Jobs Night update
Since the data was released 14 hours ago, I’m calling this my Jobs Night rather than Jobs Day update. I’ll keep it short for the holiday weekend.
Today’s employment report:
- Net payroll employment fell by 54,000 jobs in August.
- The net -54K job loss was the result of +67 K private sector jobs, and -121 K government jobs, almost all of which were Census workers.
- The unemployment rate ticked up from 9.5% to 9.6%.
- The average workweek was unchanged.
- Data for the last two months were revised upwards.
Remember that different audiences look at employment data in different ways:
- People’s lives are most affected most by the level of employment: how many people are working, and what is the unemployment rate? These numbers are still terrible.
- As both a policy and political matter, Washington cares about the level, but even more about the direction and rate of change: are we adding or subtracting jobs, is unemployment rising or declining, are we “headed in the right direction?” Here, the data supports political claims that we’re moving in either direction: the net number is negative, but the more trend-significant private sector number is positive. This gives each side of the political battle something to spin. The numbers still hover around zero, meaning even the positive private sector number is nothing to brag about.
- Markets and market commentators care about both of the previous factors, but even more about how the change compares with expectations about the data before it was released. Here the numbers were slightly better (less worse) than expected, so the markets ticked up upon the announcement.
Here are my quick thoughts about what the data means. I don’t claim this is either innovative or controversial, but instead just a simple explanation.
- As we have for the past few months, the employment situation continues to bump around close to zero. The underlying trend (taking out census) is slightly positive.
- A slight positive underlying job growth trend is, of course, better than a trend of losing jobs. The economy is continuing to improve, albeit slowly. Decceleration is not the same as decline.
- At the same time, it feels terrible because the level is so low and the growth rate is so slow. We’re down millions of jobs from full employment, and we’re not even creating the 150-ish K jobs per month needed to keep up with population growth. For things to feel better economically (and politically), we need much, much faster GDP growth and employment growth. When monthly job growth consistently breaks 150K you can start to breathe easy. If and when it’s increasing +300ish K net new jobs per month you can feel great about the pace of the recovery, given the depth of the hole.
- Today’s report is consistent with the other data we’ve been seeing, most of which continues to support views that GDP continues to grow slowly (1-ish percent rate?).
- Today’s report and the other data are inconsistent with an economy that is declining. We don’t appear to be double-dipping (which is different than drawing any conclusions about the future).
(photo credit: Ingo Meironke)
Friday GDP arithmetic
We have new GDP numbers from the Department of Commerce’s Bureau of Economic Analysis.
- U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
- This is the second estimate for Q2 GDP. The first, released at the end of July, was +2.4%. This is therefore a downward revision, but we’re still growing, albeit slowly.
- The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.
As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent. When we’re operating way below capacity, as we are now, in a strong recovery you would expect and hope that we’d grow much faster than that. This is not yet a strong recovery.
I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus. The conclusion sounds simple but when they see it in the numbers a lot of people get confused: When stimulus ends, the GDP growth rate goes down.
Let’s imagine we have an economy that this year will produce 100. Also imagine that we have a magic crystal ball that lets us see that, if we do nothing, GDP will grow by 1 for each of the next three years. We call this our baseline.
| year 1 | year 2 | year 3 | year 4 | |
| baseline GDP | 100 | 101 | 102 | 103 |
Now suppose we want GDP to grow faster, and suppose we have a magic wand which will do that. The magic wand could be monetary stimulus, it could be fiscal stimulus, or it could just be magic. Maybe it cuts interest rates, maybe it cuts taxes, or maybe it increases government spending. I’ll let other people argue about how effective those various magic wands are. For this exercise, please grant that the magic wand will increase GDP by however much we want, and for whatever limited duration we want. My point here has nothing to do with economics, or about whether a particular type of stimulus works. It’s just arithmetic.
Suppose we set our magic wand so it will add 2 to GDP for two years, beginning in year 2, and then stop.
| year 1 | year 2 | year 3 | year 4 | |
| baseline GDP | 100 | 101 | 102 | 103 |
| stimulus / magic wand | 0 | +2 | +2 | 0 |
| GDP + stimulus | 100 | 103 | 104 | 103 |
What makes this a bit funky is that GDP is rarely reported in raw numbers, but instead as growth rates. In the real world this is done on a quarterly basis, but I’m keeping everything simple here by just using years instead. Let’s compare the annual growth rates of GDP, with and without our magic wand stimulus.
| year 1 | year 2 | year 3 | year 4 | |
| baseline GDP | 100 | 101 | 102 | 103 |
| growth rate | +1% | +1% | +1% | |
| GDP + stimulus | 100 | 103 | 104 | 103 |
| growth rate | +3% | +1% | -1% |
Economists of different stripes will argue that various stimulus magic wands have beneficial effects that last beyond the direct stimulus, and that their preferred type of stimulus will create a virtuous cycle that will permanently increase the level of the economy. Even if they’re right, you’ll still see a decline in the growth rate as the direct stimulus is withdrawn, especially if it was big in the first place. So maybe we end up at 104 in year 4 rather than 103. Even so, the growth rate would still decline to 0. My point is simply that, when the annual +2 ends, the measured annual growth rate will decline. This is mathematically trivial but politically significant.
Remember that in the real world we don’t know baseline GDP, and the raw (GDP + stimulus) numbers are rarely reported in the press. All we see are the growth rates that actually occurred, post-stimulus:
| year 1 | year 2 | year 3 | year 4 | |
| growth rate | +3% | +1% | -1% |
I have constructed this example to be as simple as possible, and in doing so the GDP growth rate actually went negative after the stimulus ended. This does not have to be the case. When stimulus ends, the GDP growth rate will go down, but that doesn’t mean it has to go down so far as to dip below zero.
Now let’s put on our political hats. Year 2 is a good year politically, with GDP growing 3%. We brag about the success of our stimulus policy.
In year 3 the economy is 2 bigger than it would be without stimulus, but since we pretty much look only at growth rates, we don’t get political credit for it. This is particularly difficult, because everybody knows it was a two-year magic wand, and here we are in the second year of the stimulus and growth is slowing down.
After the stimulus ends, our measured metric declines even further. It might even go negative. As a matter of simple math this is entirely predictable. As a political matter it’s super hard to explain. If the stimulus worked, why is the economy shrinking/slowing down?
Imagine you have a triple espresso at 1 PM. At 4 PM you “crash” as the caffeine leaves your system. Maybe your energy is where it would have been at 4 PM had you never had that drink. Maybe it’s even a little higher than it would otherwise have been, because even though the caffeine is gone, your frenetic pace over the past few hours has tapped some hidden reserve of energy that continues. Either way, it will feel like a crash as the temporary stimulus is removed.
(photo credit: hz536n)
CBO gives us the complete picture five months late
Update on September 14, 2010: I have retracted this post. I blew this one.
Last week CBO released their annual summer baseline update. On page 6 (page 24 of the PDF) is a box titled “The Effects of Major Health Care Legislation on CBO’s Baseline.” It provides an important new data point that was absent when the legislation was being debated.
While I disagreed with some of the judgment calls CBO made during the health care debate, on the whole I think they did a good job under difficult circumstances. This missing information, however, was and is a significant failing by the CBO. Unlike with other major legislation, CBO’s scoring of the health laws blended spending increases and tax cuts into a single measure of deficit effects. The final scoring showed that these two bills combined would reduce the budget deficit over the next ten years.
Some analysts dispute this scoring. That’s not my point. In addition to providing the deficit effects, CBO should have told lawmakers what the separate effects would be on spending and on taxes. To make a well-informed decision, policymakers need to know the gross effects and not just the net.
The new CBO baseline document provides this information, although five months too late to affect any votes. They begin by repeating information from last March:
In March, CBO and the staff of the Joint Committee on Taxation estimated that the net effect of PPACA and the Reconciliation Act would be to reduce federal budget deficits over the 2010-2019 period by a total of $143 billion. That estimate consisted of a net deficit reduction of $124 billion from the health care and revenue provisions in both bills.
Only now does CBO tell us in a parenthetical:
Taking into account all of the provisions related to health care and revenues, the two pieces of legislation were estimated to increase mandatory outlays by $401 billion and raise revenues by $525 billion.
This is a very different picture. Imagine two scenarios of a lawmaker who was on the fence last March. He or she is a Blue Dog Democrat, or a Democrat from a fiscally conservative red district, and is deeply concerned that the legislation may be fiscally responsible. He is presented with two different statements from CBO:
- “CBO says these bills will reduce the budget deficit by $124 billion over the next decade.”
