Wednesday, December 24, 2008

Life versus the movies

On Christmas Eve we watched the 1951 Alastair Sim version of A Christmas Carol. Scrooge as portrayed by Sim (pre-redemption) forcefully, unremittingly reminded me of Cheney. But Cheney is both far worse and utterly irredeemable.

Someone (me?) should write a satirical Christmas Carol knock-off starring Cheney. Rumsfeld as Marley? Casting or plot ideas, anyone?

Tuesday, December 23, 2008

For greater efficiency, eliminate the middleman

I realize I'm repeating myself from a post a couple of years ago, but wouldn't it be more efficient in baseball to eliminate the middleman (the players) by simply permitting the Yankees to purchase wins and championships directly?

E.g., it's the bottom of the 9th inning of game 162 with the Red Sox (or better yet the Rays) in new Yankee Stadium. Winner of the game makes the playoffs. Yanks trail 10-0. Joe Girardi comes out to talk with the home plate umpire, carrying a small piece of paper - a certified check.

Omigod!! The Yankees just purchased 11 runs for $55 million!! The home plate umpire (like the ref in football upon resolution of a replay challenge) announces what has happened. The Yankees win the pennant!! The fans go crazy!! What a comeback!! Greatest team ever!!

Sunday, December 21, 2008

The cult of home ownership

Good article in today's Times about how the Bush Administraton helped light the fuse under the current economic meltdown by pushing universal home ownership and hence encouraging bad mortgage loans.

Needless to say, there's plenty of blame to go around. Just look at the tax code, both its decades-old features and the Clinton Administration-directed changes thereto that I noted in a recent entry here. The only thing distinctive about the Bush Administration's adding a bit more gas to the fire is the lack of fit with its ostensibly pro-market attitudes.

But I must say, I've never gotten this political cult of homeownership. True, there is some at least slight evidence of positive externalities from home ownership in some settings because people are more committed to the location. (This can have nasty playouts as well, however, e.g., more assiduous racial exclusion.) But on the other hand, investment in more economically productive assets, e.g., via stock ownership, might have positive social externalities as well. Plus, home ownership is often (usually?) a really lousy investment choice from a personal standpoint. It's wildly under-diversified, if you're not rich enough to have a home plus lots of other assets, and leveraging it creates huge downside economic risk (as we've seen).

Once the dust settles, perhaps the government should seek from now on to discourage home ownership, encouraging those who aren't enormously investment-savvy to hold more diversified asset portfolios that are much less leveraged.

Saturday, December 20, 2008

What was Madoff doing?

One of the big questions about Madoff's insane scam is how he thought he would get away with it. Ponzi schemes are inherently unstable, and yet there are indications that he was running this one for decades.

I've read nothing in the media really explaining what he was up to, or why he crashed at this point, perhaps because no one knows. But I would presume the following:

1) He tried to create a Ponzi scheme that would be sustainable over a long period of time by controlling his growth rate. One reads all this stuff about how he used the exclusivity vibe and wouldn't accept just anyone's money. With the rate of return he offered, all he needed to do was grow by a little over 10 percent a year (plus whatever he was taking off the top), and perhaps he felt he could do this for a very long time by showily accepting only so much a year in new accounts. Arguably, this design and his careful and controlled execution of the growth rate made this the cleverest and best-executed Ponzi scheme ever. Perhaps with luck it could have lasted until he died at a normal age.

2) What finally brought him down now? The stock market collapse didn't do it directly, since actual asset prices verged on being irrelevant to the scheme. Presumably, the bad times dried up his new capital and caused suddenly cash-poor investors to want redemptions, leading to a run on the bank.

All this reinforces Krugman's point that Madoff's operation wasn't all that different from what the rest of Wall Street was doing. E.g., pocketing insurance premia that are simply money in the bank until you finally have to pay and can't (the story of AIG) is pretty much the same wine in a different bottle.

Friday, December 19, 2008

Perverse satisfaction?

Today's New York Times notes that a tax break for homeowners, enacted in 1997, may have contributed to the housing bubble that (coupled with pathological defects in our financial markets) did so much to bring us to our grim current economic situation.

Specifically, Congress in 1997, acting at the behest of President Clinton, provided that up to $500,000 of home appreciation would be tax-free on sale. Clinton was practicing silly but no doubt poll-tested populism, boasting that, due to the rule, middle class Americans would never again face capital gains tax on their homes.

Now let's roll the tape forward 11 years. According to the Times:

"[M]any economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

"Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for 'fueling the mother of all housing bubbles.'

"By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can’t-miss investment for much of the last decade, it was also a tax-free one.

"Together with the other housing subsidies that had already been in the tax code — the mortgage-interest deduction chief among them — the law gave people a motive to buy more and more real estate. Lax lending standards and low interest rates then gave people the means to do so.

"Referring to the special treatment for capital gains on homes, Charles O. Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: 'Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?'”

I happen to know a couple of people who got into the business of buying fixer-uppers, doing renovation work, and then selling for tax-free capital gain, thus achieving exemption for their labor income. There, at least, there was productive activity - but still distortion of economic choice by the tax incentive.

One further idiotic incentive effect was that, as soon as your home begins to approach $500,000 of appreciation, you have an incentive to sell it immediately and buy a new home for the current market price, so that you can run the exemption from zero all over again. Happily (?), however, that is no longer a problem in today's market.

Whenever something like this comes out about special tax breaks that don't merely create perverse incentives but seriously aggravate major economic problems, I have to admit to feeling a twinge of, well, perverse satisfaction that the rules I spend some of my time studying are at least important. Plus I duly note that the problems come from failure to heed the recommendations (e.g., for a relatively broad-based and neutral tax) that nearly 100 percent of the experts in my field would make. An unworthy sentiment, to be sure, but I'm only human.

Another big example is the role of the tax system in overly entrenching employer-provided health insurance as the dominant mode of provision, to the degree that, while few would advocate building on employer-provided insurance if we were starting fresh, many believe that at this point we need to just accept it as an entrenched feature. Thus, for example, one of the big criticisms of Senator McCain's healthcare plan was that it would have undermined employer-provided insurance without sufficiently putting something else in its place.

The home exemption story is admittedly a bit more complicated than just being a case of stupid Clinton-era populism. Prior to the 1997 enactment, people could generally roll over gain when they sold one home and bought a new one (for at least as much money) within a two-year period. Plus, gains on home sale were otherwise taxable while losses were nondeductible, creating apparent (and some actual) tax bias. The underlying problem is that a "correct" approach would have treated gains and losses symmetrically (leaving aside the issue of taxpayer choice whether or not to sell) when they resulted from market swings, while disallowing recovery only for declines in home value that resulted from home use. Richard Epstein, before he became a libertarian icon, actually wrote an article on this, suggesting that the basis of homes be reduced by depreciation (which would not, however, be deductible since it reflected personal rather than business use), with gain or loss relative to the adjusted basis being equally recognized. That is actually a pretty logical approach, within a standard income tax accounting framework, and the failure to do it, meaning that in some cases properly deductible investment losses were being disallowed, may have helped contribute to the 1997 silliness.

