Stand or Deliver

The situation behind today's post makes about as much sense as the 1980's song/video by Adam Ant, Stand and Deliver.

President Obama had a choice, STAND on his belief that the top 2% of wage earners should not have the decrease to their top marginal tax rates extended, or DELIVER a package of benefits to the low and middle class including a 2% payroll tax decrease in 2011, a 13 month extension of extended unemployment payments, the extension of college tuition tax credits and a business investment depreciation waiver that would highly incent businesses to spend money now. Obama chose the later.

For the first time in his presidency, Barack Obama is hearing the combination of praise from the Right and outrage from the Left. Today, House Democrats passed a resolution saying they reject the deal brokered by Obama and House Republicans saying they will not bring it to the floor for a vote. I kind of doubt that. Maybe the House Dems will negotiate some small changes and bring that up for a vote, but one of the first things a good negotiator does is understand who has leverage and how much. In a few weeks, the 112th Congress will be seated and the Republicans, not the Dems, will be in the majority. They are most certainly going to bring the extension of the Bush Tax Cuts for all up for a vote and it will pass. There is also no reason to believe they will be as generous in also providing the above-mentioned tax benefits for the middle class. That is called leverage. The Dems know it or at least should know it. Everything else has just been grandstanding for their constituents.

If Nancy Pelosi believes she can get a modified plan agreeable to the Republicans that doesn't include Bush Tax Cut extensions for taxable family incomes over $250,000, by all means have at it. If she thinks she can get the Republicans to agree to modifying the Estate Tax proposal from a $5Million waiver and 35% tax on amounts above that level, go for it. (I think the level should be somewhere between $3-$5Million, but feel strongly that that Estate Tax should not be higher than the highest marginal income tax rate, so I am good with 35% right now.)

Despite all the sturm and drang from Dems on the Obama Compromise/Capitulation on taxes, this is the very best deal the Dems could have dreamed to get in the last month of their majority in the House. In fact, Charles Krauthammer, who I so rarely agree with you would think one of us is intentionally choosing an opinion that is directly opposite that held by the other, is calling this Obama Tax Compromise the Swindle of the Year. I agree with him so much, that for what undoubtedly will be the only time in history, I will show the opening lines of his recent editorial in the Washington Post:

Barack Obama won the great tax-cut showdown of 2010 - and House Democrats don't have a clue that he did. In the deal struck this week, the president negotiated the biggest stimulus in American history, larger than his $814 billion 2009 stimulus package. It will pump a trillion borrowed Chinese dollars into the U.S. economy over the next two years - which just happen to be the two years of the run-up to the next presidential election. This is a defeat?

Krauthammer maintains and I certainly agree that "...the package will add as much as 1 percent to GDP and lower the unemployment rate by about 1.5 percentage points. That could easily be the difference between victory and defeat in 2012." I could quote more to reinforce my points, but please go to the article and read for yourself.

So the Republicans, led by Tea Party supporters, swept into the House and Senate with a big push for lowering the deficit. Of all the outrage I am hearing and reading about, strangely, very little is coming from the Right on the deficit increase. Democrats, long the sponsors of taking care of the middle class have before them perhaps the largest stimulus legislation ever affecting the middle class and they are complaining that high wage earners are getting to keep an additional 3-4% of their taxable wages above $250K for another 2 years.

It does appear that we are cursed to be living in interesting times.

Dollars, Taxes

That is what the current debate in DC is all about really. No, not the city with a team that has a star on their heads, the conflict between dollars owed as part of the National Debt and the concept of maintaining tax cuts put into place 10 years ago that expire at the end of this year. These "Bush tax Cuts" were passed through Reconciliation (attached to the budget which can't be filibustered, only voted up or down) and therefore have a 10 year expiration date. At the time, there were no budget cuts made to offset the tax cuts so they have added a nice chunk to the current National Debt.

Which is one reason why we are where we are today.