- “CBO says these bills will increase federal entitlement spending by $401 billion over the next decade, and will increase taxes by $525 billion over that same time period, for a net deficit reduction of $124 billion.”
These are very different statements. Both are true. CBO said only the first when Members were looking to understand the fiscal impacts of this legislation. This failure by CBO is important both because they failed to fully inform legislators and because that lack of information may have affected how some Members voted.
CBO had this information last March but they buried it. You couldn’t even pull the spending information out of the tables (I tried at the time), because CBO blended taxes and spending into a line labeled “net changes in the deficit from insurance coverage provisions” (see Table 1 on page 5 of this PDF). More importantly, the Director’s blog post and cover letter spoke only of the deficit reduction that would result from these bills.
CBO should not bury this information in a parenthetical in their mid-summer update, five months after the legislation was considered by Congress. It should have been part of the official scores presented to Congress before they voted. If you compare the final scoring of the stimulus law, the tables clearly separate out spending, revenues, and deficit effects.
Based on CBO’s normal scoring practices and the intense scrutiny of both CBO and this legislation, this cannot possibly have been an oversight. I would bet heavily that CBO was pressured not to show this information.
If I’m right, CBO should have resisted this pressure and provided a picture that was both more complete and consistent with how they usually score legislation.
Deficits matter. So do spending and revenues. If they remain in place, these laws will make government spending $401 B larger this decade. By reducing the budget deficit through tax increases, these bills will shift some of the fiscal burden from the future to the present. By increasing government spending, these bills will increase the cost of government on the private sector that pays for it. That latter point is an important piece of information that Congress should have had when they voted.
I am generally a fan of CBO, and please don’t group me with the bashers who say they did everything wrong. This, however, was a failure.
(photo credit: Dennis Sitarevich)
Responding to Dr. Krugman’s column on tax cuts for the rich
In his column yesterday, Dr. Paul Krugman argues for raising the top marginal income tax rates on January 1. His polemic is useful because it encapsulates most of the Left’s arguments.
Language trick #1: “We” (the government) should not “give money to the rich.”
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blockquote>But these
In this view of the world, revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them. When you hear that “we cannot afford to cut taxes” and “we should not give tax cuts to ______,” you are hearing this philosophy.
Like a family or a business, the government does not “pay for,” “finance,” or “afford,” its revenue stream or changes to it. You pay for your spending or you finance your spending. If your revenues are insufficient to meet your spending, then in all other contexts we say you cannot afford the amount you’re spending. The same should be true for the government.
Money doesn’t just magically appear in the government coffers. A private citizen or firm earns income and the government takes a portion of that income. The money initially belongs to he or she who earned it. Using “we” to refer to the government suggests the funds being spent by the government belong to the government. This matters because if the money belongs to the government, then elected officials should apply their moral principles to figure out who needs or deserves it most. If the money belongs first to he or she who earned it, then elected officials should apply their moral principles to figure out whether they should take it from the earner and spend it on something else or give it to someone else. Those are fundamentally different decisions. The first philosophy ignores the costs (moral and economic) of government taking something from someone who earned it.
While these may seem like small rhetorical differences, they represent two critical divides in the fiscal policy debate. You can learn a lot about how an elected official approaches spending, taxes, and deficits by listening to how he or she uses the pronoun “we” and whether he or she refers to “paying for government spending” or “paying for spending and tax cuts.”
Language trick #2: “Extending the Bush tax cuts” is bad.
There are two tricks here – talking about “extending tax cuts” and labeling them with the Bush name.
At some point a policy flips from “extending a tax cut” to “preventing a tax increase.” The top marginal income tax rate has been 35% for almost ten years. The top capital gains and dividend rates have been 15% for almost eight years. As a real-world policy matter if action is not taken, these tax rates will increase above where they have been for a long time. Most DC Democrats try to have it both ways – they talk about “preventing tax increases on the middle class” but oppose “extending tax cuts for the rich.” This rhetorical inconsistency masks a parallel situation in law and policy. Either they’re both extending tax cuts, or they’re both preventing tax increases.
Most of the policies scheduled to expire December 31 were enacted in the bipartisan 2001 tax law. The only significant expiring changes from the Republican-only 2003 tax law are the lower rates on capital gains and dividends. The marginal income tax rate cuts, the new 10% income tax bracket, the estate tax repeal, and the marriage penalty reliefwere part of the 2001 law supported by current Senate Finance Committee Chairman Baucus, sitting Democratic Senators Carnahan, Feinstein, Johnson, Kohl, Landrieu, Lincoln, and Ben Nelson, as well as twenty-eight House Democrats. You never hear anyone arguing against “extending the Baucus-Feinstein-Landrieu-Lincoln-Nelson tax cuts.”
Revise history #1:
Why the cutoff date? In part, it was used to disguise the fiscal irresponsibility of the tax cuts: lopping off that last year reduced the headline cost of the cuts, because such costs are normally calculated over a 10-year period. It also allowed the Bush administration to pass the tax cuts using reconciliation – yes, the same procedure that Republicans denounced when it was used to enact health reform – while sidestepping rules designed to prevent the use of that procedure to increase long-run budget deficits.
In 2001 I was Senate Majority Leader Trent Lott’s tax policy staffer and was deeply involved in the procedure and tactics of the 2010 sunset date. Dr. Krugman suggests that we Republicans “used” the 2010 sunset date “to disguise” their revenue effect. He has his facts wrong. We wanted the tax cuts to be permanent. Since we were using reconciliation with a 10-year budget window, had we extended the tax cuts even for “that last year [2011],” we would have given 41 Senate Democrats the ability to kill the bill on a Byrd Rule point of order. We ended the tax cuts after 2010 because we had to, not because we saw some rhetorical advantage to doing so.
There are two controversial uses of reconciliation: one is to cut taxes without offsets, since reconciliation had generally been used in the past to reduce deficits rather than to increase them. The other is to enact major non-budgetary policy changes outside of the Senate’s regular order. The debates about the appropriateness of reconciliation are therefore different between the 01/03 tax cuts and the 09/10 health care laws. It appears twelve Senate Democrats and 28 House Republicans thought it was appropriate to use reconciliation for the ’01 tax cuts, since they voted for the bill.
Revise history #2:
Obviously, the idea was to go back at a later date and make those tax cuts permanent. But things didn’t go according to plan. And now the witching hour is upon us.
Actually, this was the plan, to wait until 2010 and then press for making these policies permanent, not to try to do so earlier. We knew in 2001 that a looming unpopular tax increase would maximize pressure on the fence-sitters, and that by ending them in an even-numbered year we would maximize the chance that in-cycle Members of Congress would vote to prevent a tax increase. Tax-increasing DC Democrats knew this as well, and they could have scheduled this vote last year when they would have had a better chance of winning. Or had they enacted a budget resolution conference report this year, they could have created a reconciliation bill that would have allowed them to get their policy win with only 50 Senate votes + the VP. Because they failed to enact a budget resolution and create a reconciliation bill, they must now wrestle with an Senate minority that has significant leverage. Democrats gave Senate Republicans this leverage by failing a basic task of governance.
Ignore the biggest part of the deficit effect:
According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion in revenue over the next 10 years.
I’m not sure why he quotes the TPC’s $680 B figure when the Administration’s $970 B figure is larger. He focuses on the deficit delta between the two sides while ignoring the deficit-increasing effect of the tax policies President Obama has proposed. Setting aside the President’s AMT policy for a moment, and using Dr. Krugman’s language with Treasury’s numbers, he also could have written that “the Obama proposal to extend the Bush tax cuts for everyone but the rich would cost the federal government $3.1 trillion over the next 10 years.” The $680/$970 B delta between the two sides of this debate is a lot of money and an important policy difference. At the same time, if you’re worried about budget deficits, you shouldn’t ignore the much larger $3.1 trillion deficit effect that is not in dispute between the parties.
Focus on the super-rich while pushing a policy that also taxes the sort-of-rich:
And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 per year. … the majority of the tax cuts would go to the richest one-tenth of 1 percent.
Yes, the super-rich make a lot more than the rich. This is a feature of pre-tax income, not of tax policy. Thanks to our progressive income tax structure, the post-tax distribution of income is more compressed than the pre-tax distribution. The 2001 and 2003 tax cuts increased this compression. The post-tax distribution is still wide. The super-rich are still that way even after the government takes a greater share of their income than it does from the non-rich.
