes to succeed. If Republicans were in 2013 to try to repeal the laws as-is, CBO would score them with increasing the deficit. That’s not impossible to do through reconciliation, but it’s a trickier path.
Still, this is a solvable problem. The best policy way to address this would be to leave some (most?) of the Medicare savings in place, and not repeal them. I’d also favor leaving the “Cadillac tax” on high cost health plans in place.
I think Republicans would be unlikely to choose this path, because it would disrupt their clean policy message and legislative strategy to repeal all of ObamaCare. If I’m right, they could include in the reconciliation bill other spending cuts that more than offset the CBO-scored deficit increase. Technically, the Senate Budget Committee Chairman could also overrule CBO scoring, but why give Democrats the rhetorical advantage of a perceived process abuse? Republicans correctly insist that we need to slow spending growth, and they could here turn a tactical disadvantage into a legislative opportunity to further cut spending.
DC Democrats are right that repeal won’t happen this week, even with a Republican House. They should worry, though, because there is a clear and achievable path to repeal just two years from now, and the McConnell amendment moves down that path.
(photo credit: wstera2)
The three man FCIC dissent (Hennessey, Holtz-Eakin, Thomas)
At long last, here is the dissent filed by Vice Chairman Bill Thomas, Dr. Doug Holtz-Eakin, and me to the Financial Crisis Inquiry Commission Report. (I know, you’ve been holding your breath waiting for this.) This dissent will be transmitted to the President and the Congress later today (Thursday, January 27th) along with the majority’s document and Peter Wallison’s separate dissent.
Our dissent is 27 pages long as a PDF. The majority’s document is 20 times longer. Their endnotes are 98 pages. I am not making this up. The full report will be available on FCIC.gov tomorrow around 10 AM EST. Peter Wallison’s dissent is available now.
Since I know that 27 pages is too long for the overwhelming majority of readers on the web, I’ll try to suck you in by telling you that our core argument is in the first seven pages. The last twenty flesh out in more detail each of our “ten essential causes of the crisis.” You could stop after seven pages (I hope you won’t) and have our basic argument.
If you have followed any of the press coverage of the FCIC over the past six weeks, you may think you know what we’re going to say. This dissent, however, makes a fundamentally different argument than the four-man document I signed onto in December. For me this document supersedes that December document, which I looked on as a temporary placeholder.
Here is the text:
- As a long web page: Dissenting Statement of Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin, and Vice Chairman Bill Thomas
- As an Adobe Acrobat PDF (29 pages): Dissenting Statement of Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin, and Vice Chairman Bill Thomas
For members of the press corps, the three of us will host a press call today (Thursday, January 27th) at 1 PM EST. Please contact the FCIC staff for details.
Related information:
- Wall Street Journal op-ed: What Caused the Financial Crisis? (by Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin). This is a precis of our dissent.
- Reuters: FACTBOX – GOP report cites 10 causes for US financial crisis (by Kevin Drawbaugh and Dave Clarke)
- NY Times: Dissenters Fault Report on Crisis in Finance (by Sewell Chan)
(photo credit: Hanibaael)
Financial Crisis Inquiry Commission op-ed
Tomorrow the Financial Crisis Inquiry Commission will send its majority report and two dissenting views to the President and the Congress. One of those dissenting views comes from Vice Chairman Bill Thomas, Doug Holtz-Eakin, and me. The other comes from Peter Wallison. The majority conclusions are supported by the six Commissioners appointed by then-Speaker Pelosi and Senate Majority Leader Reid: Chairman Phil Angelides, Brooksley Born, Byron Georgiou, Senator Bob Graham, Heather Murren, and John Thompson.
I will post our dissent here at KeithHennessey.com soon. Doug will do the same at the American Action Forum. Around 10 AM Thursday morning, all three documents will be posted on the FCIC website.
Until then, here is a Wall Street Journal op-ed that is online now and will appear in tomorrow’s print edition. It’s by Mr. Thomas, Dr. Holtz-Eakin, and me, and it is a precis of our dissent.
If you have been following the Commission’s work, I think you will find that this op-ed and our 3-man dissent differ significantly from the document released by the four Republican appointees in December. Please do not assume that you know what Thomas, Holtz-Eakin and I are going to say based on prior press coverage or a reading of that December document. This is quite different.
Stay tuned for a lot more here on this topic over the next few days. While I will send at most one email per day to my mailing list (as promised), I anticipate posting several times on Thursday, and maybe more over the next few days, as I try to respond to initial feedback and press coverage. If you are tracking this issue closely, please check back or subscribe to the RSS feed for timely updates.
For now, here are two initial press stories, as well as our op-ed. Happy reading. Our full dissent is coming soon.
- Reuters: FACTBOX – GOP report cites 10 causes for US financial crisis (by Kevin Drawbaugh and Dave Clarke)
- NY Times: Dissenters Fault Report on Crisis in Finance (by Sewell Chan)
Wall Street Journal op-ed: What Caused the Financial Crisis? (by Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin)
What Caused the Financial Crisis?
Congress’s inquiry commission is offering a simplistic narrative that could lead to the wrong policy reforms.
By BILL THOMAS, KEITH HENNESSEY
AND DOUGLAS HOLTZ-EAKIN
Today, six members of the Financial Crisis Inquiry Commission—created by the last Congress to investigate the causes of the financial crisis—are releasing their final report. Although the three of us served on the commission, we were unable to support the majority’s conclusions and have issued a dissenting statement.