Our National Debt is at an all-time high and projected to continue growing. However, Congress is battling over whether to maintain tax breaks just for taxable income levels up to $250,000 or to extend them for all levels of taxable income. That is right, the measure passed by the House (with no Republican support) does provide the continuation of the Bush Tax Cuts for everyone. It just stops the benefits at a taxable income level of $250,000 for families ($200,000 for individuals). The plan passed in the house would increase the margin tax rate on dollars above the $250,000 level by 3-4%. So, 100% of all taxpayers get to keep a tax cut. For 98% of all taxpayers, they get the exact same amount of tax cuts as passed by the 2001 and 2003 Bush Tax Cuts. It is just the marginal taxable income above $250,000 for the highest earning 2% of the population that Congress is arguing about. It seems counter-intuitive that we can talk about suffocating debt throughout the Fall campaign season and then be willing to make it bigger just a month later, but that is where we are.

President Barack Obama campaigned on not raising taxes on those making less than $250,000 (in some conversations he said 95% of the American public). In fact, he has lowered taxes already for a little over 95% though the Making Work Pay tax credits of $400 for an individual and $800 per family in 2009 and 2010.

In some Democratic circles, there is the desire to call the Republicans bluff and make them filibuster for this extra tax cut for the top 2% of earners while holding tax cuts for the lower and middle class hostage. People harken back to when preisdent Bill Clinton called the bluff of Newt Gingrich and the Republican Congress on the budget and shut down the government. People became outraged and called their local congressman. A budget had to be passed at some point and Clinton was able to draw a line in the sand and stay there until Congress was forced to come back to him and accept his budget. The same cannot be said about the current Tax Cut situation. The Republicans would be quite OK with letting the tax cuts subside because they know that more harm would be done to Obama than to them. So Obama and the Dems do not have a strong bargaining position. I think the Dems could have played chicken with the Repubs if they had brought this bill to the floor much earlier in the year, but that luxury is gone.

The National Debt will still be a problem 2 years from now regardless of what bill does or doesn't get passed now, but the tax cuts are a big deal now. Also on the table are the continuation of extended unemployment benefits.

The sign of a good negotiator is one who realizes what they can't get, and uses that to maximize how much they get. At this point it is very likely that President Obama realizes his only choices are the temporary extension of all Bush Tax Cuts or none of them. He doesn't want the lower and middle class to be worse off, so he will settle on the 2 more years of tax cuts for taxable income above $250,000. The mark of how good a job he does in negotiating is to see what he gets in return. I assume there will be a 1 year extension of extended unemployment benefits, but it would be interesting if he is able to slip in anything else as well. Stay tuned.

Do Deficits Matter?

This is a classic question posed to Economics students for several decades. In fact, I can remember being asked that question in Econ 1 in 1978. Most of the students said yes, the professor answered "not really". A better, although less precise answer would have been, "it depends".

First some terminology so we are on the same page. A deficit is the amount of money spent in a year that is more than revenue. This amount gets added to the national debt, which is the accumulation of all annual debts and surpluses over the years. Sometimes, perhaps because they both begin with the same letter, they are used interchangeably. We will actually use both terms to help give some depth to the discussion.

The graph below measures the entire national debt as a percentage of GDP (Gross Domestic Product) or the amount of goods and services produced in the US in a year. I like this measure because it gives us a sense of how big the debt is compared with our economy and also effectively adjusts the amount for inflation.

(Numbers courtesy of presidentialdebt.org)
As you can see by looking at the graph for 1978, my professor was probably more correct than the students as that level of 34% is lower than the level for almost any year since. We would be very happy now to get our Debt/GDP ratio down to 34%. This ratio floated up from a low of 32.9% at the end of 1981 to 67.1% at the end of 1993. At that point it hovered and then dropped during the Clinton Administration. However, only the only surplus was in 2000 (drop of 2% in actual dollars). In the preceeding years, the debt just didn't rise as fast as GDP, and therefore became a smaller percentage.