Multiplication tells us that if you raise their marginal tax rate by the same number of percentage points, you’ll collect a lot more money from a super-rich person than from a sort-of-rich person. Dr. Krugman flips this on its head by saying policymakers are “giving” these people money, rather than “not taking it.” It’s different.
If this is a big concern to Dr. Krugman, he could propose a much higher marginal income tax rate on the super-rich. He instead proposes we also raise taxes on someone earning $260K per year. That’s still a lot more than most people make, but there’s a big difference between $260K of annual income and someone who earns millions per year.
Dismiss the small business argument:
[W]e’re told that it’s all about helping small business; but only a fraction of small-business owners would receive any tax break at all.
True, but those are also the successful small business owners who are (a) employing people and (b) the ones we need to hire more people.
Dismiss the macro argument:
Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.
Note that he does not reject the argument that tax increases will decrease economic activity. He instead argues it’s inefficient – that the macroeconomic bang for the deficit increase buck is small. He argues that increased government spending is more cost-effective. Even if you think he’s right, Congress is not going to enact another few hundred billion dollars of increased government spending as he proposes. The question is therefore not the one Dr. Krugman would like, which is “Do you prefer preventing tax increases or increasing government spending?” The question Members of Congress instead face is, “In isolation, do you want taxes to go up on anybody four months from now, including successful small business owners whom we hope will hire more workers?”
Demonize those who disagree with you
So what’s the choice now? The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class – which is an expensive proposition in its own right – but to let those provisions benefiting only people with very high incomes expire on schedule. Republicans, with support from some conservative Democrats, want to keep the whole thing.
And there’s a real chance that Republicans will get what they want. That’s a demonstration, if anyone needed one, that our political culture has become not just dysfunctional but deeply corrupt.
Dr. Krugman concludes by declaring it an outrage to oppose raising taxes in a weak economy because certain people whom he thinks are undeserving will get to keep more of their income. He ends with his usual view that anyone who disagrees with him is stupid, evil, and corrupt.
The coming Democratic split on Social Security
I have a post on The Daily Beast today about the prospects for Social Security reform.
You can read it at The Daily Beast or here.
Thanks to The Daily Beast staff, who were efficient and friendly.
A Democratic split is coming on Social Security.
On one side is the president, who said Tuesday in Ohio, “I have been adamant in saying that Social Security should not be privatized and it will not be privatized as long as I am president. The population is getting older, which means we’ve got more retirees per worker than we used to. We’re going to have to make some modest adjustments in order to strengthen it. And what we’ve done is we’ve created a fiscal commission of Democrats and Republicans to come up with what would be the best combination to stabilize Social Security not just for this generation, but the next generation. I’m absolutely convinced it can be done.”
On the other side we have Paul Krugman, who wrote in The New York Times earlier this week, “The program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.”
Krugman continues, “Social Security’s attackers claim that they’re concerned about the program’s financial future. Instead, it’s all about ideology and posturing. To a large extent they rely on bad-faith accounting. But
While Krugman names Obama fiscal commission co-chairman Alan Simpson, he also is targeting Democrats such as fiscal commission chairman Erskine Bowles and House Majority Leader Steny Hoyer.
Let’s look at how a Social Security deal might come together, first in the president’s commission and then on Capitol Hill.
A few conservatives who say that personal accounts alone can fix Social Security will oppose any deal that includes changes to benefit spending promises or tax increases, so they’re on the outside no matter what. That group is small but could cause a little trouble by (incorrectly) promising gullible and nervous conservative members of Congress that a free lunch solution is theoretically possible.
For most Republicans, three things are important: permanently solving Social Security’s cash flow problem, not raising taxes, and allowing younger workers to voluntarily redirect some of their current payroll taxes into personal accounts. Republicans know these “carve-out” accounts are anathema to most Democrats and impossible with a Democratic president. To pick up enough Republican support to be viable, a deal must therefore significantly, if not permanently, address Social Security’s long-term cash flow problem and must not raise taxes. If a proposed deal includes tax increases, I think all but a few Republicans will walk away. To get a deal, Republicans might split evenly on carve-out accounts, but they won’t split on tax increases. The president gets a win by blocking “privatization” (carve-out personal accounts), while Republicans get a win by not raising taxes. The reduction in, if not elimination of, Social Security’s long-term financing problem would be a bipartisan win for which both sides would claim credit.
If I’m right about Republicans on personal accounts and taxes, Democrats will split. Many Democrats would naturally oppose a deal that only slows spending growth and does not raise taxes, even if that deal excludes the carve-out personal accounts they oppose.
The president’s comments Tuesday suggest he is trying to lower the temperature during election season and nudge Democrats toward a deal that some Republicans could support. He could fairly easily convince his fellow Democrats to support a deal that uses trust fund accounting, solves only a fraction of the cash flow problem, and relies heavily on tax increases. But he, or his proxy Bowles, chairman of the fiscal commission, can’t get Republicans to agree to tax increases, and probably cannot get more than a handful of Democrats to fix Social Security’s cash flow problem permanently without tax increases. I expect Democrats in Washington will split on whether a commission deal “cuts benefits” too much, especially if the deal doesn’t raise taxes. They will want to support the president if he leads, but they won’t like the substance of the deal needed to get Republican support.
If a bipartisan deal is at all possible, I expect, therefore, that it will be only a partial solution to the permanent cash flow problem, and it will exclude both carve-out personal accounts and tax increases.
All the while, Krugman and others on the left will argue that the problem is overblown and maybe even nonexistent, the benefit changes are draconian, and the solution is a Trojan horse for privatization or at least dismantling of Social Security. I expect this reaction to be independent of the substance of any deal. Like the fairly small free-lunch personal accounts-only crowd on the right, I expect this much larger group on the left will attack a deal and those who support it. Despite an overwhelming expert consensus that Social Security’s cash flow problems are real, enormous, immediate, and harder to solve the longer we wait, this group will argue that little is wrong and a solution can wait.
The president therefore has two challenges: How does he convince enough congressional Democrats to support a deal they won’t like because it doesn’t raise taxes, and how does he mitigate the attacks from those on the left who deny a serious and immediate problem even exists?
This would be easier for the president if a center-left coalition were feasible, but the substance of Social Security reform has always lent itself to a center-right coalition that excludes a small conservative fringe and cleaves the left in two. This is not a natural coalition for President Obama, who has so far been willing to nudge his party toward but not lead them to a difficult caucus-splitting choice (see: public option, dropping of). If Republicans take the majority, the president could support and execute a center-right deal despite vigorous opposition from the left. If Democrats retain either the House or Senate majority, he would have to push Speaker Pelosi or a Democratic Senate majority leader to agree to a deal that splits congressional Democrats.
In modern American politics, presidential leadership sometimes means angering many in your own party to accomplish a national goal. If doing so is the only feasible legislative path to addressing this critical policy problem, will the president be willing to lead?
(photo credit: Nick Wheeler)
PAYGO for thee but not for me
The Obama Administration and its allies in Congress argue that upcoming tax increases should be prevented for “the middle class” but not for “the rich.” They say we need to prevent tax increases on the middle class, but that we should not extend the Bush tax cuts for the rich.
Team Obama and their Congressional allies make a three-stage argument:
- tax cuts should be paid for;
- changing the law as Congressional Republicans propose would mean “extending the Bush tax cuts for the rich” and increasing the budget deficit by almost a trillion dollars; and
- we need to reduce the budget deficit.
Over the past eighteen months the President, Speaker Pelosi, and House Majority Leader Hoyer have repeatedly stressed the first point. They argue that both spending increases and tax cuts need to be “paid for”: the resulting deficit increase must be offset with other spending cuts or tax increases. This view is generally referred to as two-sided pay-as-you-go, or two-sided PAYGO. In some cases their legislation has abided by this principle: the deficit effects of the health laws and the recent law giving States $26 B were fully offset using CBO scoring. In other cases they have ignored the principle: the deficit effect of the $862 B stimulus law was not offset.
I disagree with two-sided paygo and I disagree with measuring the deficit effects of these tax policies relative to current law. My point today is not to debate whose version of paygo is right, but instead to demonstrate that those who have set the rules are violating them. I am applying their logic and their rules to the policy positions they advocate.