In a November 2009 article, Brookings Institution economists Martin Baily and Douglas Elliott describe the three common narratives about the financial crisis. The first argues that the primary cause was government intervention in the housing market. This intervention, principally through Fannie Mae and Freddie Mac, inflated a housing bubble that triggered the crisis. This is the view expressed by one of our co-commissioners in a separate dissent.
The second narrative blames Wall Street and its influence in Washington. According to this narrative, greedy bankers knowingly manipulated the financial system and politicians in Washington to take advantage of homeowners and mortgage investors alike, intentionally jeopardizing the financial system while enjoying huge personal gains. That’s the view of the six majority commissioners.
We subscribe to a third narrative—a messier story that emphasizes both global economic forces and failures in U.S. policy and supervision. Though our explanation of the crisis doesn’t fit conveniently into the political order of Washington, we believe that it is far superior to the other two.
We recognize that the other two narratives have popular appeal: They each blame a clear entity, and thus outline a clear set of reform proposals. Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations (the second) there would have been no calamity.
Both of these views are incomplete and misleading. The existence of housing bubbles in a number of large countries, each with vastly different systems of housing finance, severely undercuts the thesis that the housing bubble was a phenomenon driven solely by the U.S. government. Likewise, the multitude of financial-firm failures, spanning varied organizational forms and differing regulatory regimes across the U.S. and Europe, makes it implausible that the crisis was the product of a small coterie of Wall Street bankers and their Washington bedfellows.
We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:
Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.
However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?
Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.
These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.
A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10).
We agree with our colleagues that individuals across the financial sector pursued their self-interest first, sometimes to the detriment of borrowers, investors, taxpayers and even their own firms. We also agree that the mountain of government programs supporting the housing market produced distorted investment incentives, and that the government’s implicit support of Fannie Mae and Freddie Mac was a ticking time bomb.
But it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.
Mr. Thomas is a former Republican congressman from California. Mr. Hennessey served as director of the White House National Economic Council in 2008. Mr. Holtz-Eakin is a former director of the Congressional Budget Office.
(photo credit: trugiaz)
Financial Crisis Inquiry Commission: a dissent coming soon
Financial Crisis Inquiry Commission Chairman Phil Angelides has announced that the commission’s report will be released next Thursday, January 27th.
I voted against the majority report and filed a dissenting view along with Vice Chairman Thomas and Commissioner Doug Holtz-Eakin. I’ll let others speak for themselves about their votes and actions.
About a month ago, four of us on the commission filed a preliminary paper. For me, the upcoming three-man dissent, of which I am an author, will supersede that document. At the time I thought it was necessary to sign onto a document that would have met the statutory reporting deadline required of the commission had we been able to muster six votes. My views are more fully and more accurately represented in the 27-page dissent you will see next week.
For now I’m not going to discuss the substance of the issue, but I will point you to a good paper that may help you prepare for next week’s release.
In November 2009, Douglas Elliott and Martin Baily of the Brookings Institution wrote “Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble.”
Elliott and Baily describe three narratives of the crisis:
Narrative 1: It was the fault of the government, which encouraged a massive housing bubble and mishandled the ensuing crisis.
Narrative 2: It was Wall Street’s fault, stemming from greed, arrogance, stupidity, and misaligned incentives, especially in compensation structures.
Narrative 3: “Everyone” was at fault: Wall Street, the government, and our wider society. People in all types of institutions and as individuals became blasé about risk-taking and leverage, creating a bubble across a wide range of investments and countries.
This is a good way to think about different approaches to explaining what caused the crisis.
Expect more from me on this topic next week, including our dissent.
(photo credit: Goldilocks by violscraper)
Memo: Introduction to the federal budget process
Last Friday I spoke to more than 200 Republican House Members at the House Republican retreat in Baltimore. I was one of three on a panel on the budget, chaired by House Budget Committee Chairman Paul Ryan.
I will post separately about my presentation and my thoughts on the retreat, but I was struck by the enormous impact of having 96 new Members in this year’s freshman class (87 R and 9 D). I realized that many of these freshman find themselves immersed in substantive and strategic discussions about the budget, the continuing resolution, and the debt limit before they have had an opportunity to learn the basics of the budget process.
I have therefore written this memo for them. I hope you might find it useful, too. Here it is as a PDF.
Stanford, California
Sunday, January 16, 2011
MEMORANDUM FOR NEW MEMBERS OF THE HOUSE OF REPRESENTATIVES
FROM: KEITH HENNESSEY
SUBJECT: INTRODUCTION TO THE FEDERAL BUDGET PROCESS
As a new Member of the House you will cast several important early votes on budget issues. This memo is a crash course on the federal budget process. I assume you’re starting fresh.
You will need a deeper understanding than I provide here to participate in the budget process. I’ll help you build the puzzle frame and show you what the picture on the box looks like, and over time you can assemble the rest of the puzzle. This memo therefore leaves out many important but, I think, secondary process elements that you can learn later.
This is a process memo. If you find this helpful, please let me know and I’ll write more about the substance of particular fiscal issues.
The budget resolution
Congress dominates the budget process, not the President.
Congress starts by passing a blueprint called the budget resolution in the spring. The budget resolution sets the total amount of federal spending, revenues, and deficits for the next five (or sometimes ten) years. Oversimplifying, the budget resolution consists of lists of numbers and process rules written as legislative language.
The budget resolution is a concurrent resolution. This means that (if successful) the House and Senate must pass identical legislative language, but it does not go to the President for his signature or veto. This is why it’s called the Congressional Budget Resolution. This initial Congress-only process step is a principal source of Legislative Branch power relative to the Executive Branch.
