I love WikiLeaks Cablegate

Thanks to WikiLeaks, foreign affairs are no longer the private business of the ruling class, but open for all to see.

Bush Tax Cuts

If I were the Democrats I would say that I had no problem extending the Bush tax cuts for high earners provided they were paid for. This would put the onus on Republicans to find spending to cut or other taxes to raise to maintain current rates. My two cents. If I were a Republican I would respond that an appropriate pay-for would a phase out of the state and local tax deduction.

Carbon Tax, not a VAT

I agree with Matt Yglesias that if there is gonna be a consumption tax it should be a carbon tax not a VAT. I think part of the reason that some are still enamored with a VAT is that it can raise a ton of money, probably more than a carbon tax. That said, a carbon tax should generate substantial revenues and also would more efficiently curb carbon emissions while not sacrificing any ground on efficiency to the VAT.

Ezra Klein's Guide to Philanthropy

Basically, he thinks of himself as a charity case. Personally, I like to do a mix of scientific research less popular diseases (that sounds weird but some diseases can be devastating but somehow aren't as marketable), international development, social services, cultural outlets, and conservation. But to each his own.

More on The Trust Fund

This was a comment that was left on Matthew Yglesias' blog that does a much better job of articulating the problematic nature of the trust fund:
"My point is the value of the trust fund is the value of future congresses to honor the current promises to pay future retirees and the value of future congresses and presidents to transfer money to social security when it is needed.Holders of public debt would probably not flinch or be concerned at all if the trust fund was never paid back. It has no implications for the u.s's ability to borrow from third parties."

Yglesias Pens Uncharacteristically Daft Post

Matthew Yglesias is apparently hot and bothered about the characterization of the SS Trust Fund as lacking assets. His take on the Social Security Trust Fund is incredible. Here is the key part:
"The Social Security trust fund is a very real fund that really contains assets—bonds—that represent lending from Social Security to the rest of the government (ROTG). "

"The only issue with the Social Security Trust Fund is that if you assume ROTG will repay its debts, that means ROTG will need to obtain that many through tax hikes or spending cuts. Conversely, if ROTG avoids tax hikes or spending cuts, that will require additional hikes or cuts from Social Security."

So, to paraphrase, the only issue with the SS Trust Fund is if you assume that the Trust Fund is real then you will be sorely suprised when your taxes go up/non-SS spending is cut/SS benefits are cut to compensate for the fact that the Trust Fund is not real. Great, thanks for clearing that one up. I think this is a post he wishes he could have back.

Millionaire Tax Bracket

The rich are different. Among other things they are very good at sheltering income. Ezra Klein's suggestion of making a millionaire's tax bracket seems foolish as over time it won't get that much income as: 1. there are not a ton of millionaire's though with time there will be more; 2. Most millionaire's get their money in the form of capital gains which are taxed at a lower rate. If you want the super rich to pay a greater share of taxes then capital gains should be taxed as ordinary income.

Wyden-Brown Proposal

I basically agree with Reihan Salam's take on the Wyden-Brown's proposal. I think it would be great to enable states to experiment on health reform by giving them a waiver and letting them implement their own reform but the waiver process is essentially worthless if there is a requirement that the insurance that is offered is as comprehensive as envisioned in the health care bill. Reihan's objection is one I share more broadly with the entire health reform effort which is in order for a state to qualify for a waiver the state must ensure that the insurance is as comprehensive as the health care bill offers. I think that is the central failing in the health care bill which is that in maintains a system of comprehensive health care coverage when we should in fact be shifting away to a system of catastrophic coverage. What if for instance, a state said that it wanted to take the the funds and implement universal catastrophic coverage for everybody and health savings accounts for medicaid eligible population and spend any savings on things that would constitute wellness or public health improvements. This could be as varied as increasing budgets for healthier school lunches, better and more extensive public transportation, promoting walkable communities, expanding community clinics or just return the savings to the people in the form of lower taxes.

