Lessons from Ireland’s economic collapse

Ireland may have saved civilization at one time, but now Ireland may be pulling down the European economic system.  Robert Samuelson explains what is going on with the Irish economic collapse and the European bailout of yet another country in the Euro-zone:

That Ireland, after Greece, has come to grief is ironic. Until recently, it was admiringly dubbed the Celtic Tiger for emulating Asian countries in attracting foreign investment – Intel and others – and achieving rapid export-led growth. From 1987 to 2000, annual economic growth averaged 6.8 percent; unemployment fell from 16.9 percent to 4.3 percent. But then solid growth gave way to a housing boom and bubble whose collapse left Irish banks awash in bad loans.

One cause was easy credit occasioned by the euro. With its own currency, Ireland could regulate credit. If it seemed too loose, the Central Bank of Ireland could raise interest rates. Adopting the euro meant Ireland surrendered this power to the European Central Bank (ECB), which set one policy for all euro countries. The ECB’s rates, though perhaps correct for France and Germany, were too low for Ireland and some others. Moreover, financial markets pushed rates on government bonds of euro countries down to lower German levels. In 1995, Ireland’s rates were more than a percentage point higher than Germany’s; by 2000, they were almost identical. . . .

So now the reckoning. In Ireland, the burst housing bubble left a massive budget deficit and lifted unemployment to 14 percent. Most European economies suffer from the ill effects of some combination of easy money, unsustainable social spending and big budget deficits. Countries are interconnected, so there are spillover effects. European banks – led by British, German, French and Belgian banks – have $500 billion in loans and investments in Ireland, reports the Financial Times. Large losses could snowball into a broader banking crisis.

Europe’s challenge is no longer just economic. It’s also social and political. Cherished values and ideals are under assault. The euro, intended to nurture unity, has bred discord, as countries assign blame and argue over sharing costs. The social contract is being rewritten, with government benefits and protections being cut.

via Robert J. Samuelson – In Ireland’s debt crisis, an ominous reckoning for Europe.

A single currency set by a central authority, indifferent to individual country’s economy sounds like an experiment that didn’t work.  This is another kind of argument for federalist-style de-centralization.

The “tax expenditures” solution

Here is another proposal for how to cut the deficit.  This one suffers from a toxic premise:

There is a way to cut budget deficits without raising tax rates. “Tax expenditures” are the special features of U.S. income tax law that subsidize mortgage borrowing, health insurance, local government spending and more. Although these subsidies are a form of government spending, they are counted as reduced tax revenue rather than increased government outlays. Yet tax expenditures increase the deficit by hundreds of billions of dollars a year, more than the total cost of all non-defense programs other than Social Security and Medicare.

A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president’s bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

Their most extreme suggestion is to eliminate all tax expenditures, raising $1 trillion a year in additional tax revenue, and then use all but $80 billion of that to cut tax rates. I think that devotes too little money to deficit reduction at a time when fiscal deficits are dangerously large.

Because Bowles and Simpson recognize that eliminating all tax expenditures is politically impossible, they also proposed to eliminate or scale back some tax expenditures while cutting tax rates less to achieve the same $80 billion annual deficit reduction. This option will undoubtedly be opposed by some who find it unfair to limit measures from which they benefit while leaving unchanged tax rules that benefit other people.

Here is a practical alternative toward the same end: Congress should cap the total benefit taxpayers can receive from the combined effect of different tax expenditures. That cap could be set as a percentage of an individual’s adjusted gross income and perhaps subject to an absolute dollar amount.

To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction.

The idea is not to single out a particular tax expenditure. Because the cap would reduce the revenue cost of all tax expenditures without eliminating or reducing specific ones, it would not unfairly burden taxpayers who benefit from one particular type of tax measure.

The budget gain would be substantial. My colleague Daniel Feenberg of the National Bureau of Economic Research and I have estimated that capping an individual’s benefit from tax expenditures at 2 percent of adjusted gross income would reduce the federal deficit in 2011 by $262 billion, or about 1.7 percent of gross domestic product. An additional cap on these benefits in absolute dollar terms would produce a larger deficit reduction.  . . .