By itself the budget resolution does not spend a single dollar or raise any tax revenue. It is to spending legislation what a blueprint is to a house: a plan, a set of guidelines, constraints, and rules that the builders must follow.
The budget resolution is crafted in the House and Senate Budget Committees, led by their Chairmen, Rep. Paul Ryan (R) and Sen. Kent Conrad (D). They are the most important people in the budget resolution process early in the year. The legislative lead then shifts to other Committee chairs who write individual bills that conform to the budget resolution.
In addition to setting totals, the budget resolution also divvies up total spending by committee. The Committees of which you are a member are each given a spending allocation by the budget resolution. This number constrains legislative action by the committee over the next year. The House Ways & Means Committee and Senate Finance Committee handle all revenues.
Each committee then acts throughout the calendar year to pass bills that stay within the numeric constraints established by the budget resolution.
At this point the road forks into two types of spending: discretionary spending (aka appropriations), and mandatory spending (aka entitlements). This is a critical distinction that you need to understand.
Discretionary spending through annual appropriations bills
About 30% of total federal spending, classified as discretionary spending, is assigned to the Appropriations Committee. The House Appropriations Committee Chairman (Rep. Hal Rogers) will further divide his committee spending allocation into 12 subcommittee spending allocations. Beginning in late spring, these 12 subcommittees and then the full Appropriations Committee will write 12 appropriations bills.
If all goes smoothly, the House will pass all 12 bills. The Senate has a parallel process. Each of these bills will go to a conference committee. Compromise versions will be repassed in the House and Senate and will then go to the President for his signature or veto. Twelve new laws will be enacted before the new fiscal year begins on October 1. All rarely goes smoothly.
In addition to the suballocation among 12 subcommittees, there’s an important division within the appropriations pie between defense and nondefense spending. Sometimes this division is set by the budget resolution, and sometimes it’s left to the discretion of the Appropriations Committee Chairman (often with “guidance” from House Leadership). Radically oversimplifying, Republicans tend to prioritize defense spending more highly than Democrats do, relative to nondefense spending.
The keys to discretionary spending are:
• It is decided annually. This means Congress spends a lot of time on these bills and the thousands of spending decisions contained within them.
• Congress must act for money to be spent each year. If Congress fails to enact one or more of the 12 appropriations bills by October 1, the programs in that bill will stop operating on that date. The default is that no money will be spent.
• Most of the functions you think of as “the federal government” are funded through these annual appropriations bills.
The appropriations process begins with a baseline amount for each discretionary spending program. The baseline assumes for each program that we will spend next year what we are spending this year, usually plus an allowance for inflation. If $100M is being spent for program X and the topline appropriations baseline inflation adjustment is 2%, then the baseline for program X for next year will be to spend $102M.
The 12 Appropriations Subcommittee Chairs lead their committees in a process that then moves these baseline figures for each program up or down to conform with their overall subcommittee spending allocation. If a bill would spend $104M on program X next year, that is often characterized as a “$2M increase above baseline.” If a bill would spend $101M on X next year, then those who want to spend more will characterize this as a “$1M cut
Congress often fails to complete their appropriations work on time. Just before the new fiscal year begins on October 1, the Congress will therefore typically pass a short-term continuing resolution (CR). The CR is an appropriations bill that funds all discretionary spending programs not yet covered by an enacted appropriations law. A CR is a temporary holdover measure to keep these parts of government operating while Congress finishes its work.
A CR might therefore cover all discretionary spending, as it did last year when Congress failed to enact any of the 12 appropriations bills. Or it could cover any subset of that spending if some but not all of those bills have already become law.
If a CR is not enacted by October 1 (or by the date when the prior CR runs out), then those parts of the federal government not funded “shut down.” This is a significant policy impact and even more significant politically.
A CR generally declares a truce by continuing spending for all programs at last year’s level, sometimes + or – a small percentage amount across the board. Reallocation fights stay in the regular appropriations process while the truce keeps everything going the way it was.
A CR can last for days, weeks, months, or the remainder of the fiscal year (until September 30th).
The current Continuing Resolution was a long-term one, signed into law on December 22nd of last year and funding all discretionary programs through March 4, 2011. It is the fourth CR enacted since September 30th. Congress will therefore have to decide by March 4th whether to:
• extend this CR through the end of this fiscal year;
• extend it for a shorter time and revisit the decision later; or
• enact some or all appropriations bills so that no CR is necessary.
Mandatory spending
About 70% of total spending is classified as mandatory spending. Mandatory is a technical term, not a normative one.
Most mandatory spending consists of entitlements established by a formula. Examples include:
• If you’ve worked a certain number of years over your life and you reach age 62, you are legally entitled to a Social Security benefit determined by a formula written into the law.
• If you’re a senior citizen or disabled, you are legally entitled to health benefits under the Medicare program, and doctors, hospitals, health plans and other health providers are paid by the government for providing you with those benefits.
• If you’re unemployed and meet certain criteria, you are entitled to unemployment insurance payments.
Mandatory spending differs from discretionary spending in several important ways:
• It’s on autopilot. This spending continues until Congress changes the laws that create the entitlements. If Congress does not act, the spending continues.
• Mandatory spending programs therefore often will operate for several years without Congress changing them.
• Relative to discretionary programs which must fight each year for their funding, mandatory programs therefore enjoy a protected status. Since it’s hard to pass legislation, defaulting to autopilot allows spending advocates to defend more easily previously legislated spending increases.
• Entitlement spending is set in law by creating eligibility criteria and a payment formula.
• While most of the programs in the government are funded by discretionary spending, most of the money goes out through mandatory spending.