Still, the predominant message here remains: stupid tax breaks interacted with other defects in our economic system to help create the current horrific circumstances we face. It's happened before, and it will happen again.

Monday, December 15, 2008

That didn't take long

In 2004, Congress enacted a temporary dividends received deduction for U.S. multinationals that repatriated foreign earnings. Under the temporary DRD, the tax rate on dividends from foreign subsidiaries effectively was lowered from as high as 35 percent to just 5.25 percent, but only for dividends during a 12-month time window.

Every tax expert I know whose views on this proposal were sounded - except for those being paid to support it - thought it was a bad idea, despite the acknowledged case for permanently lowering the tax on U.S. multinationals' foreign earnings. The problem lay in the provision's being temporary, and thus creating lock-in when the rate went back up because people would anticipate and wait for the next tax holiday.

As it happened, there was an extraordinary level of response to the tax holiday, more than experts or revenue estimators had expected because it had been thought that companies with lots of perfectly legal and effective tax planning tricks might not be sufficiently worried about the repatriation tax even to pay 5.25 percent to get their earnings home for tax purposes. It's also generally thought that the claim that the repatriations would create U.S. jobs proved predictably bogus. (See Lisa M. Nadal, "Bailouts Disguised as a Tax Cut?", 121 Tax Notes 1230, 12/19/08.)

As Nadal notes, the same companies that successfully pushed for the tax holiday in 2004 are now already seeking a reprise. That didn't take long.

In an important sense, the policy here is entirely backwards even apart from its temporariness, which Nadal suggests could be rationalized this time around in terms of the ongoing liquidity crisis in the U.S. economy. (For myself, in order to accept the liquidity argument for another tax holiday, I'd need to see good evidence that it cost-effectively addresses the credit crunch despite being aimed at just a small clientele of U.S. companies that happen to have trapped foreign earnings that they want to repatriate.)

What makes the policy backwards is that the case for exemption (or a low U.S. tax rate) for foreign source earnings is strongest for new investment, not old investments that have already been made. Retroactively exempting the profits from old investment creates a transition windfall without actually changing the past anticipated incentives, which by now are water under the bridge. A temporary rate cut for dividends, unlike a permanent one, is pretty much guaranteed to apply only to old investment.

True, enacting two tax holidays in 5 years would tend, all else equal, to lower the expected future U.S. tax rate on new investment, since why couldn't the holidays just keep on happening. But counting on holidays is a distortionary and uncertain way to reap tax savings, and who knows if they'll actually keep coming as the U.S. heads out of the recession at some point (one hopes) and ever closer to the point of long-term fiscal distress.

I'm on the verge of writing a book or article on U.S. international tax policy, and one point I want to emphasize in it (akin to the same point made by "new view" skeptics concerning corporate integration) is that in theory there should probably be negative transition relief - i.e., the transition gain from escaping the expected level of tax on past outbound investment probably ought to be eliminated by a one-time tax or its equivalent. (For more on these sorts of transition issues, see my 2000 opus, if I may call it that, When Rules Change.)

But from an interest group standpoint, the bad stuff creates the strongest political pressures for a favorable change, precisely because it plays out in targeted transition gain rather than generalized improvement of incentives.

UPDATE: A reader points out that Larry Summers recently estimated at a public forum that there are $3 trillion of untaxed profits of US multinationals sitting out there abroad. A one-time transition hit on the $3 trillion, plus international tax reform (of some kind) going forward, might be an interesting idea, a few years down the road.

Saturday, December 13, 2008

Cat pandering

Couldn't resist posting this shot of Buddy, a.k.a. the "bad little bunny."

Elmer Fudd wouldn't have liked him, nor Yosemite Sam nor Marvin the Martian, but we actually cherish his foibles.

Friday, December 12, 2008

Reasons to be cheerful

1) I've finally gotten to the end of a huge to-do list that's been hounding me, and frequently growing faster than I could cross things off it, since mid-July. While a new to-do list, possibly a lot worse than the last, is starting to loom and will be having its malign way with me by early January, for the moment I can't or shouldn't do most of those things yet.

2) Expanded 2-CD reissue of Pavement's Brighten the Corners. I got in the mood by spending a few days with the reissue of Wowee Zowee. So far the added material sounds pretty good.

3) Today I was hitting better on the tennis court, and my suspect elbow didn't fall off. My once-reliable forehand, no less than the elbow, has been playing nasty tricks on me lately.

4) Creative gift ideas for certain others, suitably restrained but nonetheless (I hope) thoughtful, have recently occurred to me.

5) I could be in a jury room right now if the case I was picked for hadn't settled.

Thursday, December 11, 2008

Meanwhile, back at the ranch ...

Aided by my enforced downtime (with fewer time-wasting temptations) during jury duty, I have completed a draft of a short article (under 6,000 words) entitled "Internationalization of Income Measures and the U.S. Book-Tax Relationship." It is in part a highly compressed reprise of the line of analysis here (forthcoming shortly in the Georgetown Law Journal), although it also addresses the question of how cross-border convergence in defining taxable and financial income might affect the tradeoffs I identify. I anticipate its appearing some time in 2009 in a National Tax Journal forum on book-tax differences.

A brief conclusion, which probably will also serve as the abstract, goes as follows:

"Taxable income and financial accounting income are measures that use the same name but serve different purposes, leading to some differences in how they might ideally be defined. However, concern about managerial incentive problems may support integrating them, either to increase the economic accuracy of amounts reported or to reduce the resources that managers expend on reducing taxable income and increasing reported earnings. Political incentive problems, on the other hand, arguably support separating the measures, so that legislative eagerness to control the tax base need not promote politicization of accounting standards. The case for a largely one-book system may grow stronger, however, if pressures for international convergence in defining income on both the tax and accounting fronts lead to reduced politicization of both."

I'm not going to post it on SSRN just yet, but anyone interested in reading the current draft version can contact me off-line.

Monday, December 08, 2008

Jury duty

Today I showed up in Chinatown for jury duty, which I had put off twice (out of town the first time, teaching my Tax I class the second). Wouldn't you know it, I got picked for a jury. Civil trial, and I am hoping it will be very short or perhaps even settle. It's likely to an interesting episode albeit with tedious stretches, but I will begrudge the lost time. More when I am free to speak - no need to test here the rules against jurors discussing still-pending trials.

Meanwhile, I see that the Tax Deals class I will be co-teaching with Mihir Desai in the spring has seen its enrollment shoot up from zero (because initially it had not been listed in time) to 8 on Friday, to 21 at the start of today, to full capacity of 25 by the time I was being picked for that jury. Nice to see that there is live interest out there.

UPDATE (Thursday, 12/11): I am now officially off the hook, as the case settled.