While that might seem like it is obscuring debt increases (and to some extent it is), it is giving a better picture of the impact. To get a better look at it, imagine that we are running a deficit and adding to the debt every year for 10 years and that each year, our GDP grows by 3%. However, our annual deficit is only a single dollar. At the end of this 10 year period, our deficit will be $10 larger (insignificant on a $13 Trillion debt) but our GDP will be almost 35% larger. Our national debt as a percentage of GDP will have shrunk by about 25%.

So again, why is that important? Well, assuming that our Government Revenue (read taxes) as a percentage of GDP remains fairly constant, our ability to pay the interest on our national debt is relative to our GDP. If the debt becomes too large as a percentage of GDP, the interest payments begin to take on too large a percentage of our tax revenue, thereby squeezing out other expenditures and/or increasing the debt even further. In fact, the US has among the lowest ratio of tax revenue to GDP among developed countries. This chart also includes state and local taxes and shows that almost all of Europe is higher than the US with only Mexico, Turkey, Korea, and Japan lower.

So what is the correct level of debt/GDP? Well, assuming that there is no reasonable way we can make this 0% anytime within our lifetime, it appears that bringing it back to a level under 70% would be prudent. Once we are there, we should attempt to find non-draconian ways to bring it back into the 50% range which is the long-term post-WWII average.

So now that we have that question answered, how do we make that happen? Well that is a topic for at least a few future posts, but just a few comments and a nice toy for you to play with. I am happy the Republican Party with a large assist from the Tea Party has gotten religion about deficits. I won't slap them about that belief running in stark contrast to their last 30 years of leadership because I really hope they mean it this time. I think they will be in trouble in 2 years if they don't follow through on it this time, so, for their sake and the sake of the country, I hope they are good on their word. They will also have to face the fact that you can't reduce the deficit significantly without increasing taxes and making reductions in defense spending and Social Security and Medicare benefits.

However, you can make adjustments to Defense, Social Security and Medicare and make some tax adjustments that don't seem devastating. Want to play King of the World (or at least Chief Poo-bah of the US Economy? Try your hand at this nifty interactive toy from the New York Times that lets you figure out how to balance the budget. Let me know what percentage of tax increases and spending cuts you come up with by leaving a comment. Enjoy.

2010 Mid-Term Elections Review

Well, not too bad a prediction job by The Voting Booth.

We called the Senate final tally on the button 51(+2) - 47. We were a little bit low on the number of seats Republicans would take in the House. We said 55 and they have picked up 60 to date with a few more seats still being determined by recounts.

Definitely a wave election or at least a swinging of the pendulum back to somewhere around the levels prior to the 2006 & 2008 elections. The Senate is still a little more Democratic than prior to the 2008 elections, but is a little more Republican than prior to the 2006 elections. 2012 shapes up to be a very interesting election on all fronts.

First, a congratulations to the Republican Party. Just two years ago, it seemed more likely that the party would be disbanded than that they would take back the House and make major gains in the Senate. Republicans are just better at the political game than Democrats. Occasionally, in situations like 2008, the Dems can message and GOTV equal to or better than the Republicans they have a registration advantage over. However, 2010 proved to be a storm too big for a good GOTV hampered by horrible messaging.

As in most election years, if the economy is an issue, it will bury the party in power. Combined with a mid-term trend away from the party in power probably explains 50-75% of the outcome. Regardless of what they did, there was no way Democrats were going to lose less than 30-40 seats in the House or less than 3-4 seats in the Senate. The remaining difference was created by a brutal, ruthless and persistent messaging from Republicans starting from when they got their breathe back in early 2009. True, it was filled with fact stretches and outright lies (see Death Panels, "useless" Stimulus and Bailouts, etc.), but they were made believable at least to enough people who were motivated to vote and pull the "R" lever. It may not have much to do with statesmanship, but it was textbook politics.