The big three entitlements are Social Security, Medicare (health care for seniors and the disabled) and Medicaid (health care for poor people, the disabled, and some middle class seniors). Other significant mandatory programs include many farm subsidy programs, some welfare programs, and unemployment insurance.
Interest on the debt is classified as mandatory spending, although it’s usually not thought of as an individual entitlement.
The (eligibility criteria + payment formula) nature of entitlement programs is important relative to discretionary spending. The baseline for an entitlement program is whatever the experts estimate will happen under the eligibility criteria and payment formula next year, independent of what happened last year. If we expect the unemployment rate to rise over the next year, then the baseline for unemployment insurance (UI) will be higher for next year than actual spending this year, and maybe much higher. If we expect the unemployment rate to fall, then the baseline spending for UI will decline.
Similarly, baseline spending for Social Security is driven by demographics and economic conditions. As Baby Boomers are now retiring, the number of people newly eligible for benefits each year grows, and the spending baseline grows with it.
This leads to an important inequity between programs funded through discretionary spending and those funded through mandatory spending. Suppose the baseline for federal spending on national parks increases by 2% because it’s discretionary spending. Baseline Medicare spending is projected to increase more than 7% next year. If Congress decides to enact laws so that spending on each program would increase by 5%, the budget process will describe these policies as a large spending increase for national parks, and a large spending cut for Medicare. Medicare advocates will point out that the demands on their program have increased because there are more seniors and health care prices are increasing rapidly, but the parallel situation might also be true for national parks or other discretionary programs.
While all discretionary appropriations spending goes through the House and Senate Appropriations Committees, mandatory spending is spread out across several committees, each of which is allotted a (mandatory) spending allocation by the budget resolution. If laws are passed this year to change a mandatory spending program, that legislation must not increase the spending within each committee’s jurisdiction by more than the amount allotted to it by the budget resolution. The budget resolution committee allocations therefore determine how easy or hard it is for each committee to pass new legislation. If a committee’s allocation is increased above baseline, the committee has money to spend. If it is below baseline, that committee is required to change programs within its jurisdiction to spend less than they otherwise would under current law.
Cutting mandatory spending is legislatively difficult. It is often done across several committees in the same year as part of a broad effort to cut spending and reduce the deficit. The budget resolution can but does not have to create the opportunity for a reconciliation bill. The budget resolution instructs other committees to save certain amounts of mandatory spending on programs within their jurisdiction. It can also tell the Ways & Means Committee to raise (or cut) taxes. If the budget resolution creates a reconciliation bill, it gives committees a deadline to report legislation. These different bills are then packaged together into a single reconciliation bill that is brought to the House floor. When used for deficit reduction, the idea is one of shared sacrifice: all the committees are chipping in saving to meet a shared deficit reduction goal.
The reconciliation process is even more important in the Senate, because a reconciliation bill cannot be filibustered. A unified majority of the Senate can therefore pass such a bill, unlike almost all other legislation which can be blocked by a determined 41-vote minority.
The reconciliation process was originally (in the 80s) used for deficit reduction. It has also been used for other purposes by Republicans (to cut taxes) and by Democrats (to enact health care changes).
The debt limit
Since the government is running annual budget deficits, the tax revenues coming into the government are insufficient to pay the spending commitments made by the government. Treasury must therefore raise cash to pay the bills by borrowing funds from capital markets. Their ability to do so is capped by a law colloquially called the debt limit.
I will save a discussion of the different ways to measure government debt for a later more detailed memo on the debt limit. For now, I hope it suffices to say that the government needs to have the legal authority to borrow the cash needed to pay the bills.
Like a continuing resolution needed to prevent much of the government from shutting down, the debt limit bill is therefore considered a must-pass bill. This year that has led to discussion about whether the must-pass nature of this legislation can be used as leverage. Some fiscal conservatives hope they can use this bill to force the President and his legislative allies to agree to spending cuts or budget process reforms. I’ll discuss both the substantive and strategic aspects of that in my next memo.
Sequence
While initial public discussion this year has focused on the debt limit, that might not be the first budget vote you cast.
• The current continuing resolution expires on March 4th. Some vote will be needed by then.
• The budget resolution usually comes to the House floor in mid-March.
• Treasury says the current law debt limit will be broached in April or May. Legislation could come up any time between now and then.
For more analysis of American economic policy, please visit my blog at KeithHennessey.com. If you like, you can subscribe at that site to my email mailing list.
(photo credit: House Republican Conference)
Memo: Introduction to the federal budget process
The 10 most important American economic policy issues of 2010
Here is my view of the 10 most important American economic policy issues of 2010.
1. The weak U.S. macroeconomy
In 2010 a weak macroeconomy once again swamped in importance all other economic policy issues. Forecasters had predicted a tough year — the 9.7% average unemployment rate for the first 11 months of the year is not far above the Administration’s 9.3% forecast for the year.
In 2011 the most important metric will once again be the unemployment rate. Economically as well as politically the focus will once again be almost entirely on job creation. We need the economy to be generating hundreds of thousands of net new jobs each month. That is unlikely but not impossible.
Most forecasters project a stronger U.S. economic growth path in 2011 than 2010, but few are projecting that growth will be robust enough to bring the unemployment rate down rapidly. While this week’s unemployment claims took a turn for the better, that’s a volatile data set, and the labor picture over the past few months has been weak. If the forecasts hold up, things will be bad but improving throughout 2011. You decide whether the politics and press will focus on the bad or the improving part.