The Administration and its allies are correct that the current law tax increases they propose take effect on “the rich” would significantly increase federal revenue: $970 B over the next decade compared to keeping this year’s tax policies in effect. This $970 B over ten years is the delta between the two parties as they fight about taxes this Fall. If these tax increases take effect and if Congress does not spend them, projected future budget deficits will be $970 B lower than if the law is changed to prevent these tax increases. This $970 B is a very large amount and I don’t want to suggest that the deficit effect is minor. It’s not. You could argue that we should raise taxes on the rich to reduce the deficit, despite whatever negative effects it may have on small businesses, capital investment, and the pace of the economic recovery. I would disagree with you, but today I’m trying to make a different point.
The first argument made by the President and his allies breaks down because they also want to prevent tax increases on / cut taxes for the non-rich. The President proposes that Congress change the law to prevent tax increases that would otherwise reduce the deficit by $3.1 trillion over the next decade. This includes extending both those policies labeled as “Bush tax cuts” for the middle class, as well as policies from the February 2009 stimulus law that the Administration refers to as “middle class tax cuts.”
The President also proposes that the AMT be permanently fixed to prevent it from biting many more middle-income and upper-middle income taxpayers, rather than having Congress do annual patches. You could describe this as a tax cut relative to current law, or as preventing a (stupid) tax increase in current law. However you describe it, this policy change would take $659 B less revenue from taxpayers over the next decade than current law, and would mean deficits that much higher. I support this policy change and I don’t think it should have to be paid for, but I’m also not in favor of two-sided PAYGO.
The Democratic position is therefore:
- tax cuts should be paid for;
- Republicans are irresponsible for pushing to “extend the Bush tax cuts for the rich,” meaning preventing all tax increases from taking effect January 1, even though doing so would raise future budget deficits by $4.726 T relative to current law;
- and yet Congress should “prevent tax increases on the middle class” from taking effect January 1, even though doing so would raise future budget deficits by $3.756 T relative to current law.
The President would have an intellectually consistent argument if he dropped the first bullet. He could argue that preventing tax increases on the middle class is worth the $3.8 T of higher deficits that would result, but that the economic and fairness effects of the tax increases on the rich are not worth another trillion dollars of higher budget deficits. This view would at least be internally consistent.
What the President and his Congressional allies are arguing, however, is that legislation that would prevent tax increases they like must be offset, but legislation that would prevent tax increases they don’t like does not have to be offset. That violates their well-established and much-trumpeted two-sided PAYGO view.
Both sides have violated PAYGO in the past. The whole point of a PAYGO principle is to prioritize deficit reduction over other desirable policies. If you apply a principle to block the policies you don’t like but exempt yourself from it for policies that you favor, then it’s not much of a principle.
Source for revenue estimates: Treasury’s Green Book (Table 1 and Appendix A).
(photo: alancleaver_2000)
Obama Economy Facts
I have an op-ed running in today’s New York Daily News.
Since the point is to provide lots of facts, below I include a sourced version of it. You can read the clean version at the Daily News or the footnoted version below.
As is usually the case with op-eds, the editors chose the title, not me. I suggested Obama Economy Facts, which is nowhere nearly punch enough for the Daily News.
Thanks to the NYDN staff for their professionalism in working with me.
Bam’s lousy economic record: Let’s just look at the facts, shall we?
By Keith Hennessey
On the campaign trail, President Obama is talking about everything except his own economic record. He attacks his predecessor – a man for whom I worked – as his advisers promise a return to Clinton-era economics.
Rather than hearing about the last two Presidents, voters may instead want the President to explain the economic realities of his own 18-month tenure and what he foresees for the next two years. To further that understanding here are some facts.
At 9.5%, the unemployment rate is 1.8 percentage points higher today than when the President took office. There are 3.3 million fewer U.S. jobs than there were in January 2009. The U.S. economy has lost jobs in 12 of the 18 months he has been office, including the last two months.
In early August of last year, the President declared that, thanks in part to his policies, the U.S. economy was “pointed in the right direction.” We have lost jobs in six of the 12 months since then, for a net decline of 52,000 jobs. The 9.4% unemployment rate when he made this statement climbed to 10.1% and has since declined to 9.5%, still higher than it was last August.
The President signed into law an $862 billion stimulus law and two health laws that will create $788 billion of new entitlements over the next decade. Combine these with countless other smaller spending bills, several of which were labeled as emergencies and therefore not paid for, and the U.S. government is $2.5 trillion more in debt than on the day this President took office. That’s $8,000 more debt for every American man, woman, and child.
Signed free trade agreements with allies Colombia, Panama, and Korea have not been ratified by Congress because the President has not submitted them for approval. For 18 months, all three have sat in his inbox.
That’s the past and present. What, then, does the President have to offer a skeptical voter for the future?
Assuming his economic agenda is enacted into law, the Obama administration projects unemployment would average 9.0% over four years of the President’s term. If you assume he is re-elected, they project unemployment over his two terms would average 7.6%.
For comparison, unemployment during former President Bill Clinton’s tenure averaged 5.2% and during President George W. Bush’s tenure it averaged 5.3%. Former President Jimmy Carter’s unemployment rate averaged 6.5%.
Treasury Secretary Timothy Geithner says the President is returning America to “the pro-growth tax and fiscal policies” of the Clinton administration. Yet the nonpartisan Congressional Budget Office estimates this administration would have the federal government spend more than 24% of the overall U.S. economy over his term, a government 25% larger than during the Clinton era. Budget deficits would average 8.7% of the U.S. economy, compared to Clinton’s average 0.4% surplus.
The President proposes more government spending, higher tax rates and more debt than his Democratic predecessor.
If Americans had devoted all their income from the beginning of 2009 to June 8 of that year, they could have paid off the government debt inherited by this President from all his predecessors. Under the President’s policies, if they were to try this in 2013, they’d have to work until Sept. 24 9.
While attention focused on taxpayer funds invested in big Wall Street banks, Fannie Mae and Freddie Mac cost taxpayers $291 billion last year and will cost an additional $98 billion over the next decade. The new financial reform law does not address these two firms, which continue to cost taxpayers about $2 billion each month.
If the President has his way, on Jan. 1, taxes on many successful small business owners will rise. Investors will pay higher taxes on their capital gains and dividends, and some small businesses and family farms will once again be subject to death taxes. This isn’t undoing tax cuts for the rich, it’s raising taxes on small businesses.
Tanning salons and tobacco are not the only new taxes Americans will face. Drug companies, health plans and medical device manufacturers will charge higher prices as they pass new taxes on to their customers. Health Savings Accounts will no longer be usable for tax-free purchases of over-the-counter medications. Some workers will pay higher Medicare taxes, and some investors will pay a new 2.9% 3.8% tax.
Individuals and families who cannot afford health insurance will face a new tax, as will employers who cannot afford to provide their employees with health insurance. The President proposes to tax charitable contributions for high-income donors, American firms competing with foreign firms overseas, and, indirectly, your electric bill.
These facts may explain why President Obama wants to talk about somebody else.
Backup and Sources
- Unemployment rate = 9.5% in July 2010. Source: Bureau of Labor Statistics.
- Unemployment rate = 7.7% in January 2009. 9.5 – 7.7 = 1.8. Source: Bureau of Labor Statistics.
- In January 2009, total nonfarm payroll employment = 133.549 M. In July 2010, total nonfarm payroll employment = 130.242 M. The delta is 3.307 M. Source: Bureau of Labor Statistics. (Select More Formatting Options, then choose “Original Data Value” and Retrieve Data.
- Count the months that are negative, starting with the data point for February 2009. June and July 2010 are negative. Source: Bureau of Labor Statistics.
- “Today we’re pointed in the right direction.” Presidential Rose Garden statement, August 7, 2009.
- Count the months that are negative, starting with the data point for August 2009, the first one after this statement. Source: Bureau of Labor Statistics.
- In July 2009 (the data point for the Presidential statement), total nonfarm payroll employment = 130.294 m. In July 2010, total nonfarm payroll employment = 130.242 M. The delta is -52 K. Source: Bureau of Labor Statistics.(Select More Formatting Options, then choose “Original Data Value” and Retrieve Data.)
- Unemployment rate = 9.4% in July 2009, the data point for which the President made his “pointed” statement. The rate climbed to 10.1% in October 2009, and was 9.5% in the latest report for July 2010. Source: Bureau of Labor Statistics.
- All told, CBO now anticipates that the law will increase deficits by $862 billion between 2009 and 2019. Source: Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020, Appendix A.