A special mention goes to the Tea Party, who can reasonably claim to have put the lift back in the step of Republicans, generate anger and organize it. They can also be blamed for loosing the Senate as their primary wins in Delaware, Colorado and Nevada removed more mainstream candidates who would almost certainly have defeated their Democratic opponents. That would have made the Senate Dems 48(+2) Reps (50) and the chance for the Reps to pull Lieberman or one of the conservative Dem senators would have been pretty significant. Also a shout out to Lisa Murkowski for apparently winning the Alaska Senate seat as a write-in after she lost the Republican primary. By far the biggest slap in the face for Sarah Palin who despite some significant successes supporting Tea Party candidates during Republican primaries failed in the overwhelming majority of races on Nov 2nd against the Democratic candidates. The Tea Party giveth and the Tea Party taketh away.

Calling the 2010 Election

The Pendulum is swinging back.

For good or bad, the last 2 elections have swung dramatically in the direction of the Democrats taking the House, Senate and White House from the Republicans. During the last 2 election cycles, Democrats have gained 52 seats in the House and 14 seats in the Senate, giving them significant majorities during the past 2 years, larger than most differentials since the landslide elections of 1964. Under almost any circumstances, especially being the party in the White House, the Democrats could have expected some significant losses in the 2010 elections as the pendulum swings back a bit. Add to that an economy that continues to be bad, marked by almost 10% unemployment and a great deal of underemployment and those who have just plain left the workforce and you will get substantial losses. On top of all that is the politically wonderful (but in many cases morally deplorable and dishonest) job the Republican Party has done over the last 2 years, fighting the President on almost every issue and winning the message wars on almost every action taken by the Obama Administration. All this despite the fact that Republican Party has lower favorables than the Democratic Party and far lower than President Obama.

The question is not whether Republicans will have a very good day nationally on November 2nd, the question is how large will it be? Predictions are all over the place, but here is my call:

Republicans take the House gaining 55 seats to take a 17 seat majority (226-209)

Democrats lose 6 seats, but hold onto the Senate 51-47 with the 2 independents caucusing with the Democrats for an effective 53-47 edge.

This brings the House pretty much back to the balance that existed just prior to the 2006 elections, but the Democrats still have a slightly larger majority in the Senate than they had entering the 2008 elections. There are a lot of Democratic Senate seats up for reelection in 2012, so unless Obama wins convincingly in 2012 and has some coattails, the Senate could turn Republican in 2 more years. even if it doesn't happen Nov 2.

The Price of Bad Communication

By most accounts, the Democrats can expect to loose a lot of seats in the House next Tuesday, almost certainly putting the Republicans in the majority. Control of the Senate is still up for grabs although it seems that the Dems may hold onto it thanks perhaps to the Tea Party in Delaware.

In most election years, over 90% of House members are safe, leaving only 40 or so to scurry around campaigning for their jobs. This election cycle that number has at least doubled. While there are probably individual cases of (unusually) poor performance by a sitting House member, most in danger are not the cause of their problems. The country, by and large, is fed up with those in charge and most specifically, the Obama Administration.

So, I ask why? Why all the disdain? Why all the concern over the deficit now and not 2 years ago (or 4 or 6 or 8...). Why all these complaints on rising taxes when federal taxes have actually dropped over the last 2 years and are at their lowest level in many years? With unemployment hovering just under 10%, many are concerned about losing their job and with it their health insurance. So why are so many people angry that Health Care Reform just guaranteed that even if they lose their job, they will still be able to get health insurance, and for many at discounted rates? For those on the Far Left, didn't you just get more legislation passed that met your hopes and desires than at any time since the Johnson administration? For everyone else, what were you expecting?

53% of those voting in the 2008 Presidential Election selected Barack Obama over John McCain to lead the country for the next 4 years. His policies and opinions were pretty clear at that time. Here is the shocker...Obama has done pretty much what he said he was going to do. So where is the surprise? Granted, he didn't get as much through in the health Care Reform bill as he advocated, but that was the political sausage making and frankly that should only potentially upset the far left. The Stimulus Package wasn't as big as he wanted it and although many economists have complained that is why we are still mired with unemployment at this level, the general public isn't complaining that it wasn't big enough.