Please remember not to lean too heavily on economic projections. My rule of thumb is that the best macroeconomic forecasts get unreliable six months out and are not much more than guesses beyond a year.
2. The failure of fiscal stimulus
This trend began in 2009 and solidified in 2010. The fiscal stimulus debate camps and arguments are well established, and because the debate relies on comparison to a counterfactual it may never be provably resolved, allowing economists to argue ad nauseam.
Whatever your view on the policy question, as a political matter the stimulus failed miserably. There are a few easily identifiable errors.
- The President repeatedly took too optimistic of a tone relative to what his experts projected on something that was largely beyond his control.
- Team Obama gambled and lost by creating an unverifiable “jobs saved or lost” metric. Sometimes the unverifiability worked for them, but ultimately it broke against them because a job saved by policy is neither provable nor visible.
- The policy path the President chose in early 2009 (more accurately, the path to which he acquiesced when Congress chose it) set up countless “waste, fraud, and inefficiency” stories throughout 2010.
- After February 2009, every time the President signed another bill “to create jobs,” he reinforced the message that his first stimulus law was failing or at best insufficient.
3. The stimulus vs. austerity debate
The U.S. is now left of Germany and the U.K. on fiscal policy in rhetoric if not result. That is both weird and disturbing.
4. (Temporary?) enactment of the health care laws
The President and his allies had a huge policy victory here. I think these laws are an unmitigated disaster, the largest economic policy mistake in a long time. The President and his allies created a massive new entitlement, spent budget offsets needed to address our long-term spending problem and therefore made future middle class tax increases a near certainty, and turned health insurance into a regulated utility.
The ongoing pushback from Republicans, even after enactment, was a wonderful surprise from a party that had for too long been afraid to debate health policy. Democrats had to delay implementation of the most expensive provisions for a few years, allowing Republicans time to mount a repeal campaign that continues to build steam. My first big blog mistake of the year was prematurely declaring the legislation dead after Scott Brown’s surprise victory in Massachusetts. My second (unpublished) mistake was assuming that the President’s signature was the endgame. It appears the 2012 Presidential election will be in part a referendum on these laws.
5. Enactment of financial services reform (Dodd-Frank)
This is another big policy win from the Administration’s perspective. I have mixed feelings on the law. Some parts (like creating resolution authority for regulators to shut down too-big-to-fail firms) are essential, others (like the Consumer Financial Protection Bureau) are harmful, and still others (like the long-term resolution of Fannie Mae and Freddie Mac) are unresolved.
Many policymakers appear to have convinced themselves that new policies and structures are (or, in a few years when the regs are complete, will be) in place to prevent large institutions from failing. I worry that we still don’t have a good solution for the next Black Swan event when (not if) one or more of those huge institutions do fail in spite of the new, better informed, and more powerful regulators.
6. Carbon pricing implosion
In less than four years carbon pricing has gone from front burner to burnt toast. The Climategate data fudging scandal undermined a previously strong positive public perception of climate scientists and their advocacy. In Copenhagen the global negotiations imploded after confronting the problem of the China-India hole in the U.S./green strategy. A Democratic House and Senate could not agree to carbon pricing legislation, demonstrating that regional economic perspectives are at least as important as policy philosophy. The President walked a tightrope between demonstrating to greens that he was with them and allowing himself an exit strategy when legislation inevitably failed. West Virginia Governor (and now Senator) Joe Manchin erased any doubt by literally shooting the Waxman-Markey bill in a campaign ad.
We now appear headed down the worst possible policy path. Congress will not enact legislation but the Environmental Protection Agency will start regulating greenhouse gas emissions and allowing/encouraging States to do so. This is the most economically burdensome way to regulate carbon emissions. It will be large enough to impose significant constraints on domestic power production and heavy manufacturing now, and maybe on other sectors later. Yet any reductions in U.S. emissions will be small relative to uncapped increases from China and India. EPA’s rules and Congressional efforts to block them will create policy uncertainty, deterring needed investment in the expansion of U.S. power production and slowing long-term economic growth. EPA’s regulatory authority always served two purposes to those who want to price carbon: as a threat to try to force legislative action, and as a costly fallback if legislation failed. The fallback option never made sense. It should but probably won’t be abandoned.
7. The Democratic Congress’ budget failures
From the perspective of Congressional Democrats, the health care and financial services victories counterbalance their two fiscal policy failures in 2010. Tax rates on income and capital will not increase during President Obama’s first/only term. They failed to enact full-year appropriations bills to fund the government, resorting instead to short-term continuing resolutions. The new Congress will have to complete the leftover appropriations work in early 2011. Many of the President’s spending goals will be unmet as he wrestles with a Republican House majority with very different priorities. I am pleased with both outcomes, which exceeded my initial expectations.
Both results can be traced directly to decisions by Speaker Pelosi, Senate Majority Leader Reid, and their respective Budget, Tax, and Appropriations Chairmen. They failed because they didn’t even try to govern. They never tried to pass a budget resolution, they delayed action on taxes until the last possible minute when Republicans were strongest, and they never tried to pass appropriations bills in the Senate. They missed an opportunity to create a reconciliation bill that would have allowed them (and the President) to win the tax extension debate. In each case these were unforced errors by Democratic Congressional leaders that significantly affected the fiscal policy outcomes of 2010.
8. Rise of the Tea Party
I have not much to add here other than to recognize that the small government impetus began with the early 2009 Santelli rant and exploded into summer 2009 Town Hall opposition to Obamacare. I now think of it not as a political party, but instead as a strong and deep anti-TARP-autos-bailout-stimulus-Obamacare-cap-and-trade-government-spending-earmarks-deficits sentiment. In simpler terms it’s a powerful populist pushback against the expansion of government. Over the next two years Republicans can succeed to the extent they respect this sentiment and push for smaller government and a bigger private sector.