Jury duty involves a whole lot of waiting around, and going to the courthouse then leaving again when they conclude that they don't need you for a while. But at least in the Manhattan New York State court (I've heard differently about the Bronx), they make extraordinary efforts to keep people in the jury pool reasonably happy. The building has wireless, carrels are available, the court personnel are gracious and polite, they try to minimize inconvenience, etcetera. Indeed, I even got a Juror Appreciation Week coffee mug. The jury pool seemed to mirror the Manhattan population, though perhaps with a slight tilt towards the affluent and professional sector. This may help explain the consistent courtesy and (up to a budget-constrained point) catering to our comforts.

On Monday afternoon, 19 of us were randomly called for a civil case that we ended up learning about in some detail from the attorneys during the voir dire. Apparently, a financial institutions executive driving a Mercedes had hit a pedestrian. The victim and plaintiff, according to the defense attorney, was a gracious and lovely woman "of a certain age," which turned out, as best I could tell when I saw her later, to mean in her mid to late 60s.

Ouch. Even though apparently there was no DUI issue, this does not sound like a case that you would want to send a jury. But of course it depends on how hard the plaintiff was pushing for disputable damages. The defense attorney spent a great deal of time during the voir dire explaining how nice and lovely the plaintiff was, and how he hoped we nonetheless could (a) understand his sad duty to impeach her on cross, and (b) retain our objectivity and award only modest damages if we were skeptical about her claims, apparently involving dental work.

Apart from the defense attorney's trying to precondition us to fight our expected pro-plaintiff sympathies, the main focus of the voir dire was on whether anyone had civil suit or car accident experiences that would make them biased. Three people claimed they would be unduly biased due to personal experiences of this kind, but all three appeared to me primarily motivated by the understandable desire to avoid being picked. Another three people appeared to have too little English language comprehension to be feasible jurors. This left 13 of us for 8 slots (6 jurors plus two alternates). The chosen ended up including not just me but another lawyer and also a doctor (who might have ended up being our go-to juror on medical testimony).

The 8 of us ended up spending Tuesday sitting in a small room, then being sent home for a few hours, then going to the courtroom and sitting around a bit more before being told that the trial would start Thursday morning. Today, we sat around for about a half hour and then were called in by the judge and told that the case had settled.

On the way out, the defense attorney greeted me as professor. I expressed surprise that I had been chosen for the jury, and he said that he, too, had been surprised that they (i.e. he and the plaintiff's attorney) had picked me.

I hope my certificate of service arrives promptly, as the feds have already sent me a juror questionnaire and thus are likely to summon me soon.

Sunday, December 07, 2008

Someone's got to take out the trash

Amazing article in today's Times about Moody's.  They used to refuse any compensation from the issuers they were rating, because this would create a conflict of interest and undermine their credibility.  Then they decided to be compensated by those businesses.  Then they went public and got caught up in short-term earnings mania.  Then they started rating trash instruments as AAA, and when good customers complained about a lower rating they would raise it.  Meanwhile, they were basing projections on scenarios in which, say, there was no estimated chance that housing prices would generally decline.

One can try to explain this in a rational behavior scenario.  Greedy cashing out on the Moody's side by officers with short time horizons, collective action problem on the shareholders' and investors' sides so no one steps forward to be the one to question them seriously.  But assuming individually rational behavior that plays out like this doesn't really help the neoclassical approach, because you get to wildly socially irrational outcomes anyway.

Friday, December 05, 2008

End of the semester

I have just completed teaching my last Tax I class of the fall 2008 semester. I'm always ambivalent when this happens. Certainly, having more free time until the next semester is welcome; teaching has elements of being a chore and isn't necessarily the main reason one goes into this line of work. But a semester-long class is kind of a living thing that the professor & students share and that can be fun; you really get to know each other though just in this formalized setting. And I felt we had pretty good relations and some fun together plus a sense of shared enterprise. I enjoyed teaching this class, and the next time inevitably will be different; possibly not as good since these things inevitably vary each time around.

As a parting gesture various students brought in items of fruit on the last day. This referred in part to a couple of early twentieth century Supreme Court tax cases that (following Marvin Chirelstein) I mocked for their labored and unhelpful metaphors about "fruit and tree": Eisner v. Macomber, saying that only the fruit is income; and Lucas v. Earl, saying that the fruit can only be taxed to the tree on which it grew. Other references behind the gesture: someone brought in an apple earlier in the semester, and when I forgot it he brought in a persimmon the next time; also, I've mentioned my mania for the Union Square farmer's market when fresh fruit is in season. So the gesture was literarily rich; multiple layers of reference.

Anyway, here was my net haul: 4 bananas, a persimmon, a few lychees, a pomegranate, a kiwi, a pineapple, a mango, an orange, a tangerine, a Clementine, an Asian pear, a Comice pear, and a potato (perhaps because in French it's a "pomme de terre"?). Plus an NYU canvas bag so I can carry my loot home.

Luckily I do not plan to respond by asking them on the exam whether this haul is taxable income. Detached generosity? (I'd like to think so.) Might section 102(c) apply? (No, they aren't the employer.)

Final chapter of the class saga, other than the exam, is recruitment to the lifestyle. We tax profs are all alike. We are hoping people will be interested enough to take more classes in the subject, and perhaps to give more thought than they had expected to tax policy as a subject or tax practice as a career. I'd certainly be happy to see people from this class again over the next few semesters. On this angle, on verra.

Wednesday, December 03, 2008

Dinosaur poem I once wrote for my kids

Maybe ten years ago or so or more, I wrote them this little doggerel number while we were at Rye Playland early in the summer.  I recently spotted it in my closet.  With apologies to Robert Bakker (for his dinosaur novel Raptor Red), and for the historical inaccuracies regarding which species actually coexisted with velociraptors:

The duckbill herd had drunk its fill
Thought Raptor Red: "It's time to kill."
Her sisters three were close at hand
And by the grove they made their stand
The duckbill herd was acting shy
And sticking close as they went by
A flash of claws, a snarl of teeth
The sisters leaped, and pinned beneath
A duckbill chick, who soon was still
The herd all honked and fled downhill
And stomped beneath their thundering feet
An acrocanthosaur who'd planned to eat
The raptors' kill as stolen meat
The raptors stretched and ate their fill
And lay down in the grass until
Another acro spied their prize
But by that time no meat was left
Except some for the pterodactyls and the flies.

Monday, December 01, 2008

Loser culture

Why are the U.S.-owned car companies so bad?  Presumably the reason is ingrained corporate culture.  They spent decades as oligopolists, protected from foreign competition because World War II had leveled the rest of the industrial world.  Plus, barriers to entry in the car business prevented domestic turnover a la Microsoft supplanting IBM.  By the time significant foreign competition arrived in the 1970s it was too late - the corporate culture had ossified beyond repair.

As a junior tax associate at a D.C. law firm in the 1980s, I went out to Detroit a couple of times on a case, and had lunch with mid-level execs in the company canteen.  It was obvious even back then that they were utterly lost and knew it.  A lot of big paunches and thinning white hair but no ideas, enthusiasm, or hope.