So what gives? It turns out that although the Obama team was historic in getting out their message in the 2008 election, they are pretty miserable in selling their story once in power. A lot of really good things have happened in this Administration:

We were at the precipice of an economic disaster that could have made the Great Depression look like a bad hair day. I was trained as an Economist and for the first time in my life, I was actually scared about the financial future of this country. If 9.6% unemployment sounds bad, put a "1" in front of it, because that is about what we would have seen. The auto industry would have collapsed as well as every company supporting them, dealers, parts manufacturers, etc. As bad as Detroit is now, it would have been apocalyptic. But few people understand what 'could' have happened, only what they see. "You stopped me from running into the oncoming car, but I scraped my knee." But Christine Romer kept harping that unemployment would stay below 8%. Bad, bad, bad move. I understand not wanted fear to set in, but you never win by setting high expectations. If statements had been made that untouched, unemployment would reach 14%, but we believe we can take actions that will keep it under 10%, the Obama Administration might be considered heroes now, because that is exactly what they have done.

The Health Care Reform Bill provides health coverage to 32 million uninsured Americans, enables those under age 26 to stay on their parents plan, prevents discrimination against "pre-existing conditions", eliminates the annual and lifetime benefit cap and according to the CBO will actually SAVE $143 Billion over the next 10 years. It is tough to be against any of these things. Those opposed usually site the cost of $1 Trillion dollars, and don't acknowledge that the cost reductions exceed the cost creating a net savings. Several previous presidents have tried unsuccessfully to accomplish this and failed. By not harping over and over again on the benefits and the cost savings rather than the cost and explaining it in terms that people could understand and cling to, this monumental social change program will be vastly underappreciated for a very long time.

Tax Reduction - Not a term associated with the Obama Administration and yet, that is what they have done. The Making Work Pay provision provided almost half of the $240 Million in tax cuts created by the Obama Administration providing a $400 per year credit for individuals and $800 for married couples. This benefit accrued to individual filers with taxable income under $75,000 and couples filing jointly under $150,000. Don't think you got it? Pull out your 2009 return and look at line 63 or look here for the IRS information. The actual calculation was done on Schedule M.

Handling 2 Wars - All combat troops have been removed from Iraq with about 50,000 peacekeeping troops still there, that number declining over time. There was a large buildup in Afghanistan with a scheduled pullout next year in an attempt to stabilize that country. Obama came through on his promise on Iraq. He went against the wishes of many of his supporters on Afghanistan, but it may very well have been the right choice. A very difficult and unpopular one, but perhaps the best for long-term considerations.

There are a few other items covered quite well in this article in Rolling Stone. Not a place I normally recommend for even handed political coverage (and it does have its rah-rah moments), but overall a pretty decent characterization of where we are.

This recent poll by Bloomberg shows that "...by a two-to-one margin, likely voters in the Nov. 2 midterm elections think taxes have gone up, the economy has shrunk, and the billions lent to banks as part of the Troubled Asset Relief Program won’t be recovered." All of which is wrong. Americans are generally not very educated in history, but these are current events. Granted there has been a concerted effort by the President's detractors to accentuate the problems and misdirect or outright lie about current issues, but the facts are on the side of the Democrats and yet they run away from them.

If the Obama Administration were as good at telling their story as the Reagan and Clinton Administrations, the Democrats might have still held on to the House and Senate. But split government isn't the worst thing. Everybody has their neck on the line. If nothing gets done, everyone is to blame, so they have to find a way to play nice at least long enough to have something to claim during the run-up to the 2012 election. If not, then Obama gets to run his 2012 campaign against a "Do Nothing" Republican-led House and history tells us that has worked pretty well.