9. Increasing awareness of medium-term fiscal problems
The bad news is America’s long-term fiscal problems are now medium-term fiscal problems. The good news is that Americans are increasingly aware of those problems, and pressure is building on elected officials to solve them. While nothing transformative on this front happened in 2010, several trends are important to note.
- The shift from long-term to medium-term is a result of two factors: (1) inaction on entitlement spending over time by both parties; (2) enormous short-term deficits that are wiping out a projected temporary deficit trough before the Baby Boom spending wave hits. Those enormous short-term deficits result from (1) the weak economy; (2) actions taken to recover from the weak economy; and (3) a generic expansion of government spending unrelated to economic stimulus.
- In February the President’s budget launched this round of fiscal debate by intentionally leaving a large deficit hole to be plugged by recommendations from a new Presidential fiscal commission. The President’s goals for that commission were too focused on the short run, and it’s unclear whether he intended the commission to solve the problem, provide him with cover for a proposal in early 2011, or just to buy him time through a mid-term election year. Nevertheless, the commission reported in December with a bipartisan package of spending reforms and tax increases, teeing the issue up nicely for 2011.
- Enormous 2009 and 2010 deficits and massive spending increases in those years raised the prominence of both the size of government and fiscal imbalance as important policy issues.
- Fiscal crises in Europe and looming fiscal crises in various U.S. States focus attention on the U.S. federal fiscal problem.
It’s always safe to bet against a big painful fiscal policy change, but if it’s ever going to happen, 2011 seems like as good a year as any. The 1997 budget deal was done by President Clinton, Speaker Gingrich, and Majority Leader Lott, a D-R-R alignment. This time we have a D-R-D alignment.
10. Round 2 of the Obama economic team
Three of the four key Obama economic advisor slots will be manned by different personnel in 2011 than a year earlier.
Out (voluntarily): Larry Summers (NEC), Peter Orszag (Budget), and Christina Romer (CEA)
In: Jack Lew (Budget), Austan Goolsbee (CEA), ??? (NEC)
- The departure of WH COS Rahm Emanuel and upcoming departure of Senior Advisor David Axelrod will also have a big effect on economic (as well as other) policy. My sources say they were heavily involved in almost all major economic decisions, sometimes operating as a separate decision-making layer between the economic team and the President.
- Treasury Secretary Geithner and NEC Deputy Jason Furman are now the institutional memory of the Obama economic team.
- Both Lew and Goolsbee are insiders who were promoted.
- The President should have filled (or at least announced) Summers’ successor at NEC weeks ago. The fall is policy development time in the White House, and the President hurt himself by not having in place a successor to his top White House economic advisor.
Have a Happy New Year.
(photo credit: Takras)
Financial Crisis Primer
Today, as required by statute, four of the ten members of the Financial Crisis Inquiry Commission sent a document to the President and the Congress. To provide transparency, here is that document, “Financial Crisis Primer: Questions and Answers on the Causes of the Financial Crisis.” The four commissioners are Commission Vice-Chairman Bill Thomas, Doug Holtz-Eakin, Peter Wallison, and me. We are the four commissioners appointed by Republican Congressional Leaders Boehner and McConnell.
At least some of the four of us will have more to say about the causes of the crisis (in writing) in January. For now, we believe this document complies with the statutory requirement that the commission report today.
There’s a fair amount of press coverage today of what’s going on behind the scenes at the FCIC. Some of that reporting is inaccurate or misleading. I hope today’s focus can be on the substance of this document rather than the process squabbling, but I feel obliged to clarify a few process points in the initial coverage.
- This is not a “report” or a “response” by the Republicans. It’s a primer on the issues we think will be important to cover in the final report of the commission. As we have not yet seen a proposed final draft of the report, nor even a first draft of proposed findings and conclusions, it’s impossible for us to respond to that report today.
- Despite the statutory deadline, the Commission recently voted 6-4 to instead report in January. The four of us are nevertheless sending this document today to as best we can comply with the deadline in the law.
- Last week the Commission voted, again 6-4 along party-appointed lines, to limit the minority’s opportunity to express our views in the commercial book version of the upcoming report. In a 512 page book that will be for sale at commercial bookstores, those who dissent are now allotted nine pages each. We will be allowed to express our views without restriction in the official GPO version of the report (which will be transmitted to the President and the Congress) and on the commission’s website, but those views will be limited or truncated in the commercial version. I suggested increasing the length of the commercial book to allow room for our full additional views but was turned down because it might add $1 to the sale price of the book. This is, to say the least, frustrating.
It’s probably hopeless, but I want to encourage reporters to focus on our substance rather than our process.
(photo credit: Tory)
A rule of thumb for Member voting psychology
The tax bill provides a great opportunity to help legislative novices understand a rule of thumb of Member voting psychology.
It’s fairly easy to vote against a bill because of something bad the bill does. It’s much harder to vote against a bill because of something good the bill leaves out.
“Bad” and “good” depend, of course, on your perspective and your values.
In the case of the tax bill, for conservative opponents that means it’s probably effective to attack the ethanol tax credit and tariff or other targeted tax extenders that cannot withstand a bright spotlight. Liberal opponents have it easier because they hate two things in the bill: the rate extensions for the top two brackets and the estate tax deal.