Hard to see how a rescue or managed bankruptcy changes this.

Studied ambiguity?

For what it's worth, I gather from the Tax Prof Blog that the artificial intelligence program at Gender Analyzer rates this blog as (only?) 61 percent likely to be written by a man, making it the closest to gender-neutral among a group of tax blogs other than the Tax Prof Blog itself, which comes in at 52%. Then again, two of the tax blogs come out opposite from the correct answer, perhaps saying more about the AI model than about the particular bloggers involved.

Thursday, November 27, 2008

Preparing to pivot

The tricky move the Obama Administration faces in budget policy is to go lax in the short run, given the need for stimulus to fight off recession, but then to steer back towards fiscal sustainability, with the drop-dead date possibly having been moved up from, say, the early 2020s to the late 2010s. 

According to today's Times, they are already thinking about this, with Jason Furman consulting with Congressional "Blue Dogs" about budget rules, "including a potential law requiring balanced budgets to formalize the pay-as-you-go approach favored by the coalition."

I'm increasingly convinced that balanced budgets and annual pay-as-you-go aren't really the right way to go about this.   The focus should instead be on a combination of short-term (five or ten year) plus long-term (infinite horizon) balance, or at least constraints on making things worse, given the distinct political pathologies that can lead to violation of either.  There are also tricky design questions involving the choice between super-majority rules and automatic changes (such as sequesters) if targets are missed.

More on this as things develop if it gets anywhere.  But the basic underlying task of designing constructive budget rules is tricky to say the least, and more art than science given the political economy aspects.

Wednesday, November 26, 2008

There's got to be a metaphor in here somewhere

But even if not, an amusing photo.

Yes, those are baby skunks that she has evidently adopted.

Saturday, November 22, 2008

Confession of a deficit hawk

Before the financial crisis hit, the U.S. appeared to be headed towards a fiscal calamity, probably no later than the early 2020s. The likely doomsday date has surely moved several years closer, perhaps to some point in the late 2010s.

I nonetheless accept the need for something like Obama's Economic Recovery Plan, and also agree that this is the time to do healthcare. But even if all this goes well, the really tricky part will be navigating back towards fiscal responsibility, after having opened the federal wallet wide and benefited from doing so.

In a really optimistic scenario, the political credibility rightfully gained in 2009 will create genuine political capital, not Bush 2004-style fool's gold, that can actually be used to do unpopular things that are unlikely to have any Republican support.

Thursday, November 20, 2008

Which do you want first, the bad news or the good news?

Bad news, you say? The Dow fell 445 points today.

The good news is that it can only happen 17 more times, then we'll be done.

If I were a billionaire

Certainly, under those circumstances, I'd be tempted to consider paying $50,000 to have our 18-year-old cat Shadow cloned, although I gather the cat cloning business isn't going so well. People raise ethical questions about cat cloning, rightly enough given all the unwanted strays, but Shadow, with his astonishingly good temperament (if we could recreate it), surely is a special case.

Today I found another use for that mythical money, upon reading that a mere $10 million could bring to life a reconstituted woolly mammoth. That would be an easy call for me if I had a billion. And sign me up as well for the reconstituted Neanderthal that (whom?) the article discusses - ethical questions be damned when you think of how astonishing this would be.

Before getting too excited, I should note that, while I haven't yet checked today's stock prices, as of yesterday they didn't appear to be heading me in the direction of a billion dollars. Indeed, these days zero is starting to look a lot more likely.

Sunday, November 16, 2008

Rangel corporate rate cut proposal

From Bloomberg, courtesy of Tax Prof:

"New York Representative Charles Rangel said he's revising his tax overhaul proposal to reduce U.S. corporate tax rates to 28 percent, down from the current rate of 35 percent .... [to be financed] by targeting special-interest provisions that favor some industries and companies over others.

"Only Japan has a higher marginal corporate tax rate among developed nations, the Treasury Department said last year. When state taxes are factored in, U.S. corporations pay about 39 percent on their last dollar of profit.

"Obama has said that the effective tax rate paid by U.S. companies is much lower once they claim deductions, credits, and other adjustments to taxable income. In 2006, for example, American companies paid an average effective tax rate of about 23.7 percent, according to a study by Ernst & Young LLP."

Tax preferences that Rangel says are on the chopping block include the domestic production incentive, LIFO accounting, some stuff for multinationals, and something in the carried interest realm.

A few points to keep in mind here: First, cutting the corporate rate and broadening the base is generally an unambiguously good idea (keeping in mind, however, that for outbound investment this depends on whether a worldwide tax is optimal, as seems unlikely given its resting on the weak reed of corporate residence).

Second, a fully financed domestic corporate rate cut (i.e., not necessarily financed by corporate base-broadening) is also highly likely to be a good idea in the setting of worldwide tax competition.

Third, even if the effective tax rate paid by U.S. companies on domestic investment is low, a high marginal rate is still a problem - not just for the general reasons why base-broadening plus rate-cutting is desirable, but also because in various cases it will be the marginal rate, not the effective rate, that drives particular decisions in the realm of worldwide tax competition. (An example is transfer pricing incentives to treat marginal dollars as foreign source rather than U.S. source.)

Here's hoping Rangel gets somewhere on this, although it is more out of his playbook than Obama's.

Saturday, November 15, 2008

Act now while supplies last

My latest article, The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?, is now available on SSRN here.

Abstract is as follows:

Current U.S. budget policy is unsustainable because it violates the intertemporal budget constraint. While the resulting fiscal gap will eventually be eliminated whether we like it or not, the big issue in current budget debate is whether the ultimately unavoidable course corrections should start now or be left for later. This paper argues that concerns of generational equity, which often are relied on by those demanding a prompt course correction, do not convincingly settle the issue, given empirical uncertainties about future generations' circumstances. However, efficiency issues create powerful grounds for urging a course correction sooner rather than later, on three main grounds: to eliminate the risk of a catastrophic fiscal collapse, achieve the advantages of tax smoothing, and smooth adjustments to the consumption made possible by various government outlays. Political economy considerations suggest that the risk of a catastrophic fiscal collapse may be significant even though in principle it could easily be avoided.

Tuesday, November 11, 2008

Colloquium presentation at Loyola LA

Yesterday I presented my forthcoming budget policy paper, The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity? [to be posted on SSRN & linked here shortly], at Loyola Los Angeles.

Ted Seto offered excellent comments in which he showed, to my surprise, that I am not at the most pessimistic end of the spectrum concerning where U.S. budget policy is headed over the next 10+ years. He suggests that I add to my "doomsday scenario" (the ugly mess if the U.S. tiptoes too close to outright default) both (a) the collapse/replacement of the dollar as the worldwide reserve currency, clearly to our detriment and to that of other countries as well if a good replacement currency (such as the Euro) doesn't seamlessly emerge, and (b) the geopolitical consequences of economic troubles that might lead to the rise of extremist political regimes in hard-hit countries around the world, a la what happened in the Great Depression, only now with widespread nuclear weapons.

