Obama accepts Bush tax cuts

President Obama has agreed with Congressional Republicans to extend all of the  Bush-era tax cuts in exchange for extending unemployment benefits.  The package includes some other interesting details:

President Obama and congressional Republicans have reached a tentative accord on a far-reaching economic package that would preserve George W. Bush administration tax breaks for families at all income levels for two years, extend emergency jobless benefits through 2011 and cut payroll taxes by 2 percent for every American worker through the end of next year.

The scope of the agreement, announced by the White House late Monday, was far broader than lawmakers in either party had been expecting. The deal would extend a college tuition tax credit and other breaks for middle-class families that were due to expire New Year’s Eve. And it would revive the inheritance tax after a year-long lapse, imposing a 35 percent rate on estates worth more than $5 million for individuals and $10 million for couples.

The package would add more than $700 billion to the rising national debt, said congressional sources who were briefed on the deal. But with the unemployment rate at 9.8 percent, the White House was focused on winning a compromise that could boost the fragile recovery while preventing the economic damage that could result from letting the expiring tax breaks affect paychecks next month.

The payroll tax holiday, in particular, is striking for its universal application. Unlike most tax breaks, it would be available to taxpayers at every income level, letting consumers keep an extra $120 billion in their pockets next year. For a couple making $70,000 a year, the holiday would provide a tax savings of $1,400.

via Obama and GOP strike tax accord.

This description of the payroll tax, which goes for Social Security, is unclear.  It doesn’t cut them by a measly 2%, which would hardly mean anything.  Rather, it cuts the tax rate from 6% of the paycheck to 4%, so that all workers will get to keep a third of what they used to pay.  That’s a pretty significant raise.

Now all the President has to do is persuade the Democrats, many of whom are reportedly livid at the deal, which keeps the tax cuts even for those who make $250,000 and up.

What should the government do?

Economics columnist Robert J. Samuelson points out that before we can cut government spending, we need to arrive at a philosophy of government:

Modern democracies have created a new morality. Government benefits, once conferred, cannot be revoked. People expect them and consider them property rights. Just as government cannot randomly confiscate property, it cannot withdraw benefits without violating a moral code. The old-fashioned idea that government policies should serve the “national interest” has given way to inertia and squatters’ rights.

One task of the National Commission on Fiscal Responsibility and Reform – co-chaired by Erskine Bowles and Alan Simpson – was to discredit this self-serving morality. Otherwise, changing the budget will be hard, maybe impossible. If everyone feels morally entitled to existing benefits and tax breaks, public opinion will remain hopelessly muddled: desirous in the abstract of curbing budget deficits but adamant about keeping all of Social Security, Medicare and everything else. Politicians will be scared to make tough decisions for fear of voter reprisals.

Unfortunately, Bowles and Simpson ducked this political challenge. They performed an accounting exercise to shrink the deficit without trying to define what government should do and why. . . .

It’s not in the national interest to subsidize farmers, because food would be produced at low cost without subsidies. It’s not in the national interest to subsidize Americans, through Social Security and Medicare, for the last 20 or 25 years of their lives because healthier people live longer and the huge costs make the budget unmanageable. It’s not in the national interest to subsidize mass transit, because most benefits are enjoyed locally: If the locals want mass transit, they should pay for it. As we debate these questions, groups will inevitably promote their self-interest. But in doing so, they should have to meet exacting standards that their self-interest also serves the broader national interest. . . .

The biggest blunder of their approach involved huge proposed cuts in defense, about a fifth of federal spending. National security is government’s first job. Bowles and Simpson reduced it proportionately with all other discretionary spending as if there’s no difference between a dollar for defense and a dollar for art subsidies. Nor was there much effort to identify programs that should be eliminated because they fail the national need test. . . .

This was a formula for changing government without a philosophy of government.

via Robert J. Samuelson – What the Bowles-Simpson plan left out.

OK, let’s help formulate a philosophy of government that could set some priorities and thus help us make decisions about the national budget.  (That’s what I have to as a college administrator, come to think of it!  We set priorities and then we work out the budget accordingly.)

What do you think the government should do?  What difference would that make in what gets budgeted and what gets cut?