While I think it’s a substantively valid conservative critique that the bill “only” extends current law tax rates for two years, when it “should” be permanent, I don’t think that’s likely to sway many (any?) votes. That doesn’t mean that Members voting against the bill won’t cite this argument, but instead that this argument is in most cases unlikely to be substantively dispositive.
Please note:
- I’m trying to make a general point about how Members often think about their vote, not just a specific one about this bill.
- This point is specific to Members of Congress. It has nothing to do with anyone who doesn’t actually vote on a bill, including outside commentators.
- I’m trying to explain how Members do vote, not how I think they should vote.
- I’m not worried about flagging which opposing arguments to the tax bill are most effective because this train is steaming down the tracks. Cloture was invoked yesterday 83-15.
If my rule of thumb is right, it means there’s a subtle difference in the effectiveness of the following arguments:
- “This bill is bad because it doesn’t include spending cuts to offset the unemployment insurance spending.”
- “This bill is bad because it increases the deficit as a result of the unemployment insurance spending.”
The second argument is likely to be more effective at swaying a Member against the bill than the first. Members might oppose the bill because it increases the deficit, rather than because it excludes spending cuts.
I think this is a fairly reliable rule of thumb. I find it useful in many legislative contexts and hope you will too.
(photo credit: shellygrrl)
Responding to conservative critics of the tax deal
Like most negotiated legislative compromises, the tax deal has its critics at both ends of the spectrum. I support the deal and will take one more chance to respond to conservative criticism before this afternoon’s cloture vote.
Here is Rush Limbaugh:
Obama’s adding all these pork projects, more ethanol subsidies. That’s not what the election’s about. They could go a long way helping themselves making it clear they’re not going to buy a two year deal, with a certain tax increase in 2013, for hundreds of billions of dollars, including new ethanol subsidies. What kind of deal is this? OK, yeah, we’ll take it, say the Republicans, we’ll take two years of the same tax rates, and then we’ll take increasing tax rates in 2013, and the ethanol subsidies, yeah what else do you want?
… Even the Republican leaders have been part of the system for decades. False deadlines, foolish deals, and it need not be. I now hope this deal fails, I say it, directly and officially. If the deal fails, the Democrats are in control, so it is they who will be raising taxes. Let the tax rates go up, on January 1st, let ’em go up. Wait for our cavalry to show up and deal with this the right way. They had two years to deal with this. They’ve had the two years of Obama’s presidency to deal with this and they haven’t, on purpose. They want the tax rates to go up, and they’re selling -that we agree to two years of the tax rates not changing? How about permanently the tax rates not changing, then we’ll talk to you? Two years, and we got thirteen months of unemployment compensation. The only way you can describe that thirteen months is, look at all the spending that is. Look at all the spending. Three years of unemployment compensation benefits, in exchange for a 35% death tax, a 2% cut in the payroll tax, and two years of tax rates on income not changing. They had two years to deal with this. The new Congress coming in will fix it, if the GOP leadership will allow it.
Here is Club for Growth President Chris Chocola:
This is bad policy, bad politics, and a bad deal for the American people. The plan would resurrect the Death Tax, grow government, blow a hole in the deficit with unpaid-for spending, and do so without providing the permanent relief and security our economy needs to finally start hiring and growing again.
Instead, Congress should pass a permanent extension of current rates, including a permanent repeal of the death tax, and drop all new spending. A month ago, the American people repudiated Washington big government.’ It’s time for both parties to finally hear that message and act on it.
I find that most arguments about a negotiated compromise boil down to the simple question, “Compared to what?” Mr. Limbaugh and Mr. Chocola are comparing the deal to their preferred policy. I judge the deal compared not just to my preferred policy, but also to where we are now, and to where we will be if there is no deal and taxes go up 19 days from now.
Let’s examine each of the complaints in turn.
Complaint: “
Response: I agree that the bill would be much better if the 2010 tax rates were made permanent. But if there’s no deal, we’ll have the current law rates for only another 18 days. Two years is better than 18 days.
Mr. Limbaugh suggests that by killing this deal, “The new Congress coming in will fix it.” How? Let’s assume that a new Republican House passes a bill that makes the 2010 rates permanent, and permanently repeals estate and gift taxes, and makes these changes retroactive to January 1st. That bill would have to pass the still-Democratic Senate, and then be vetoed by or negotiated with the same Democratic President. Unless you think that a House-passed permanent bill will fundamentally change the balance of those negotiations with the President, waiting for the cavalry doesn’t do much good.
I could be convinced to allow a temporary tax increase if I thought the political pressure generated by it, or the arrival of the new Congress, were likely to fundamentally rebalance the negotiations to make a longer extension more likely. I don’t think that’s the case here, so I’m against imposing even temporary pain on the American people.
Complaint: “… a two year deal, with a certain tax increase in 2013 …”
Response: I think just the opposite. This deal increases the odds of winning the 2012 fight. And I think we have a better chance of extending the 2010 rates beyond 2012 because they will now sunset once again in an election year. The Left would have had a better chance of winning the long-term fight if they had made a further tactical concession and had agreed now to a three year rather than a two year extension. Republicans like to debate taxes in election years. It helps win the tax policy fights and it helps win seats.
Complaint: The unemployment insurance spending isn’t offset.
Response: I agree. This is bad. It’s $56 B of deficit increase. I don’t have a problem with expanded and extended unemployment insurance benefits when the rate is as high as it is now, although up to 99 weeks of benefits is extreme. If I could make one change to this bill, it would be to cut other spending by this same amount, effective beginning three years from now, after the economy has had plenty of time to fully recover. For me the downsides of this deficit increase are far outweighed by the upsides of preventing rate increases.