The tax expenditures subject to the cap in our calculations reflect deductions for mortgage interest, state and local income and property taxes, and charitable contributions; credits for dependent care, children and certain education costs; and the exclusion of employer payments for health insurance. Congress could, of course, expand or reduce this list. Dropping the deduction for charitable contributions, for example, would reduce the 2011 revenue gain by some $45 billion.

More than 65 percent of taxpayers do not itemize their deductible expenses but use the standard deduction. Nearly half (46 percent) of taxpayers who use the standard deduction would not be affected by a 2 percent cap. For those who are, the cap would apply to various tax credits and to the exclusion of employer payments for health insurance.

via Martin Feldstein – How to cut the deficit without raising taxes.

Doesn’t this assume that all money belongs to the government?  So not taking a person’s money counts as an “expenditure”?  It also says that taxing something that was not taxed before somehow avoids a tax increase.

If you can get past those problems, what do you think of this idea?  Capping deductions might be better than eliminating them entirely, as some are proposing.  But decreasing the mortgage deduction certainly won’t help the housing market–which is necessary for non-government economic growth–nor will cutting back charitable deductions help churches and other private groups step in with the safety nets that government budget-cutting will be eliminating.

Medicare crisis

Part of the new federal  health care plan will be funded by cuts to Medicare, the existing government program that pays for health care for the elderly.  Already, though, an increasing number of doctors are  refusing to take on Medicare patients because the payments are too low.  And starting on January 1 those payments are scheduled to be cut  a whopping 25%.   From The Washington Post:

Want an appointment with kidney specialist Adam Weinstein of Easton, Md.? If you’re a senior covered by Medicare, the wait is eight weeks.

How about a checkup from geriatric specialist Michael Trahos? Expect to see him every six months: The Alexandria-based doctor has been limiting most of his Medicare patients to twice yearly rather than the quarterly checkups he considers ideal for the elderly. Still, at least he’ll see you. Top-ranked primary care doctor Linda Yau is one of three physicians with the District’s Foxhall Internists group who recently announced they will no longer be accepting Medicare patients.

“It’s not easy. But you realize you either do this or you don’t stay in business,” she said.

Doctors across the country describe similar decisions, complaining that they’ve been forced to shift away from Medicare toward higher-paying, privately insured or self-paying patients in response to years of penny-pinching by Congress.

And that’s not even taking into account a long-postponed rate-setting method that is on track to slash Medicare’s payment rates to doctors by 23 percent Dec. 1. Known as the Sustainable Growth Rate (SGR) and adopted by Congress in 1997, it was intended to keep Medicare spending on doctors in line with the economy’s overall growth rate. But after the SGR formula led to a 4.8 percent cut in doctors’ pay rates in 2002, Congress has chosen to put off the increasingly steep cuts called for by the formula ever since.

This month, the Senate passed its fourth stopgap fix this year – a one-month postponement that expires Jan. 1. The House is likely to follow suit when it reconvenes next week, and physicians have been running print ads, passing out fliers to patients and flooding Capitol Hill with phone calls to persuade Congress to suspend the 25 percent rate cut that the SGR method will require next year.

via Doctors say Medicare cuts forcing them to shift away from elderly.

Does anyone have a solution for this?

How government agencies avoid competitive bidding

Are you an Eskimo from Alaska?  Are you part Eskimo?  Do you know an Eskimo?  (That term, by the way, according to Wikipedia is NOT pejorative when referring to the Alaskan tribes.)  If so, you can start a company and get a government contract without having to compete for it.  Then you can sub-contract the actual work to other companies, pocketing millions for yourself.

That’s one of the ways the federal procurement process avoids having to comply with time-consuming but money-saving laws about taking the lowest bid .  From The Washington Post:

United Solutions and Services, known as US2, had just three employees and several small contracts for janitorial services and other work. It was based in a four-bedroom colonial, where the founder worked out of his living room.

But the firm had one quality the Army prized: It was co-owned by an Alaska native corporation (ANC) and therefore could receive federal contracts of any size without competition, under special set-aside exemptions granted by Congress to help impoverished Alaska natives.

On Sept. 2, 2008, US2 was granted a deal worth as much as $250 million – 3,000 times the $73,000 in revenue the firm claimed the year before. The contract enabled the Army to quickly fund a wide array of projects, including a global campaign to prevent sexual assault and harassment, without seeking outside bids.