- For the $788 B figure I included only the net deficit impact of the new insurance coverage provisions. I could have chosen a larger number to incorporate other deficit-increasing provisions. Source: Congressional Budget Office, Score of H.R. 4872 in a letter to Speaker Pelosi, Table 1 on page 5.
- Debt held by the public on January 20, 2009: $6,307 B. Debt held by the public on August 12, 2010: $8,787 B. The delta is $2.48 trillion. Source: TreasuryDirect.
- U.S. population = 310 M. $2.48 T / 310 M = $8,000 per person. Source: Census.
- “The Colombia Free Trade Agreement was signed on November 22, 2006. Colombia’s Congress approved the agreement and a protocol of amendment in 2007. Colombia’s Constitutional Court completed its review in July 2008, and concluded that the Agreement conforms to Colombia’s Constitution.” Source: U.S. Trade Representative.
- The Panama Free Trade Agreement was signed on June 28, 2007. Panama approved the TPA on July 11, 2007. Source: U.S. Trade Representative.
- The Korea Free Trade Agreement was signed on June 30, 2007. “If approved, the Agreement would be the United States’ most commercially significant free trade agreement in more than 16 years.” Source: U.S. Trade Representative.
- The Administration’s projected annual average unemployment rates are: 2009 = 9.3%, 2010 = 9.7%, 2011 = 9.0%, 2012 = 8.1%. These average to 9.025%. Source: Office of Management and Budget, Mid-Session Review, Fiscal Year 2011, Table 2 on page 9.
- The same table shows projected annual average unemployment rates are: 2013 = 7.1%, 2014 = 6.3%, 2015 = 5.7%, 2013 = 5.3%. The eight-year average is 7.5625%. Source: Office of Management and Budget, Mid-Session Review, Fiscal Year 2011, Table 2 on page 9.
- Clinton average is calculated from February 1993 through January 2001. Bush average is calculated using February 2001 through January 2009. Carter average is calculated using February 1977 through January 1980. Source: Bureau of Labor Statistics.
- “Rather than creating a false prosperity fueled by debt and passing the bills on to the next generation, we need to restore America to a pro-growth tax and fiscal policy,” Treasury Secretary Timothy Geithner, Remarks as prepared for delivery at the Center for American Progress, August 4, 2010.
- CBO estimates outlays/GDP ratios: 2009 = 24.7%, 2010 = 24.8%, 2011 = 25.4%, 2012 = 23.7%. These average to 24.65%. Source: Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011, Table 1-2 on page 5.
- Outlays / GDP averaged 19.6% during the Clinton Administration. Source: My post Comparing Obama Economics to Clinton economics. Note this table shows a lower average for President Obama’s average spending because it uses the Administration’s more optimistic OMB projections. For an apples-to-apples comparison here I’m using CBO numbers.
- CBO estimates deficit/GDP ratios: 2009 = 9.9%, 2010 = 10.3%, 2011 = 8.9%, 2012 = 5.8%. These average to 8.725%. Source: Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011, Table 1-2 on page 5.
- Source: My post Comparing Obama Economics to Clinton economics, which uses data from OMB’s Historical Table 1.2.
- Source: My post Comparing Obama Economics to Clinton economics. Revenues/GDP are projected to be lower during President Obama’s term because of the weak economy, but beginning in 2013 the top income tax rate will be higher than during the Clinton Administration.
- Debt held by the public on January 20, 2009 = $6,307 B. 2009 GDP = 14,119 B. Therefore debt / GDP = 44.67%. Assuming a linear GDP throughout the year, June 8th is 44.67% through the calendar year. Source: TreasuryDirect and Commerce Department, Bureau of Economic Analysis.
- I made an error here – it should be September 9th rather than September 24th. CBO projects debt held by the public at the end of CY 2012 = 11.579 T and projects 2013 GDP = 16.676 T. Therefore debt / GDP = 69.44%, getting to September 9, 2013.
- Source: Congressional Budget Office, CBO’s Budgetary Treatment of Treatment of Fannie Mae and Freddie Mac (January 2010), Table 2 on page 8.
- Source: Treasury’s “Green Book,” General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals, pp. 127-128.
- Source: Treasury’s “Green Book,” p. 131.
- Source: Treasury’s “Green Book,” p. i footnote 1.
- Section 5000B as added by Sec. 10907 of Public Law 111-148 (H.R. 3590), “Imposition of tax on indoor tanning services.”
- Section 701 of Public Law 111-3 (H.R. 2), “Increase in excise tax rate on tobacco products.”
- Section 9008 of Public Law 111-148 (H.R. 3590), “Imposition of annual fee on branded prescription pharmaceutical manufacturers and importers.”
- Section 9010 of Public Law 111-148 (H.R. 3590), “Imposition of annual fee on health insurance providers.”
- Section 9009 of Public Law 111-148 (H.R. 3590), “Imposition of annual fee on medical device manufacturers and importers.”
- Section 9003 of Public Law 111-148 (H.R. 3590), “Distributions for medicine qualified only if for prescribed drug or insulin.”
- Section 9015 of Public Law 111-148 (H.R. 3590), “Additional hospital insurance tax on high-income taxpayers.”
- Chapter 2A as added by Section 1402 of Public Law 111-152 (H.R. 4872), “Unearned income Medicare contribution.”
- Section 5000A(b) & (c) as added by Sec. 1501(b) of Public Law 111-148 (H.R. 3590), “Shared Responsibility Payment” and “Amount of penalty.”
- Sec. 1513 of Public Law 111-148 (H.R. 3590), “Shared responsibility for employers.”
- Source: Treasury’s “Green Book,” p. 129.
- Source: Treasury’s “Green Book,” throughout pp. 39-49.
- Source: The President’s Budget would establish “emissions allowances” from an economy-wide carbon cap. A cap-and-trade is economically equivalent to a carbon tax with some of the revenues raised rebated to carbon producers. Source: The President’s Budget, FY 2011, Table S-2, footnote 3 on p. 4.
(photo credit: White House photo by Pete Souza)
Live on KQED
Dr. Laura Tyson and I will be live on KQED radio’s Forum for an hour today, beginning at 9 AM PDT / noon EDT.
You can listen live here.
Roles of the President’s White House economic advisors
The White House has announced that Dr. Christina Romer, Chair of the President’s Council of Economic Advisers, will soon resign and return to California. This comes on the heels of Budget Director Peter Orszag’s resignation. Dr. Romer is generally considered to have the inside track to replace Janet Yellen as President of the San Francisco Federal Reserve Bank when Dr. Yellen moves to become Vice Chair of the Federal Reserve Board of Governors.
There is a lot of press speculation about why Dr. Romer is leaving and about why Budget Director Peter Orszag left. This speculation centers on the personalities and interactions among various members of the President’s economic team.
I think I can instead add a little value by describing the different positions that make up the President’s economic team, and in particular by explaining the roles of the heads of the National Economic Council and the Council of Economic Advisers. The NEC is run by Dr. Larry Summers, while Dr. Romer is the outgoing CEA Chair.
White House staff
Let’s begin with some formal organization that is broader than just the economic team. Within the Executive Branch there is a bureaucratic structure called the White House Office (WHO) and another called the Executive Office of the President (EOP). The White House Office is a subset of the EOP. Most of the names you know and the people you see on TV and in the press labeled as “White House staff” work in the White House Office:
- Chief of Staff Rahm Emanuel and his two Deputy Chiefs of Staff Jim Messina and Mona Sutphen;
- Senior Advisors David Axelrod, Valerie Jarrett, and Peter Rouse;
- Communications Director Dan Pfeiffer and Press Secretary Robert Gibbs;
- White House counsel Bob Bauer;
- head of Legislative Affairs, Phil Schiliro;
- Staff Secretary Lisa Brown;
- heads of the three White House policy councils:
- National Security Council (Jim Jones);
- National Economic Council (Larry Summers);
- Domestic Policy Council (Melody Barnes);
- and a handful of others.
Each of these senior White House staffers reports to the President, and each has a title in the form of Assistant to the President for X. Rahm Emanuel is Assistant to the President and Chief of Staff. Phil Schiliro is Assistant to the President for Legislative Affairs. Larry Summers is Assistant to the President and Director, National Economic Council.
Each Assistant to the President (AP) has a staff of 1-4 Deputies, up to about eight Specials, and also junior staff. The Deputies are formally Deputy Assistants to the President, and the Specials are Special Assistants to the President. Technically, each reports “to the President,” but each does so through their respective AP.