Monday, November 10, 2008

JCT Tax Expenditure estimates

I've commented in the past on the great work that's been going on at the Joint Committee on Taxation seeking to improve the usefulness of the tax expenditure concept by wresting it free of the irrelevant side-debate with which it was long intertwined concerning efforts to define a "normal" tax base.

The JCT has now issued what I believe are its first new set of annual five-year estimates using their revised methodology.

This advance deserves attention, and over time I hope will get it.

Stanford Law School conference on the tax gap

This past Saturday I was a commentator, at the Stanford Law School's tax gap conference, on a paper by Joe Bankman, Stuart Karlinsky, and Susan Morse concerning why cash businesses cheat (based on field interviews with people who spoke freely because it was confidential).

In my comments, I described the paper's chief finding as quite similar to that of a recent scientific study that addressed the question: Why do the female spiders in some species eat their mates?

As a news article on the study explains:

"[Previous s]tudies have suggested various complex evolutionary reasons involving costs and benefits to the species, sperm competition and esoteric sexual selection schemes.

"But it turns out that the motivation for this creepy cannibalism is much simpler. It's all about size. The males are much smaller. Big females eat their puny mates simply because a) they're hungry and b) they can."

That, in a nutshell, is the Bankman-Karlinsky-Morse finding. Cash businesses often cheat because (a) they're hungry (that is, they'd rather have more money than less) and (b) they can. It's not about deep feelings concerning the government, social reciprocity norms, etcetera.

Empirical evidence cited in the paper suggests that cash businesses, on average, pay tax on only half their income, versus 99% for employees. This is clearly a big efficiency problem as well as a revenue problem, amounting to a huge tax preference for one set of activities over another. Talk about excessive incentives for entrepeneurship. And while part of the under-reporting comes from hand-to-mouth small operators, it also extends well up the income scale.

Why hasn't enforcement been better? It's inherently hard to observe cash businesses' transactions, but not impossible, especially in the modern computer age. Political will and under-powered government incentives to find the revenue are important as well. Aggressive data mining operations, perhaps involving private firms that will be compensated by the Treasury based on how much their suggested approaches end up yielding, could do a lot to address the problem, and perhaps in the next few years we will see movement in this direction. Even if the reported income percentage from cash businesses were raised just a bit - say, from 50% to 60% to 70% - that would raise revenue while actually reducing economic distortion.

Once again, an economic downturn isn't the absolute best time to start doing this, but it might be an ideal time to lay the groundwork to start doing it in the next phase of the business cycle.

Audacious stunt by the Treasury Department

Today's Washington Post reveals a truly audacious stunt that the Treasury Department pulled in late September, essentially repealing on its own motion Code section 382 as applied to banks. The ruling through which it did this is available here, and it appears to be aptly described as flat-out repeal of the provision so far as banks are concerned.

Background for non-tax geeks (or tax non-geeks): companies can't deduct their net losses (you pay zero tax, but don't get a refund, whether your income for the year is zero or minus $10 billion). But losses thus rendered unusable can be carried over to other taxable years and used to offset taxable income in those other years. Loss companies therefore stagger around carrying "net operating losses" (NOLs) that they can use whenever they have offsetting positive taxable income, but in some cases they are unlikely to have such income any time soon or perhaps ever.

The NOLs are a tax asset, however, potentially making the companies (even if otherwise they are dogs) attractive to companies that have profits they would like to shelter. Section 382 greatly limits this little game by sharply reducing the ability to use the losses when you (i.e., another company) acquire a loss company.

The policy merits of this provision are decidedly mixed. For starters, why should losses be nonrefundable? An alternative approach to existing law would say that, if $10 billion of taxable income generates $3.5 billion of tax liability, then a $10 billion loss should generate a $3.5 billion negative tax, i.e., payment by the Treasury to the unfortunate taxpayer. Absent such a rule, the tax law discourages risk-taking and increases effective tax rates via a "heads we win, tails you lose" approach to tax liability. This is unambiguously bad policy (ignoring a complicating consideration that I'll add in a moment), and recent research by economist Alan Auerbach suggests that it has increasing adverse effects on corporate tax burdens because of greater dispersion in economic outcomes that makes losses more common.

There is, however, one decent rationale for loss nonrefundability. It serves as a backstop on the extent to which companies can derive tax benefit from generating fake tax shelter losses. Consider Enron. They were losing tons of money, but creating tons of positive taxable income through sham transactions that they used to generate bogus financial accounting income. They then offset the fake income with fake losses from preposterous tax shelters. But they could only use the shelters to drive their taxable income to zero. Absent nonrefundability, they could have kept on going and forced the government to pay them huge sums annually through the tax system.

Nonrefundability is thus defensible, which is not to say that it is clearly correct or unproblematic, so long as we remain unconfident that claimed tax losses are true economic losses. Section 382 then serves as a backstop by preventing the use of mergers as an endrun around the loss limit (create fake losses, then sell them to someone who can use them). It is a bad provision insofar as it tightens the constraint on using real losses that ought to be refundable, a good one insofar as it limits the abuse scenario, and a bit of a good one insofar as it prevents otherwise inefficient and socially undesirable mergers from being done simply for tax reasons (as the price of getting to buy the losses).

What's the balance of merits overall? Hard to say. But it is troubling to see the Treasury unilaterally repealing it as to banks, really beyond its proper authority (at least in normal circumstances) even if they can get away with it.

Even given the financial crisis, I don't think they should have flat out repealed section 382 as to banks. More limited relief, directed to the current financial situation and the next few years, would have made more sense and been less fundamentally improper. Perhaps policy enthusiasm for the broader repeal played a role.

Then again, given the change in Administration, it's plausible to me that the overreach will be allowed to stand just for now (again, perhaps justifiably given the financial crisis) and then reversed. And/or Congress can reverse it with deferred implementation of the rule restoring the provision's applicability to banks.

It will be interesting to see, in the years ahead, whether the Treasury reverses other Bush-era regulatory giveaways to corporate taxpayers, as there were indeed a lot of them and some at least were dubious (though often also defensible) on policy grounds. A recession might not be the right time to do any of this, but the new Administration should be around for a while, and the current Treasury has certainly left us here with a precedent for sharply reversing course, just because one wants to, when the time seems right.

Friday, November 07, 2008

Go West, young (?) man

Later today I'm headed to California, where I will first, on Saturday, comment at a Tax Gap conference on a paper by Joe Bankman, Stu Karlinsky, and Susan Morse concerning cash businesses. Then, on Monday, I will go to Loyola Los Angeles and present my paper (from the GWU conference that I blogged recently here) concerning the long-term U.S. fiscal gap. The forum is Loyola's tax colloquium, hosted by Ted Seto. That paper will also shortly be posted on SSRN, whereupon I will offer the link to it here.