Stimulus jobs are just about over

An illustration of the futility of creating jobs by just spending government money for construction projects.  Once the projects are finished, we are back to unemployment.  And all of those “shovel-ready” construction jobs are just about finished.  From The Washington Post:

The stimulus was here.

Those words should be embossed on a stretch of Route 29 outside of Charlottesville, where paver operator Clifford Carter poured hot asphalt one year ago.

The $885,000 project, funded by federal stimulus dollars, took two days in November 2009. A few weeks later, he was laid off – temporarily, he thought, until paving season resumed in the spring. But in April, he received his first permanent layoff notice. Without a job, he couldn’t afford to keep paying for life or health insurance, so he let both lapse.

“When they kicked me out the door, I lost everything,” he said.

The end of the stimulus – the $787 billion that Washington approved last year in an effort to forestall another Great Depression – is more than a year away. But for Carter and thousands of other workers in the road construction industry, it has already arrived.

Road construction workers were among the first to benefit from the 2009 American Reinvestment and Recovery Act, which pumped hundreds of millions of dollars into “shovel-ready” road resurfacing projects in order to save or create millions of jobs.

The bulk of highway-related work will be done within a year and more than half of the funds for it have been paid out, said Ken Simonson, chief economist for the Associated General Contractors of America, an Arlington County-based trade group.

But with the economy continuing to lag, private-sector work has all but disappeared, and many states have cut back on road work in an effort to plug gaping deficits.

Without the stimulus, thousands of workers who build and maintain America’s roadways could soon join the 1.6 million construction workers who are unemployed. The construction industry lost an additional 5,000 jobs in November, the latest U.S. Labor Department data show, bringing the sector’s unemployment rate to 18.8 percent.

via After stimulus, construction industry seeing private-sector and state projects drying up.

The revenge of the marketplace

The mass transit system in Washington, D. C., is in a financial crisis.  This is because, in an effort to raise money, the government raised prices.  Which has resulted in fewer and fewer people using the system.

The across-the-board fare increase imposed by Metro this summer has led to a drop in bus ridership and less-than-expected rail revenue as a result of changing travel patterns, an initial analysis by Metro shows.

Bus ridership has fallen 7 percent, with overall Metro system ridership 2 percent below the levels of the last fiscal year, which ended in July, and 3 percent below Metro’s projected level. The lower-than-expected passenger revenue is the main factor in Metro’s overall revenue shortfall of 4 percent so far this year.

The number of rail riders remained flat (though it was boosted by major events on the National Mall), but 2 to 3 percent of rail riders have moved their commutes from peak times to the window with the lowest fares, and others avoided certain trips, according to the analysis.

Metro this summer implemented nearly $109 million worth of rail, bus and paratransit increases, including a new 20-cent “peak-of-the-peak” surcharge for some rush-hour riders.

via Revenue, ridership on Metro fall short.

As prices rise, demand goes down.  That is an iron law of economics that cannot be legislated away.  Pricing has to be set by the market, not by government fiat.  The economic marketplace operates as a natural law, whether or not policy makers believe in it.

I lived in Estonia for a few weeks back when it was still a part of the Soviet Union, staying with a family as part of a college faculty exchange program.  Under Communism, prices were set by the state so as to make goods affordable for the masses.  But when the prices were set lower than the cost of production, you couldn’t buy the goods because the stores were virtually empty.

Also, production was not determined by market demand; rather, the government set quotas.  Factories had to meet their quotas or the managers and workers would get in big trouble.  So they took shortcuts.  A shoe factory could meet the quotas easier if they didn’t have to keep resetting the machinery to manufacture different sizes.  So they would produce a whole run of, say, size 6 shoes, the smaller size also having the advantage of saving material.  So if you went into a shoe store, you might find that it only had shoes in size 6.  If you wore a different size, you were out of luck.

Governments can certainly interfere in the marketplace, but the marketplace will have its revenge.

Fighting debt problems by encouraging debt

The usually liberal Fareed Zakaria on the incoherence of the government’s attempts to fix the economy:

Washington is asking consumers to stop saving and start spending, while the government issues more debt and the Fed lowers rates – all measures designed to increase debt. In other words, we are fighting a crisis caused by excessive debt by encouraging excessive debt. Is that really the best way to get growth?