Each AP has an office in the West Wing of the White House where the Oval Office is located. Generally, proximity to the President correlates with power.
Now let’s move outside the bureaucratic structure of the White House Office. The Executive Office of the President (EOP) includes the White House Office. It also includes two large organizations, the Office of Management and Budget and the US Trade Representative, and several smaller ones, including the statutorily created Council of Economic Advisers, the Council on Environmental Quality, and the Office of National Drug Control Policy. The OMB Director and CEA Chair have offices in the Eisenhower Executive Office Building with many other White House staff, and are informally considered “White House staff.” Importantly, these two attend the daily White House senior staff meetings, which thus makes them a part of the President’s core team just like the head of legislative affairs, the senior advisors, the communications director and press secretary, and the heads of the policy councils. If you want to get formal and technical, the OMB Director and CEA Chair are “EOP staff,” not “White House staff,” but in the real world there is no practical difference, and you should think of them as White House advisors to the President.
The USTR is across the street and has a little more distance from the President and the core team. Also, he or she is often jetting around the world, so the USTR often plays in his or her trade sandbox and is slightly removed from other, non-trade, issues.
The President’s Economic Team
The formal roles of the economic team members remain roughly constant from one Administration to the next, but the informal roles depend on the President, his management style, and the people on his team.
- Director of the National Economic Council (NEC) – Now held by Dr. Larry Summers. The NEC Director’s job is to coordinate economic policy for the President.
- Deputy Chief of Staff for Policy – This is now Mona Sutphen. The DCOS’ involvement in economic policy is, I think, very particular to any given White House. In the Bush 43 White House, the DCOS was heavily involved in all policy areas, including economic policy. This person is not only close attuned to the needs of the President and the Chief of Staff, but he or she has “visibility” into other policy areas as well and a better view of the macro policy picture than some members of the economic team. While the DCOS may be less of an economic specialist than most other members of the economic team, he or she is usually “wicked smart.” The DCOS and NEC Director are White House staff and therefore are not Senate-confirmed. Every other position listed below is subject to Senate confirmation.
- Chair of the Council of Economic Advisers (CEA) – Until about September 1, this is Dr. Christina Romer. After that, who knows? The CEA Chair is generally the chief economist in the White House and almost always comes from an academic background. Correction: Alan Greenspan was a consultant, not an academic. (hat tip: JD Foster)
- Director, Office of Management and Budget (OMB) – Dr. Peter Orszag had this job until last week. Jack Lew is the President’s nominee to replace Dr. Orszag. A Member of the Cabinet, the OMB Director develops, implements, and manages the budget for the President. He or she also is the senior management officer within the executive branch, supervising the regulatory process and other management oversight. Imagine trying to manage implementation of a $2 trillion budget.
- Secretary of the Treasury – Tim Geithner has this role. The Secretary of the Treasury is generally considered the President’s chief economic spokesman and often is considered the President’s senior economic advisor. The reality depends on the specific issues and the people involved. The Secretary of the Treasury is the primary face of the Administration on the economy and economic policy, and is usually a major power player within the Administration on economic policy, if not the principal player below the President. Formally his turf is narrower than most foreign finance ministers, who usually exercise OMB’s budget function as well. But his policy domain includes taxes and debt management, domestic and international finance, going after terrorist financing, and the U.S. dollar; he often plays a role in many other areas as well. The Secretary of the Treasury is usually particularly highly visible in international economic policy and interactions with financial markets and institutions.
- Secretary of Commerce – This is now held by Gary Locke. Generally considered the next most important economic Cabinet position, Commerce is sometime thought of as the “industry and trade” slot. During the financial crisis, President Bush had Secretary of Treasury Hank Paulson working on financial institutions and markets, and he had Commerce Secretary Carlos Gutierrez as his lead negotiator on auto industry issues. That’s a traditional sectoral division of labor. Less well known is that Commerce also handles things like technology and telecommunications policy, meteorology (through NOAA, the National Oceanographic and Atmospheric Administration), and the Census, along with a bunch of other stuff.
- U.S. Trade Representative (USTR) – Now held by Ron Kirk. USTR is the President’s lead trade negotiator.
- The Secretaries of Labor, Energy, Health and Human Services, Agriculture, Transportation, Housing and Urban Development, and the head of the Environmental Protection Agency each handle sectors of the economy with significant economic impact.
White House Policy Councils
The policy councils are organizational structures centered in the White House that the President uses to help him make policy decisions. The National Security Council was the original policy council, formed by President Truman in 1947. Presidents Johnson and Nixon had domestic policy staffs, which turned into the Office of Policy Development in the White House. President Clinton formalized the creation of a separate National Economic Council and a Domestic Policy Council, making three policy council staffs. President Bush (43) created a fourth, the Homeland Security Council, which has since been folded back into the National Security Council.
Each Council is chaired by the President and consists of Cabinet members and, in some cases, White House staff. Everyone listed below on the economic team is a member of the National Economic Council, and there’s an NEC staff of maybe 20ish professionals headed by Larry Summers. While formally the term National Economic Council refers to the set of principals (Cabinet officials and Assistants to the President) who comprise the council, colloquially the term NEC usually refers to the head of the Council (Larry Summers) and his or her staff.
The policy councils divide up all of policy – every policy issue “belongs” to a policy council. Any disputes about which council owns an issue are resolved by the Chief of Staff. The respective policy council staff coordinate that policy issue for the President. The word coordinate is carefully chosen – it does not mean “run” or “decide” or “implement.”
I used to describe it to new NEC staff like this:
A big part of our job is to be the official and definitive source within the Administration for the answer to the question, “What is the President’s policy on X?” where X is anything have to do with economic policy. That can be simple, like “What is the President’s policy on extending the capital gains tax rate?” Or it can be far more complex, like “What is the President’s policy on Senator Grassley’s amendment to tighten the three-entity rule in calculating income limits on certain farm subsidy payments?”
Part of our job is to know and explain the answer to every one of those policy questions, but it’s not our job to decide the President’s policy. Our job is instead to:
- figure out which policy questions need a Presidential decision;
- get him the information he needs to make a decision, and make sure it’s accurate, complete, useful, and well-presented;
- make sure he has maximum flexibility and as wide a range of options as possible, and that he understands the merits of the various options;
- make sure he gets recommendations from his advisors, especially when they disagree; and
- make sure we get a decision from him in a timely fashion.
Once we get a decision, it’s our job to work with the rest of the President’s team in the White House and the Cabinet to make sure that decision is faithfully implemented and accurately and convincingly communicated. Others take the lead on those tasks, while we help them understand the President’s policy so they can do their jobs well.
NEC, CEA, and the policy process
It’s easy to confuse the very different roles of the NEC and the CEA.
The NEC Director (Summers) runs the economic policy process. It’s a process management role. When an economic policy issue needs a Presidential decision, the Director of the NEC manages the process within the White House and the Executive Branch that ultimately results in a Presidential decision. Policy council staff run many meetings and conference calls.
The NEC Director generally has an advisor role and an honest broker role. The advisor role is the high visibility one that everyone thinks is fun: you get to tell the President what you think he should do on every economic policy decision he needs to make.
The honest broker role consumes much of the NEC Director’s time. Each week the NEC Director and his or her staff of about twenty run dozens of meetings and conference calls of senior Administration officials to discuss and debate policy questions, gather recommendations, and ultimately advise the President. In my view, the best NEC Directors were the ones who would not impose their own policy views on this decision-making process, but instead would let the 5-20 other senior advisors to the President slug it out. The NEC Director would make sure the debates were informed by accurate information, solid policy and legal analysis, and rigorous logic and strategy. If a Cabinet Secretary or a senior White House staffer thinks that the NEC Director is going to prevent the President from hearing his or her advice, or that the NEC Director has his thumb on the decision-making scale, then that Cabinet official or White House staffer will often seek a back channel to bypass the decision-making process and provide unfiltered ex parte input to the President. The President has to deal with so many issues and so many decisions that if this NEC-led process breaks down, the wheels eventually come off.
In addition to whatever personal skills and abilities he or she brings to the job, most of the NEC Director’s power comes from his or her proximity to the President (physically, bureaucratically, and sometimes personally), from the breadth of his turf, which covers all economic policy, and most importantly from the reality that he or she runs the meetings and controls the paper. If the NEC Chair is effective and perceived as fair by other members of the President’s economic team, he also gains power from other senior advisors who want to help the NEC policy process succeed, even when they sometimes disagree with the President’s decisions.