I'm also planning to say something here, at some point soon, concerning U.S. tax and budget policy under the Obama Administration, given the fiscal gap on the one hand, the still-cratering economy on the other, and some of the tax policy issues that the Administration either may or must be taking on soon (e.g., outbound investment by US multinationals, expiring Bush-era tax cuts, etc.). But that will take a bit more time (though I write these entries super-fast) than I will have available for the next few days.

Tuesday, November 04, 2008

Obama wins

Eight years of unrelieved ugliness are almost over.

Perhaps the most important thing, in the long run, is that the Republicans return to sanity so that we have two reasonably responsible parties, as any well-functioning democracy needs. They have been stark raving mad for 14 years now, relentlessly undermining civil society and seeking to destroy honest public discourse along with the rule of law. I am very pessimistic about this in the short run, but more hopeful as one looks past, say, 2012.

Some important things, perhaps healthcare reform, arguably can be accomplished by just one party. Likewise, rejecting endless war, to the utter exclusion of moral suasion and "soft power," as our primary foreign policy tool. Other important goals, such as addressing the fiscal gap, clearly do require both parties. And still others, such as fundamental tax reform, ain't gonna happen nohow anyway.

In any event, however, kicking them out tonight was a start.

Election Day

I got to the polling place at 6:25 AM - lines around the block, hundreds of people, I've never seen anything close on Election Day even more towards prime time. But the line moved well, and in 35 minutes I was done.

The guy behind me on line was saying he hadn't voted since Perot. The woman he was talking with said she tries to vote each time, but in the past didn't always see a clear choice. "But with all the corruption, it seems like every day there's a new scandal ..."

Seven and a half long years of lies, corruption, incompetence, malevolence, and endless insults hurled at New Yorkers and others like us - indeed, at anyone around the world who isn't a small town white religious conservative Republican - are evidently more than enough to bring out the fighting spirit in this town, and elsewhere, I am sure, as well. I think people around the country who are sick to death of it all will brave long lines if they have to, even in places like New York where the statewide outcome is a given.

Monday, November 03, 2008

Nate, don't fail me now

On Election Eve, Silver at has it up to 98.1 percent.

This will make it easier to sleep tonight.

I'm planning to vote by 6:30 a.m., but just the once.

EARLY AFTERNOON ELECTION DAY UPDATE: If Silver's estimates are treated as reliable (and they assume lack of overall systematic bias in the polling data), Obama gets 264 electoral votes from states that the model treats him as having a 100 percent chance of winning. (Pennsylvania, with 21 electoral votes, is among those states.) He would go over 270 if he got Colorado's 9 EVs (98%), Virginia's 13 (97%), Ohio's 20 (88%), or Florida's 27 (73%). Nevada's 5 (95%) would get him to 269, presumably good enough for the win given (a) Democratic control in Congress plus (b) the persuasive significance of his popular vote edge, assuming it holds.

Obviously, these various probabilities, even if we take them at face value, are unlikely to be entirely uncorrelated.

While some might take comfort from these numbers, they also provide a panic guide if Virginia doesn't fall briskly into place in the hour after 7 pm (as this might undermine confidence in the entire projection).

The flat tax isn't flat

Freddie, a thoughtful conservative blogger not previously known to me but linked by Andrew Sullivan, says the following about McCain's "socialism" attack:

"I think we could have an election that involves a major debate about the progressive income tax, but in order to have it, we'd have to have a candidate who is actually opposed to progressive taxation. The alternative to progressive taxation is a flat tax, and John McCain is not a flat tax supporter. If this 'spread the wealth around' argument is an argument with actual substance, instead of pure political opportunism, it has to be waged by people who are actually opposed to progressive taxation, in favor of a flat tax. John McCain, as much as he may want to limit the slope of the tax line, isn't in favor of a flat tax; it's not in his policy proposals at all. Could you have a simple 'let's have a more regressive tax scheme than we currently do' argument? Sure. But that can't be this scorched-earth, progressive taxation equals socialism argument the McCain campaign is making. It just doesn't make sense to have this extremist argument when the candidate making it isn't on one of the extremes."

Freddie has a point, but he doesn't go far enough. First of all, if you are truly anti-redistributive, a uniform head tax is as good a candidate as the flat tax, and perhaps better, for your preferred tax norm. Hard to choose between them on anti-redistributionist grounds when (absent a meaningful non-government baseline) we don't really have a way to measure the relationship between benefit and rising income.

But in any case the flat tax isn't actually flat. It has a zero bracket, which means that it has a progressively graduated marginal rate structure. Historical tidbit: when the Supreme Court struck down the income tax (pre-Sixteenth Amendment) in the infamous 1896 Pollock v. Farmer's Land case, it held that a flat tax with a huge zero bracket and one very low rate (maybe 2.5% or so?) was unduly progressive, violating equal protection and indeed being, in the Court's view, socialistic.

To believe in flat rate taxation as a matter of principle - leaving aside the formalism and incoherence of a principle that's based only on the revenue side of the budget without regard to the outlay side - you just cannot believe in a zero bracket. Otherwise, as the old joke goes, we have already established what you are (i.e., a "socialist" under the inane and intellectually bankrupt pretend view of the McCain campaign) and are merely haggling over the price.

Sunday, November 02, 2008

Economist Christine Romer on fiscal policy

From an interview (along with her husband David Romer) in a Federal Reserve Bank of Minneapolis publication, the Region:

"What's very striking is that we had a pretty sensible long-run fiscal view in the 1950s - the budget should be balanced over the medium run, but not each and every year and not in exceptional circumstances ....

"But views took an unfortunate turn in the 1960s and 70s. Policymakers started to believe that budget balance was not important even over an extended horizon, and that tax cuts would pay for themselves. And views took another wrong turn in the 1980s, when policymakers added notions such as the starve-the-beast hypothesis that tax cuts would force spending cuts. I think these are wrong turns that we haven't corrected yet - as evidenced by our ever-worsening long-term fiscal outlook."

The Romers' empirical work has refuted the starve-the-beast hypothesis as applied to the last few decades, and showed instead that what tax cuts lead to is subsequent tax increases. (I've also seen empirical work suggesting that tax cuts tend to be accompanied by spending increases, since fiscal discipline is either tight or slack - although here the theory is correlation with an underlying common cause, not necessarily direct causation).

Astonishing historical factoid from the Romer interview: taxes were apparently raised at the beginning of the Korean War BEFORE significant money was actually being spent on it, simply because they knew that the high expenditure levels were coming. That is like hearing tidings from another planet, inhabited by a farsighted species entirely unlike our own.

Friday, October 31, 2008

Income inequality vs. consumption inequality

A post today by Kevin Drum reminded me of an issue that arose in the media a few months back that I've meant to address. Some economists (I gather mainly conservative ones) argue that focusing on income inequality is misguided. Thus, according to Michael Cox and Richard Alm some months back:

"Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society."