The investment manager and guru Jeremy Grantham says no. In his latest quarterly letter, he points out that over the last generation, American government has created conditions that encouraged everyone to keep accumulating debt. But far from getting a bang, the country’s growth rate actually slowed down over that period. In fact, the effect of all this government-subsidized debt has been deeply destructive. It created asset bubbles in stocks, bonds, commodities and more. One stunning chart in his letter underscores the extent to which the Fed created what he calls “the first housing bubble in history,” meaning the first time that U.S. house prices rose dramatically across the board – and are now falling just as dramatically.

Debt-fueled growth “is, in an important sense, not the real world,” Grantham writes. “In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement.”

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

via Fareed Zakaria – Economic policy needs common sense, not Fed magic, for long-term growth.

Another conversation with my brother

In case you missed it on the George Bush & Aids post, my brother and I had another exchange, in the course of which I formulate what I consider a truly conservative economic ideology:

He says: OK. I (“Dr. Veith’s” younger brother who is still and always will be a Democrat) hereby give George Bush credit for saving millions of lives as a result of his AIDS initiative. Hey, that felt kind of good!

Now for you conservatives, isn’t it about time to give President Obama credit for the bailout of General Motors?

I say: Jimmy (my brother) @3: Thank you for that concession. That was all I wanted. But what you want from conservatives shows that liberals do not understand the many different ideologies that they lump together under that label. Most people on this blog, I daresay, are suspicious of BOTH big government AND big business.

We do believe in free markets. To return to your earlier illustration, if doctors and pharmaceutical companies and everyone else in the health care professions could not make a lot of money from their work, we soon would be back to what you decried in the primitive health care endured by Adam Smith back in 1776.

However, the really big companies hate free markets. They don’t want competition that brings prices down and increases supply. This is the lesson of Monopoly, at which I beat you so many times, the object of which is not prosperity and abundance for everybody, but one person putting everybody else out of business and getting–with the state-run socialist bank–ALL of everyone’s money.

And even worse for us crunchy-conservatives or front-porch conservatives or social conservatives or whatever you want to call us than big government and big business is when both of those behemoths combine together into something that so gargantuan that it crowds out everybody! This is why we don’t like Obama’s bailout of the big banks and his merger with General Motors. This is also why we don’t like Obama’s health care system, which is a marriage of big government with the big insurance companies.

Then he says:

To my big brother,”Dr. Veith”. Thanks for reminding me how often you beat me at Monopoly.

I agree with much of what you said in your comments at #26. I agree that the individual can be harmed by both BIG government and BIG business. My question for you is how can we check the powers of BIG business?

Historically, it has been done in two ways, with unions and government. With the decline of unions, government is the principal way we can check the powers of big business. When conservatives reject any government role in a “free market system” as a mater of ideology, they are left with nothing to check the powers of big business.

I don’t think that a corporation should be allowed to make money any way it pleases. Corporations are fictional “persons” created under the law. Corporations exist to serve the people, we do not exist to serve the corporation. It is perfectly appropriate that the government that created corporations can and should regulate its activites. For example, the government should prohibit companies from selling dangerous products to the public, and should protect the safety of the company employees. I acknowledge that rules and regulations imposed by government on business can be too burdensome and heavy handed. So the rules and regulations imposed by government should be smart and pragmatic. But I think it is insane to reject the role of government in a modern free market economy on purely ideological grounds.

This is why I support Obama’s health care, because I think it is perfectly appropriate for government to prohibit insurance companies from denying people coverage for a pre-existing condition. Allowing insurance companies to only insure healthy people is a business model that does not benefit the public and is not sustainable in the long run.

Now I don’t want to start another debate on the wisdom or lack of wisdom of Obama’s health care. Time will tell. My point is that we should not reject the power of government to regulate the health care insurance industry as a matter of principal.

Does this make me a soci@list? I don’t think so.

I repost these exchanges because my brother is actually very perceptive, liberal though he is, and because they demonstrate the lesson I have been trying to impose on you all, that it is possible to disagree without being disagreeable, to remain one big happy family through it all, and that it is possible to use discussions consisting of different opinions to come to actual insights.

Anyway, who is with me in this suspicion of big government and big business and, especially, their marriage with their hideous spawn?

And can anyone answer Jimmy?  What can limit both big government and big business?


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