The CEA Chair (Romer) is the leader of a team of three Members of the Council of Economic Advisers. One CEA chair described CEA’s role as an internal economics consulting shop within the White House. The CEA Members all have economics PhDs and always come from an academic background, as do most of their senior staff economists. The senior staff economists generally take a one year leave of absence from their academic positions at universities. Junior staff economists are often non-tenured young academics or newly-minted PhDs. Some of the staff economists are detailed from other government agencies.
The CEA chair and staff manage all the economic data statistics for the President and prepare memos for him which explain the data. They analyze the economics of policy options, help design those options, and help critique other options. They spend a lot of time explaining economics and educating the President, other members of the economic team, other Presidential advisors, and the public about the basic economic facts and logic that underlie every policy question.
Therefore NEC does economic policy and decision-making, and CEA does economics. They’re different. CEA staff apply economic theories and data to economic policy, while NEC staff operate at the intersection of economics, policy design, the law, communications, politics, strategy, and the practical aspects and constraints of legislating and managing a bureaucracy.
Simple example: Should the President support a $1 gas tax increase?
This is not just an economic issue. There are effects on energy policy, on environmental policy, on transportation policy, and on the budget. There are legal issues, tax policy and administration issues, and effects on State and local governments. There are political constraints, vote-counting limitations, and interest group pressures and counterpressures. There are communications and electoral effects. For this supposedly simple yes/no question, let’s look at everyone within the Executive Branch who has a legitimate claim to providing advice to the President.
- NEC would host the meetings.
- CEA would attend and explain the economics of a gas tax increase – what would happen to fuel consumption, how would supply and demand shift, what would be the effect on driving and on oil imports. CEA would often tap into other expert economists inside and outside government for this information and analysis.
- Treasury would attend because it’s a tax issue. They would be the lead in expressing views on the tax policy, design, and administration issues, as well as on the broader economic effects.
- OMB would attend and be happy that the deficit would be lower. In an R Administration, OMB would sometimes oppose this policy because of the tax increase. But then somebody (probably Transportation or EPA) would argue we should spend the money and OMB would push back hard. OMB would also explain how gas taxes interact with the Highway Trust Fund.
- Commerce would attend because of the broad economic impact across a range of industries.
- Transportation would attend because it involves, duh, transportation.
- EPA would attend and be excited that emissions would be lower. They would also snipe with Transportation over who had jurisdiction.
- Energy would attend because it’s an energy issue, even though the Department of Energy really doesn’t do fuel taxes or vehicles.
- Interior might want in because they do oil and gas production.
- Agriculture would want to be included because of the significant effects on farmers, both for their farm equipment and the cost of shipping their goods.
- Since this is principally a domestic economic issue, you probably don’t need State or USTR there.
In the Bush Administration, we would also include the Chief of Staff or someone from his office, White House Counsel (always good to have a lawyer in the room), White House legislative affairs (to tell us where the votes were, which Member would scream loudest, whether we had a chance of enacting it, and if so, how best to do it); White House political affairs (usually to discuss expected support and opposition from outside interest, far more than the raw politics of the issue), White House Communications and the Press Secretary, and someone from the VP’s staff. For a gas tax increase we’d also include the head of the White House Council on Environmental Quality.
If you have two from NEC (running the meeting) and the Chief’s office, and only one from each other shop (don’t forget the other senior White House Advisors listed above), that’s at least 18 people in the room. At least. Each has a legitimate claim to be there, and each has a view on whether the President should support a $1 gas tax increase.
I would guess that in the Obama White House they would also include Carol Browner, who has a new role as an Assistant to the President for Energy & Environment Issues (one of the new czars), as well as Valerie Jarrett, who among other things handles State and local issues for the President. If the Feds raise gas taxes, that makes it harder for the States to do the same.
On a straightforward question like a gas tax increase for which the substantive analysis is easy, there would probably be three meetings: one of mid-level White House and Agency staff chaired by the NEC Deputy or the NEC Special who handles energy issues, a principals meeting of Cabinet-level officials and senior White House advisors chaired by the NEC Director, and then a meeting with the President. I’d guess that maybe 200-300 man-hours (of very senior people) would precede a 45-minute decision meeting with the President.
Can it be a smaller meeting? Absolutely, and sometimes it is. You can always have fewer people involved, but at a minimum it’s important that the President understand all the dimensions of the decision. Of course, if you cut people out, especially from access to the President, it’s harder to get them to play as part of the President’s team.
NEC’s primary role (Summers) is to manage this circus for issues within his broad scope, keep it moving forward, and make sure the result of that process is useful to the President. CEA’s primary role (Romer) is to participate in that process as the lead economist.
I hope this explanation shows why CEA is(almost, ex Greenspan) always run by an academic PhD economist, and NEC is often run by someone without an academic economics background but instead with a policy or management background. Dr. Laura Tyson, Dr. Larry Lindsey, and Dr. Larry Summers are all PhD economists who ran the NEC. Bob Rubin, Gene Sperling, Steve Friedman, Al Hubbard and I were not PhDs or academic economists.
It can be particularly tricky when the head of NEC is a brilliant and well-regarded economist in his or her own right. Why should the President look to the CEA Chair for the formal economics, when he already has a brilliant economist as his NEC Director? Why does he even need the CEA Chair in the room? At the same time, are academic economic training and credentials the right skill set to manage a policy process, be an honest broker, and balance the economics with all the other factors that go into a Presidential decision?
I can see at least three obvious structural differences between the way the Obama economic team operates and the way we did during the Bush 43 tenure:
- President Obama meets with a few of his principal economic advisors daily. Gut reaction: this is both a blessing and a curse. President Bush met with different configurations of his advisors as needed, rather than with the same group each morning. During normal times this averaged 2-3 meetings with the President per week. During the financial crisis it was almost every day, and sometimes more than once on a busy day.
- The proliferation of White House czars means that economic policy processes and decision-making are more dispersed in the Obama White House. As best I can tell, NEC did not run the health policy process for President Obama in 2009-2010, nor the cap-and-trade policy process, as it did during the Bush era. You can decide whether that’s good or bad.
- The current NEC Director has previously served as Treasury Secretary and is a leading academic economist in his own right and would be extremely well qualified to chair the CEA. This makes him at least a potential threat to both Secretary Geithner and the CEA Chair, and it means that everyone needs to work extra hard to make sure their roles are understood and that they can function together as a team.
Thanks to a couple of friends who helped me improve this post. I’d like some feedback. Is this kind of process and structural description interesting and useful, or should I just stick to explaining and commenting on the policy?
(photo credit: White House)
Understanding the Social Security Trustees Report
Spendthrift teenager Billy Jones sits at the kitchen table, proudly examining a piece of paper.
“Why are you so happy, Billy?” asks his skeptical eight-year old sister, Suzy.
“Because today I am updating the balance on my Social Security Trust Fund and my Social Security credit card,” replies Billy.
“Wait, I thought you had terrible credit,” asks Suzy. “Is this a real credit card, like the one you use when your allowance runs out and you keep spending money?”
“Well, no. Technically this is more like an American Express card. It looks just like a credit card, but I have to pay the full balance immediately every time I use it. There’s no credit line attached to it, and it doesn’t let me borrow. But I like to pretend it’s a real credit card.”
Suzy sighs. “You have this AmEx-like card, and you call it your Social Security Card, right? asks Suzy.
“Right,” says Billy. “And once a year I figure out how my Social Security financial picture looks, and I issue a report I call the Social Security Trustees Report. Today is that day.”
Suzy shakes her head. “And you’re smiling. I was afraid of this. Let me review the situation to make sure I understand it. You typically get an allowance from Mom and Dad of about $18,000 per year. That’s money that the rest of us in the family don’t get to spend, it’s all for your purposes. You typically spend more than your allowance, about $20,000 per year, and you’ve been gradually accumulating credit card debt (on a real credit card that lets you borrow money from others). Lately you’ve been spending much more – like $25,000 this year and running up a huge amount of new credit card debt. Two days ago we looked at you lobbying Mom and Dad to allow your allowance to increase by about $500 per year on January 1st. I complained because that’s $500 less each year for the rest of the family.”
“Right, but you’re an irresponsible little sister who won’t let me have a bigger allowance when I have this enormous credit card debt.”