Complaint: “… by making it clear they’re not going to buy a two year deal, for hundreds of billions of dollars …”
Response: This suggests Republicans are “giving” the President and Democrats “hundreds of billions of dollars” of things that Republicans don’t want, in exchange for “only” a two-year extension of current law rates. I think this overcounts the components of the bill that Republicans generally oppose, and it severely undervalues the benefits of preventing income and capital tax rate increases.
Let’s look at where the deficit increases in this bill come from.
All figures are from CBO and JCT, are relative to current law and are 10-year totals:
- Prevent income tax rate increases ($408 B)
- Prevent AMT increase next year ($137 B)
- Prevent estate tax from returning to $1M exemption and 55% rate in 2011 ($68 B)
- 2% payroll tax holiday ($226 B)
- Temporarily extend business expensing provisions ($22 B)
- Extend unemployment insurance ($57 B) and
- Grab bag of tax “extenders” ($55 B).
I think I just have different policy preferences than Mr. Limbaugh on this one.
I strongly support $613 B of the above policies – the first three.
While the bill would be better without these (or with the unemployment benefits offset), I’m happy to accept the following policies in a package:
- the half of the 2% payroll tax holiday that’s actually a tax cut, which increases the deficit by $112 B;
- extending unemployment insurance, for $57 B;
- extending the business expensing provisions for $22 B.
I’d prefer to drop the business expensing provisions ($22 B), and the other half (the “refundable” part that is just an entitlement payment in disguise) of the payroll tax provision ($114 B), and I could easily cut the tax extenders at least in half if you let me ($28 B).
If I tally “things I really like” and “things I can accept” and compare them to “things I don’t like,” the numbers look good to me. Not great, mind you, but good. And for a divided government this looks to me like a great deal.
Complaint: “Obama’s adding all these pork projects, these ethanol subsidies.”
Response: This is unfair. The ethanol tax credit extender is not an Obama Administration demand. It is demanded by corn state Senators of both parties. The same is true for most of the tax extenders. They are mostly special interest tax provisions, and I would be thrilled if we could eliminate most of them. It is incorrect, however, to attribute them to the President or to one party in Congress.
Both parties have dirty hands on this. So while it’s legitimate to complain about the inclusion of these provisions in this deal, it should not be surprising and it should not be described as something Republicans “gave” to the President in the negotiation. This is, unfortunately, routine for Washington. I support changing that routine, but I wouldn’t blow up this bill because it doesn’t fix some bad practices of the past.
Complaint: “I now hope this deal fails, I say it, directly and officially. If the deal fails, the Democrats are in control, so it is they who will be raising taxes.”
Response: Then you’re hoping that every American who pays income taxes will begin to get smaller paychecks at the beginning of next year. You’re willing to allow tax increases on everyone who pays income taxes so that political blame will fall on Democrats. I think it’s abundantly clear that Democrats failed to govern by leaving this issue until the last minute. I’m not willing to allow tax increases just to further stress that political point.
Complaint: “The plan would resurrect the Death Tax.”
Response:
- Estate and gift tax in 2010: zero
- Estate and gift tax in 2011 if there’s no new law: $1M exemption, 55% rate
- Estate and gift tax in 2011 if the deal becomes law: $5M exemption, 35% rate.
If you compare the estate tax component of the deal to where we are now in 2010, it’s “resurrecting the death tax” and looks like a bad deal. If you compare it to the policy if there’s no law, it’s a substantial improvement. The same could be said, however, about any numbers between these two extremes.
I’d prefer permanent repeal. Given the configuration of a Democratic President and a Democratic Senate, I think Senator Kyl did a good job negotiating a fair compromise that is worthy of support.
Complaint: “The plan would … grow government …”
Response: How does it “grow government?” By once again extending unemployment insurance benefits? I think that’s sloppy language. The health bill expanded government. The cap-and-trade bill expanded government. Tax cuts don’t expand government, spending increases do. The only significant spending increases in this bill are extensions of provisions in current law. So I’d agree the bill keeps certain spending components in place, but that’s not “growing government.”
Complaint: “The plan would … blow a hole in the deficit with unpaid-for spending”
Response: See above. CBO scoring shows that most of the deficit impact is from the tax side, not the spending side. I agree the bill would be better if the spending were offset. While “blow a hole in the deficit” is a judgment call, I think it’s way off base here.
Complaint: “Instead, Congress should pass a permanent extension of current rates, including a permanent repeal of the death tax, and drop all new spending.”
Response: Sure, but if you can’t get all that, are you willing to take four-fifths of a loaf?
It’s incredible to see how the debate has shifted and how expectations have changed.
In 2001 there was a big policy battle over cutting the top income tax rates from the Clinton levels. President Bush and a Republican Congress enacted a law, with support from moderate Democrats, cutting income tax rates for all income taxpayers.
In 2003 President Bush won that battle convincingly by repackaging the top individual rates as small business rates. The debate then shifted to a big partisan policy battle over reducing the double taxation of dividends. The results of the Bush years were lower tax rates for all income taxpayers and lower tax rates on dividends and capital gains.
In 2008-2010 President Obama and huge Democratic majorities tried to undo these policy victories. They tried to raise tax rates on income and capital. They failed, and that failure will extend through President Obama’s first/only term. If someone had told me, the day after Election Day 2008, that tax rates on income and capital would not increase for the next four years, I would have laughed at them. Now it’s about to come true, and Presidents Obama and Clinton are helping make it happen.
And some want to oppose it because it’s not enough?
(photo credit: Tony Tsang)