Given the view I've expressed elsewhere (even if with qualifications and reservations) that a consumption tax is superior to an income tax, not just on efficiency grounds but also as a distributional measure of relative wellbeing, why wouldn't I agree with this?

In a word, because it's wrong, and wrong in a way that is consistent with viewing the consumption tax (if suitably progressive) as the superior instrument.

The case for a consumption tax is NOT that this year's consumption provides a better measure of one's wellbeing than this year's income or wealth. Much the contrary. What makes the consumption tax potentially an appealing instrument for measuring relative wellbeing is that it is neutral between present and future consumption. Hence, it is a wealth tax in the sense that the present value of the tax one would pay if one consumed all of one's wealth immediately is not reduced by deferring some of the consumption to future years (or even indefinitely).

So if we have a 40% consumption tax that will be in place forever and I earn $1 million this year but consume only $100,000, then, while I pay only $40,000 of tax this year, the increase in the present value of my long-term tax liability is indeed $400,000.

So a consumption tax gets it right (if one accepts this line of argument) not because current consumption is the metric of interest, but because of how the tax unfolds in imposing liability over time.

If wealth-holding gets more uneven but current consumption doesn't, the society has indeed grown more unequal. People's opportunity sets or budget lines have diverged. A consumption tax would automatically adjust for this, but using annual consumption as one's measure of inequality gets it wrong.

Wednesday, October 29, 2008

Baseball idea

There should be a rule, solely for the post-season, that games are never treated either as rained out before they have become official, or as terminated short of 9 innings, on account of weather. Rather, they would in all cases be suspended and resumed where they left off at the next opportunity.

In the regular season, starting games over or ending them early seems acceptable, but in the post-season the stakes are too high and thus it would leave too bad a taste. We saw this in Game 5, where even the Phillies said they didn't want to win a shortened game (but imagine how irked they would have been had it been washed out after 4 innings with them ahead). Selig lucked into being able to suspend Game 5 because the Rays tied the score. But with the rule change I suggest the umpires would have been able to do this in any event, and the contortions of dragging out an important game under unplayable conditions would not be necessary.

Monday, October 27, 2008

[Deleted rant about Douglas Holtz-Eakin]

I've deleted a rant I had here about Doug Holtz-Eakin's doing more sleazy lying on the campaign trail, because only his former life as a reputable academic made it potentially comment-worthy. But face it, the guy really isn't worth talking about any more. Saruman, I expel you from the order of Wizards ... Although on second thought he reminds me more, at this point, of Emil Jannings in the latter stages of The Blue Angel.

UPDATE: As the old saying goes, we [meaning academics and people who care about the truth of what we say] didn't leave him, he left us. The question is why. I have to think he doesn't plan to return to anything like an academic setting, and has a fundamental career change in mind such that he doesn't care about his reputation in the old circles. Perhaps it's just my own limited imagination that finds this baffling - not the desire to do something different, but the rejection of intellectual honor and honesty (paying off reputationally) as personal values.

Sunday, October 26, 2008

McCain explains his tax position

McCain keeps saying, so far as I can make any sense of it, that asking higher-income people to pay more tax than others is "socialist." Thus, he appears to be advocating a uniform head tax as the only alternative to "socialism," though needless to say he declines to make this explicit.

But what about the fact that, in the past, he has said that higher-income people should pay more and has criticized the Bush tax cuts as overly skewed to the rich? Luckily, he got to explain it all on Meet the Press, where Tom Brokaw pressed him on the contradiction between his present and past remarks.

Take it away, John, you silver-tongued devil:

“That's what -- listen, even the flat tax people somewhat pay more. Even -- you put into different, different categories of wealthier people paying, paying higher taxes into different brackets. I mean, and the, and these are different times, my friend. These are times of the biggest financial crisis we've faced in America.”

Wow. When is Palin going to start briefing him on the issues?

Friday, October 24, 2008

GWU Law School conference on generational equity

Yesterday I attended the first half of a conference at GWU Law School in Washington, D.C., organized by Neil Buchanan, concerning generational equity. 5 panels: philosophical perspectives, government finance (my panel, obviously), environmental, reproductive rights, "living constitution."

Ordinarily it's bad sportsmanship to go to a conference and not attend all of the panels, since this would both shrink the audiences and destroy the idea of bringing multiple perspectives together. But this time around I had no choice but to miss panels 3-5, as they are today in DC whereas I have to be back in New York to teach my next class.

On the philosophical perspectives panel, Bob Hockett and Ori Herstein presented papers dealing with aspects of the generational equity issue that don't especially excite my main interests - my fault, no doubt, not theirs - as I'm committed to a utilitarian perspective in which one weights present and future individuals equally whereas they are worried about problems such as the Derek Parfit non-identity issue (we don't know yet, and perhaps it isn't determined yet, which individuals they will be), or the issue of whether people can have rights before they exist. Great commentary, from a perspective that I very much share, by GW philosopher David DeGrazia, who has written books on animal rights that I now am curious to see.

On the fiscal panel, the main papers were by Neil Buchanan and me. Neil criticizes generational equity-based grounds for worrying about the fiscal gap, on the view that, even if future lifetime net tax rates go way up, future generations are still expected to have higher after-tax and transfer lifetime incomes than current ones.

I argued in my paper that relative wealth is only one of the inputs to a utilitarian analysis of generational equity, and that there are lots of other important inputs, with the unfortunate effect of making the implications of such analysis for our long-term budgetary problems empirically indeterminate. I argue that efficiency reasons (the risk of a fiscal meltdown, plus arguments for tax smoothing and outlay smoothing) strongly support addressing the fiscal gap immediately, subject only to countercyclical concerns which affect only the timing of implementation for tax increases and benefit/spending cuts, not the timing of their announcement. Plus I discuss the political economy issues and suggest that in the current U.S. they support taking a pretty grim view of the fiscal meltdown risks.

Nancy Altman offered comments on my paper. Although she is perhaps a bit more in the Krugman camp than I am (viewing it as primarily a healthcare crisis not a budget crisis, whereas I say it's equally both), I stated publicly during the discussion that she and I appear to be 90% in agreement. A minute later I whispered to her that this was too low - probably more like 95% agreement.

I'll post the paper on SSRN fairly soon and then of course link to it here. I've gotten a few excellent comments from readers that I need to incorporate, plus I need to adjust in a couple of places for (a) the most recent developments in the financial markets meltdown we're having, plus (b) the outcome on Nov 4, once that is known.

Wednesday, October 22, 2008


I seem to be having Internet problems. I can't download, or even find any reference to, the McCain proposal to replace the income tax with a uniform head tax. Yet he must be planning to announce this, given his newfound aversion to "socialism."

THE big news story of the day

Working out in the health club this morning, I could see (from screens tuned to CNN and even Fox) that the big news story of the day, hands down, is Palin's $150,000 clothing budget from the RNC.