Reporters Should Not Be Allowed to Report Unless They Know the Difference Between the General Fund and the Unified Budget

This article makes the basic observation that raising the retirement age hurts the poor. This is a fair observation. Raising the retirement age is probably the most regressive means of putting SS into balance. It is probably also one of the most efficient (keeps people in the workforce longer + lower taxes). Anyhow, I don't think the Bowles-Simpson Commission's proposal of raising the retirerment age a whole 2 years over the next 65 years is all that draconian, but whatever. What really gets my goat about the article is this part:
"On its current path, Social Security is projected to run out of money by 2037, largely because of aging baby boomers reaching retirement. The longer action is delayed, the harder it will get to shore up the program."

Stephen Ohlemacher is probably blissfully unaware of his error. But he has mislead the public and this is typical of how the media treats discussions about social security, budget deficits, and our nation's finances more genearlly. In their ignorance the media has abbetted what would amount to accounting fraud in the private sector. Many will think I am crazy and will say, "but wait a minute, the author is right, there is the trust fund, we have prefunded Social Security to cover the gap between Revenues and Outlays that starts in 2018. That will take us till 2037." Here is the problem with that, every year, the federal government spends more than it takes in (except for a few years during the Clinton Administration).

Presently and since 1984 during the last go around of Social Security Reform, Social Security revenues have exceeded Social Security expenditures. What happens is that the government uses the surplus revenues to plug the gaps in its budget and then issues the Social Security Administration special issue bonds that bear interest (read: IOUs) for the money it borrows. This is where the general fund and the unified fund distinction comes into play. The General Fund does not look at Social Security outlays (but typically does count some of its revenues- to my mind the decoupling of revenues and expenditures in a pension fund is cooking the books). But to the extent it uses the surplus revenues it counts those as revenues. For example, just using some made up numbers, let's say in the current year for the US government to prefund social security it needs to collect $200 billion more than it spends in social security benefits. Now imagine that there is a general fund deficit of $200 billion. The government takes those $200 billion dollars and plugs it into the general fund. Instead of issuing debt to cover the general fund the government now has to issue debt to cover future expenditures to future social security recipients. Let's say that the size of the economy is $10 trillion dollars. Thus, in this scenario, the government by shfiting excess social security revenues away from prefunding the trust fund and into the general fund has not actually changed the fiscal picture. But what our moronic press corp would do is say that the government has balanced the budget deficit as there is no general fund deficit. However, there is a deficit, it has been shfited off the books, that is the unified deficit, and it is in my view the important number. In this scenario since the Social Security trust fund has been shortchanged by $200 billion (in a $10 trillion hypothetical economy) the unified budget defict would be 2% of GDP. The government is doing this even today**.

As I mentioned in the previous paragraph, when the government takes those excess social security revenues, it issues debt not assets to social security. Some say that Social Security trust fund possesses actual T-Bills. It doesn't though. Well, first, you can verify whether this is the case (click on this link), and it is not. Second, it wouldn't actually make a difference. A T-Bill is a form of debt that the government issues. You get a T-Bill in exchange for giving the government money. That T-Bill is backed by the taxpayer and at some point if you want to redeem it the government will have to raise revenues to pay you. So if the SSA were to in fact posess T-Bills it would be the functional equivalent of having an IOU as one part of the government would be issuing debt to another part of the government. The end result would be the same. The taxpayer would be asked to cover the debt.

Going back to the title of this post and how it relates to the earlier quote, my objection is the characterization of Social Security as being solvent until 2037 is essentially false. An accurate statement would be: 1. Social Security is solvent so long as social security revenues are equal to or greater than Social Security expenditures; 2. Social Security will continue to be solvent after social security revenues are less than social security expenditures if the taxpayer is willing to fund the difference. The second clause may or may not be true. So here would be my proposed revision:

"On its current path, Social Security is projected to run out of money by 2018, largely because of aging baby boomers reaching retirement and generations of fiscal mismanagement and creative accounting. We are past the point of no return, future benefits will be cut at the margins next decade and wholesale in the decades thereafter."

The health of social security is contingent on the ability to redeem the bonds in the Trust Fund. The ability to redeem the bonds in the trust fund is tied to the health of government's finances more generally. If publicly held debt were low, issuing new debt to fund social security wouldn't be an issue. However, the Government's finances are piss poor and deteroriating and we are just beginning to work our way through the baby boom. The media in pretending that there is some imaginary pot of gold out there that is gonna cover the next two decades of Social Security expenditures. They have been unwitting accessories in cooking the government's books.