“Yes, but you have a bad habit of taking your allowance increases and spending them, as you did with that health care thing. But let’s not rehash Tuesday’s argument. As I understand it, you have two expensive spending habits, both centered on your iPhone: you spend a lot of money buying both music and movies. For some reason that I don’t understand, you call the music “Social Security,” and the movies you call “Medicare.”
“These two spending habits are growing rapidly. This year you’ll spend $4,800 on ‘Social Security’ music, and another $3,600 on ‘Medicare’ movies.”
“So far, so good,” says Billy.
“Right. And you always charge the music you buy to your ‘Social Security Card,’ and you charge the movies to your ‘Medicare Card.’ But these aren’t real credit cards that let you borrow. They work like American Express cards that require you to pay the full balance as soon as you incur the cost.”
“Now of the $18,000 per year that you get in total allowance from Mom and Dad, some of that is for specific chores that you do. This year about $4,400 of that $18,000 total allowance is compensation for mowing the lawn, and you dedicate that portion of your allowance to your Social Security music spending. You call that your Social Security payroll tax allowance.”
“Uh huh.”
“And this year another $1,200 or so of that $18,000 annual allowance is compensation for shoveling the snow off the driveway. You dedicate that portion of your allowance to buying Medicare movies. You call that your Medicare payroll tax allowance.”
“Doin’ great, sis.”
“Thanks. Now today let’s focus just on Social Security. Since this card doesn’t actually let you borrow, you have to immediately find the cash you need when you buy Social Security music. This year you will spend $4,800 on Social Security music. You’ll take the $4,400 of dedicated Social Security payroll tax allowance you got because you mowed the lawn, and use that to pay for most of the music. That’s real cash you’re spending. But you need to find another $400 of cash to pay for the rest of the Social Security music costs incurred this year. That $400 comes from the rest of your allowance, from money not for any particular chore and not dedicated to any particular purpose. We can call that big stream of allowance money from which the additional $400 per year comes your general revenue allowance.”
“Keep going.”
“You project your future music spending will grow faster than your lawn mowing dedicated revenues, so next year you’ll take more than $400 from your general revenue allowance to close the gap between your Social Security payroll tax allowance and your Social Security spending.”
“Right, but it wasn’t always like this,” says Billy. “I used to buy less music, so I was actually making more in dedicated Social Security payroll tax allowance from mowing lawns than I spent on Social Security music.”
“And in past years what did you do with the extra money you made from lawn mowing that you didn’t spend on music? What did you do with that money that was supposed to be dedicated for Social Security spending?”
“Well, I carefully kept track of how much extra I made in Social Security payroll tax allowance that I didn’t spend on Social Security, and I wrote down those amounts on this piece of paper. I call this piece of paper my Social Security Trust Fund. Today I’m issuing my Social Security Trustees’ Report, which shows that I have a balance of $17,400 in my Social Security Trust Fund. I do the same thing for Medicare, sort of. That’s actually a bit more complicated.”
Suzy looks quite puzzled. “This is messy enough, so today let’s stick to just Social Security. You kept track of past Social Security payroll tax allowance that you didn’t spend on Social Security music, and that has accumulated to $17,400.”
Billy, “Well, actually, less than that, but I gave myself credit for interest.”
Now Suzy looks worried. “You gave yourself credit for interest. But I’m confused. What did you do with the actual money in those past years?”
“What money?” Billy asks.
“The portion of your allowance that resulted from your lawn-mowing that in past years you didn’t spend on music. Your extra Social Security payroll tax allowance. Where did the cash go?” asks Suzy.
“Well … I … um …” Billy stutters. “I spent it on other stuff.”
Suzy shakes her head. “Like what? Oh you know, everything. I spent it on boxing lessons so I could defend myself, and I bought an awesome Trapper Keeper notebook with it. I bought a new bike for transportation, and I spent some of it going to museums and movies and parks. I even spent some on my online farm…”
“OK, stop, stop.” You’re telling me you spent on other things the extra allowance that in the past you had dedicated to spend on Social Security music, but you also wrote down those amounts on this Trust Fund paper and said that it should go to future spending on Social Security music. This piece of paper you call a Social Security Trust Fund isn’t actually money. It’s just an accounting convention you created to keep track of how much of those past dedicated Social Security payroll allowance dollars you didn’t spend on Social Security, but you did spend on other things.”
“Plus interest,” adds Billy, nodding.
“Plus interest,” sighs Suzy.
“But this is interest you’re crediting on non-existent money. Now that your Social Security music spending has increased, each year you’re spending all your dedicated Social Security allowance on Social Security music, and you’re tapping into your general allowance to pay for the rest of your Social Security costs. You’re also subtracting this general allowance contribution from the ‘balance’ on your ‘Social Security Trust Fund’ piece of paper, even though there’s no real cash involved here. Subtracting from this so-called Trust Fund balance is pure optics, just like adding to that balance was in the past when you were spending the extra cash for other purposes.”
“You’ve got it,” says Billy proudly. And I am announcing today in my annual report that my Social Security Trust Fund will be depleted in 2037.”
“Riiiiiiight. Why does that matter?” asks Suzy. “That piece of paper that you call a Trust Fund has no actual resources behind it. There’s no money there. But it shows how much I should be able to draw from my future general allowance to spend on Social Security music, above and beyond my dedicated Social Security payroll tax allowance from mowing the lawn! You can tell yourself that, but where does the money come from? You can make whatever promise you want about how much you will spend on music in the future, but the cash is going to have to come from somewhere. In fact, you’re taking $400 away from other needs just this year to pay for this year’s Social Security music spending.”
“Let me ask you this,” continues Suzy. “Suppose we doubled that number on your piece of paper.” Suppose we just cross out the $17,400 balance on your so-called Social Security Trust Fund, and instead we write in $35,000. We’ll round up.”
Billy says eagerly, “Suzy, that’s fantastic! Now I won’t run out of money for music spending any time soon! With $35,000 in my Social Security Trust Fund, it will take decades to draw down that balance.”
“That’s exactly what worries me,” replies Suzy. “We haven’t actually created any more money by doing this. We have just changed an accounting balance for an imaginary account. You can tell yourself that you have more money to spend on Social Security music, but you don’t actually have any more cash, now or in the future. It’s not like a bank account balance, or even like the real credit card debt you have been accumulating.”
“I’m really worried that this Trust Fund balance and your Trust Fund reports are giving you a false sense of security, and they are preventing you from taking a hard look at how much you spend each year on Social Security music. You don’t have enough dedicated allowance this year to pay for your Social Security music spending this year. You have an immediate cash flow problem, in that you’re having to sacrifice $400 of other stuff just this year to make up the difference between what you collect in dedicated Social Security payroll tax allowance, and what you spend on Social Security. And that $400 gap will be bigger next year, and the year after that.”
“Billy, this is a problem for you right now. You need to slow the growth of your Social Security music spending. When you combine that with your spending on movies that you call Medicare, over time it’s going to grow to consume most of your $18,000 annual allowance. It will squeeze out your ability to spend your general revenue allowance on those boxing lessons, those school supplies, those museums and movies and parks and even your online farm.”
“You forget, sis,” says Billy with a grin. “While this Social Security Card isn’t a real credit card, I do have a real credit card. I can just borrow the extra money I need and run a bigger deficit this year. I promised myself I’d spend this $17,400 on Social Security music over time, and I can’t break that promise. I’ll just keep increasing my borrowing on my real credit card to do so.”
“And next year, and the year after that, …” cries Suzy.
“Yep. I plan to increase my spending each year on Social Security music. I’ll draw more from my general fund allowance to pay that which is not covered by my dedicated Social Security payroll tax allowance. If that threatens to constrain my other spending, I’ll just borrow and run up my credit card debt.”
“And you’ll keep doing this until …”
“By my calculations, I’ll need to do something by 2037, when my Social Security Trust Fund runs dry.”
“But there’s no money there! And if you keep telling yourself you’re OK for another 27 years, you’re not going to do anything about the real problem, which is that you can’t afford this growth rate of your Social Security spending. At some point this cash flow problem is going to cause your real credit card debt to get so high that you’ll bump against your credit limit. Then your only options will be to drastically cut back on your Social Security spending, or slash the amount your spend on other stuff, or …”
Suzy gasps. “Oh, no. Or you’ll wait until it’s too late, and then demand a bigger allowance, leaving even less money for the rest of the family.”
Billy sits quietly, failing to suppress a smirk. “And we haven’t even discussed Medicare.”
(photo credit: veganstraightedge)