US2 could not do the work by itself, though. With the Army’s knowledge, the firm subcontracted the majority of it to more established companies, a Washington Post investigation has found.

Federal rules generally require prime contractors on set-aside deals to perform at least half of the work, something US2 did not do on more than $100 million worth of jobs, according to interviews with Army officials and an analysis of federal procurement data.

via Alaska native status gave tiny, inexperienced firm a $250 million Army contract.

The Liberal Conspiracy Theories

Glen Beck has been pushing his conspiracy theories.  Now the liberals are doing it.  They are unable to imagine that there is anything wrong with their president or with their economic theories.  So many of them believe that the Republicans and their business allies,  to ensure that the president will not get re-elected, are deliberately sabotaging the economy.  From Michael Gerson:

If a president of this quality and insight has failed, it must be because his opponents are uniquely evil, coordinated and effective. The problem is not Obama but the ruthless conspiracy against him.

So Matt Yglesias warns the White House to be prepared for “deliberate economic sabotage” from the GOP – as though Chamber of Commerce SWAT teams, no doubt funded by foreigners, are preparing attacks on the electrical grid. Paul Krugman contends that “Republicans want the economy to stay weak as long as there’s a Democrat in the White House.” Steve Benen explains, “We’re talking about a major political party . . . possibly undermining the strength of the country – on purpose, in public, without apology or shame – for no other reason than to give themselves a campaign advantage in 2012.” Benen’s posting was titled “None Dare Call it Sabotage.”

So what is the proof of this charge? It seems to have something to do with Republicans criticizing quantitative easing by the Federal Reserve. And opposing federal spending. And, according to Benen, creating “massive economic uncertainty by vowing to gut the national health care system.”

One is tempted to respond that it is $1 trillion in new debt, the prospect of higher taxes and a complicated, disruptive health-reform law that have created “massive economic uncertainty.” For the purposes of this argument, however, it is sufficient to say that all these economic policy debates have two sides.

Yet this is precisely what the sabotage theorists must deny. They must assert that the case for liberal policies is so self-evident that all opposition is malevolent. But given the recent record of liberal economics, policies that seem self-evident to them now seem questionable to many. Objective conditions call for alternatives. And Republicans are advocating the conservative alternatives – monetary restraint, lower spending, lower taxes – they have embraced for 30 years.

via Michael Gerson – Liberals resort to conspiracy theories to explain Obama’s problems.

The proletariat votes Republican

Statistical slicing and dicing of the election results shows what I had been saying:  Blue-collar workers, who used to be Democrat’s base, are now overwhelmingly voting Republican.  Higher income folks are voting for the Democrats.  These class dynamics, of course, fly in the face of leftist political theory.

Democrats remained strong in areas with the party’s core of minorities and higher-educated whites. But movement of white working-class voters away from the party is a concern for Democrats, especially because of President Obama’s traditional weakness with those voters.

Republicans’ success with the blue-collar vote and the high enthusiasm of the tea party gives it a fired-up base headed into 2012. But in a presidential election with higher turnout, the party might have trouble winning a majority with those voters alone. It certainly can’t rely on that bloc to carry the party into the future.

Democrats largely held on to their high share of the vote in the country’s densest places. The party captured 54 percent in counties with populations of more than 500,000 people, compared with only 49 percent in 1994. In smaller counties, Democrats’ share of the vote slid to 39 percent this year from 43 percent in 1994.

Much of the reason for the Democrats’ decline in less-dense areas can be attributed to the party’s trouble attracting white, working-class voters. Exit polls showed that Democrats lost white voters without a college degree – one way to measure blue-collar voters – by almost 30 percentage points in House races.

via Political divide between coasts and Midwest deepening, midterm election analysis shows.

The article, which is putting the best construction on everything for the Democrats, says that the Republican dominance among low income white people will not last long, since that demographic is shrinking.  I don’t know.  With the current economy, that number may just skyrocket.

And it doesn’t look like the Democrats will try to win back their base as long as they give off the classist vibe, the sense that all of those uneducated voters, those ignorant white trash rednecks, just don’t belong among their betters.


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