* I am not entirely sure if this is accurate for 2009-10 as the social security revenues are depressed as a function of the recession.

Military Brain Drain

Matthew Yglesias has a great post on one of the overlooked consequences of military spending. While the military does foster a lot of innovation and development through its spending it also raises the price of engineers and sucks away a lot of talent from more productive endeavors than killing feriners.

PeP Phraseology Smackdown

The New Oxford American Dictionary has crowned Refudiate as the word of the year. This is a really stupid one. Refudiate does not capture a new concept (see unfriend) or is not a novel twist or combination of words (see chillax).

More on the Bowles-Simpson Plan

Glenn Hubbard has a good rundown on the commission's chairs' report.

Tax Hikes Republicans Should Put Forward

If Republicans are serious about deficit reduction they will have to get serious not only about spending cuts but also raising revenues, and that means raising taxes. Now, some see the Republicans stated desire to maintain current income tax rates as being in competition with deficit reduction, this is not necessarily true. One can raise taxes without raising rates by broadening the taxable base (which has been significantly narrowed by a myriad of deductions, exclusions, and credits). Additionally one can tax different activities other work to raise revenues. If I were the Republicans I would propose that for every dollar of revenue raised the revenues be split evenly between deficit reduction and rate reduction. To raise revenues Republicans should propose the following:
Base Broadening Tax Modifications
1. Cap the Employer Exlusion today and set it at the average plan on the FEHB and index the cap to inflation (extend the tax treatment to those who buy their own healthcare, this will offset some of the revenues but will also be a good thing for small businesses and entrepeneurs.)
2. Cap the Mortgage Interest Deduction (currently you can deduct interest on a mortgage up to $1 million dollars, even for a home equity loan or a second home. Cap the deduction at $500,000 of interest and make home equity loans or second homes no longer applicable for the deduction). Don't index the cap.
3. Get rid of the State and Local Tax Deduction
4. Simplify all of the different tax advantaged savings programs- create one pre-tax savings vehicle and one after tax savings vehicle that everyone is eligible for- My suggestion would be a universal 401-k and a Roth IRA

Ancillary Revenues (New or Higher Existing Taxes)
1. Sin Taxes- the alcohol tax alone can raise significant revenues. On the flip side you would have fewer murders, rapes, and drunken driving deaths and injuries. Win/win.
2. Tobin Tax- Setting a modest financial transaction tax could raise a significant amount of revenue (up to $100 billion annually) while at the margins reducing market volatility
3. Gas Tax- Convert the gas tax from a fixed amount per gallon to an ad valorem basis. As the price of gas goes up so to will revenues (unless consumption of gas all of a suddent decreases much faster than the price of gas increases)
4. Carbon Tax- This is not happening but again, I think this is an area where Republicans could reorient the party in a sensible direction that is both economically efficient, distrubitionally neutral, and environmentally conscious. The tax could be very modest to begin with, though, consistently increasing over the years and plow the revenues to offset payroll taxes.
5. Bank Tax- Tax bank size. I don't know how much revenue this would raise, in an ideal world revenues would be close to nil as banks would be smaller and pose less of a systemic risk.
6. User Fees: Many agencies are funded in part or whole through user fees. These practices should be expanded.

In Case You Were Wondering...

what your municipal government's regulations regarding urban chicken coops was here is a handy link: http://home.centurytel.net/thecitychicken/chickenlaws.html

Can You Cut the Federal Workforce and Contractors?

Stan Collender says that if we cut the federal workforce and contractors that support them then some work is gonna have to be left undone. Mr. Collender has made this point a couple of times before. I think Stan Collender typically has very interesting and informative things to say about public policy but this is daft. I work in the government and on my floor alone you could send 25% of the people home (contractor and fed alike) without any loss in productivity. I am in my 20s and every where I turn I bump into somebody who is a GS-14 or GS-15 who has no real responsibility and is constantly figuring out ways to make themselves scarce. You don't lose anything by canning someone that isn't doing anything. And as it is virtually impossible to fire someone in the federal government (in my five years in the government the only thing someone that is not SES has been fired for is watching Porn). In theory contractors are supposed to serve as a workaround for managers but it usually doesn't work out that way. If you are an ineffective manager and you decide to augment your staff through contract because your employees are shirking what often happens is the contractors start to act like the feds. And because you have not disciplined your employees, because you are averse to confrontation or whatever the case may be, you don't ride your contractors. As such, you find lots of scenarios where we are spending $200k for someone to GS-7 Admin Assistant or Program Assistant type work just so we have the option of canning them but fail to exercise this option (a dear one) when appropriate. This is why you need to fire both feds and contractors. If you want to achieve greater productivity in the federal workforce there are two things that I believe are necessary:
1. More accountability, less job security (sometimes people should be fired, it is shameful how much deadweight taxpayers are asked to bear)
2. Higher Salaries at the Senior Management Level. I believe government is a good place to start salary wise but as you move up the career ladder it tops out too quickly. As a GS-15 or SES you can have a tremendous amount of responsibility yet your salary (starting $125k) isn't really competitive. Once you get to that level the traditional benefits of public sector work (a less hectic schedule/or more family friendly schedule) disappear but are not mitigated by a competitive salary. The only saving grace is that you don't have to do the sales work and proposals that you would have to do with a consulting firm. But you will end up on the hill, at trade associations, getting screamed at by stakeholders, etc.

Revenues As A Percentage of GDP

Historically revenues as a percentage of GDP have averaged around 18%. Obama's deficit commission is proposing to elevate the federal government's take to 21%. Liberals are howling that this is to low. That is a pretty significant tax hike, I don't see how you can dismiss such a proposal as unserious as it pertains to the revenue side. If anything it's ambitious.

Washington D.C.

I grew up in D.C., one of those rare natives you hear about. I actually think we as a folk, the natives that is, are a nice group of people. The problem with D.C. is that States expunge the greedy, selfish, narcissistic, and power crazed and they all come and settle here. To get a good feeling of this dynamic and the resulting culture you must read the comments on this article. Mind you, Sidwell Friends is probably the premier private school in D.C. and costs as much as a private college does.

hat tip: Marginal Revolution

Don't Repeal Obamacare, Reform It

Republicans are not going to succeed in repealing Obamacare without control of the Senate and Obama still there to veto any such repeal. As such, I don't think they should bother. While I belive Obamacare is an abomination in its present form it can and should be improved and there are ways of doing so that provide opportunities for bipartisan cooperation.

1. Funding: Both parties are giving lipservice to the deficit. However, Republicans have stated that they do not want to raise marginal rates. On its face this appears hypocritical but it needn't be. One way to raise a significant amount of revenue would be to cap the employer exemption on healthcare and align the cap with the cost of a High Deductible Health Plan (HDHP) plan. This would have a significant and immediate impact on cost control thus reducing spending in the out years while raising more than letting the only the upper tax bracket of the Bush Tax Cuts (as the White House has proposed) expire would. This would also accelerate the transition away from an employer provided system.

2. Minimum Benefits: The current health care bill's principal failure is that it defines the minimum benefit in at a very high level. As such, most routine predictable care is paid by an insurer. Adding a party to a transaction is inefficient but also promotes overconsumption as prices are not immediately evident to the consumer. By capping the employer exemption more people would opt for HDHPs where routine non-catastrophic care comes out of pocket but Obamacare has effectively outlawed such plans by defining a high minimum benefit level. Reducing the minimum benefit level to a naked HDHP will also make the individual mandate more effective as the penalty (while staying the same) would be more significant in relationship to the much lower premiums of HDHP plan. This would ameliorate the potential adverse selection spiral that Obamacare presently appears destined for.

3. Exchanges: Accelerate implementation of the exchanges, allow individuals to buy into them as opposed to employers. Let individuals buy across state lines tomorrow. These three steps together would get employers out of the health care game. If employers are no longer providing health care this should make employees at the bottom end of the wage scale significantly cheaper and help with the unemployment picture.

These three elements would preserve the basic architecture of Obamacare, maintain the coverage expansions all while reducing the present and future cost of implementation.