It is of course comical that a story like this should be so prominent, or should matter at all. Of course the RNC would want to outfit her (or any other candidate) appropriately to create the right visuals - the campaign consultants are paid to think through all this stuff.

What makes it a big story, of course, is the combination of (a) the trivially personal turn that presidential elections have taken for some time now (e.g., Edwards' haircut, evidently deemed the most important campaign story of 2007), (b) the Republicans' history of ruthlessly playing up these issues whenever it's a Democrat, inviting payback, and (c) the evident hypocrisy given Palin's over-the-top faux populism. So I'm enjoying it, but if this kind of story ceased to matter politically (symmetrically as between the parties) we all might be better off, albeit a hair less entertained.

As a matter of federal income tax law, by the way, the clothes are unambiguously taxable income to Palin if she keeps them. See Pevsner v. Commissioner, 628 F.2d 467 (5th Cir. 1980), in which an Yves St. Laurent sales manager was deemed taxable on her YSL-made business apparel, even though she wore it in the store for business reasons. (Pevsner arose as a business deduction issue when she paid for the clothes, rather than an income inclusion issue from someone else's doing so, but this makes no legal difference.) It was undisputed that Pevsner considered it important to show the flag by wearing the clothes to work, given her job, and that they were more expensive than what she would have purchased otherwise. But the court stated:

"The generally accepted rule governing the deductibility [= includability for Palin] of clothing expenses is that the cost of clothing is deductible as a business expense only if: (1) the clothing is of a type specifically required as a condition of employment, (2) it is not adaptable to general usage as ordinary clothing, and (3) it is not so worn." In other words, baseball players' or firefighters' uniforms and the like, but definitely not Palin's stylish threads (if she keeps them).

While the law seems crystal-clear, I admit that I don't know what constitutes ordinary practice for politicians, movie actors who keep the clothes they were given for a film shoot, etcetera.

UPDATE: From looking at other reactions to this story, I see inklings that (a)it potentially violated campaign finance laws, (b) some Republicans think it was a Palin-directed shopping spree rather than the work of the RNC image consultants, which if true would certainly increase the story's informational content about Palin's character, and (c) the McCain campaign claims, at least now that it has all come out, that they're planning to give all the loot to charity after November 4.

Tuesday, October 21, 2008

Jon Stewart's Daily Show

I actually got to attend a taping today, courtesy of a friend from out of the country who had an extra ticket (requested months in advance). I must say, McCain continues to give these guys great material, day after day, since almost any scurrilous or silly thing he says comes with ready videotape of a complete contradiction.

Best moment: when Jon blew the first segment (omitting the punchline) and had to retape it at the end, he added a joke just for the studio audience about the retaping that you can see (without knowing the context) in the show as broadcast.

Fiscal stimulus and the budget deficit / fiscal gap

Paul Krugman is among those mocking the idea that we need to worry about the long-term fiscal situation given the risk of severe recession and the need for fiscal not just monetary policy to address it.

Okay, I'm on board for fiscal stimulus this time around, although I don't like it in general because I think politicians tend to misuse it in other circumstances as an excuse for whatever they happen to want to do (e.g., the Bush 2003 tax cuts) and because it is used asymmetrically for the down cycles only. But I recognize that this may be one of those "Break glass in emergency only"-type moments.

Still, the response to the financial crisis is beginning to remind me of one of the perversities of how budget policy responded to 9/11. True, when 9/11 happened, we (a) needed to increase spending for Afghanistan and domestic security and (b) would have been ill-advised to implement immediate tax increases to pay for the extra spending. But there was no reason, apart from politics, not to enact deferred financing. Fundamentally, 9/11 indicated that we would have a larger long-term fiscal problem than was previously expected, yet it played out politically on the ground as if it meant that budgetary concerns could now be completely ignored. (Recall that, right before it happened, the "lockbox" question of whether Social Security surpluses were ostensibly being used to pay for current spending was at political center stage.)

The current financial crisis likewise indicates that, in the long run, our fiscal problems are larger, not smaller, than we previously believed. So it is vital to think about long-term fiscal problems even though big short-term deficits may make sense.

Krugman is blind to this because he insists that "[w]e don’t have an entitlement crisis — we have a health care crisis, one of whose manifestations is high projected costs for Medicare and Medicaid."

I just don't get this. Isn't it both? Consider a Venn diagram with one circle for the healthcare crisis and another for the fiscal gap. The two circles overlap a lot, reflecting the relationship that Krugman notes. But they also have non-overlapping aspects (privately funded healthcare problems for the one, Social Security & tax cuts & all the rest for the other). And the overlapping portion truly is both - not just one of them.

Why would one look at such a Venn diagram and say that only one of the two circles is actually there?

Wednesday, October 15, 2008

Budget policy next year if Obama wins

Jason Furman is apparently telling budget hawk Congressional Democrats that Obama would seek to establish "a government unified around the concept of fiscal discipline and centered around the pay-go rule. Insisting on paying for things will lead to better economic policy."

Does this contradict the need for short-term fiscal stimulus if things keep looking ugly? In a word, no. Stimulus is about the current outlays and revenues; fiscal discipline about the long-term relationship between them. Thus, you can have a big stimulus package that increases the current year deficit but is fully financed over the long term. Farsighted, non-cash-constrained economic actors wouldn't be fooled into greater economic activity this year, but they're not the targets of the stimulus package. And note that pre-announced financing (such as future tax increases) can actually increase the incentive to invest, etc. today.

The harder problem is political. I know that Furman is serious about and understands the need for long-term balance, but politically it can be hair-raising to try to get there, especially given the unlikelihood of Republican cooperation.

Clinton in 1993 made the correct political calculation that you can act fiscally responsibly today and not pay the price three years later if the economy improves meanwhile. (Although possibly he paid a steep price in the 1994 midterm elections?) Obama in 2009, if he's elected, could try the same thing in terms of announcing changes but not implementing them, but unfortunately implementation might be what matters in terms of when the voters react.

If McCain wins, the degree of fiscal discipline would be wildly unpredictable, probably from day to day. He's committed to immense tax cuts, but it would be surprising if he weren't a budget hawk for at least a week or two somewhere along the way. Most likely there'd be a bunch of stunts, such as reverse shut-down-the-government brinksmanship, e.g., vetoing bills that are 1 percent earmark in the hope of either shifting blame to the Democrats or counting on bipartisan veto override to get himself off the hook.

Doug Holtz-Eakin claims that McCain would square the budgetary circle through huge Medicare cuts. Probably this helps Doug to feel good about what he's doing these days, but while the claim is undoubtedly sincere I'd be beyond shocked if it actually happened.

Monday, October 13, 2008

Paul Krugman wins the Nobel Economics Prize

Interesting to have this happen now; I have no idea whether the Nobel committee cares about Krugman's public intellectual role. He's obviously a meritorious pick in any event for his economics work, which reflected a trajectory from (a) challenging the conventional wisdom, such as about international trade, to show that things were a bit more complicated and ambiguous, to (b) defending the conventional wisdom against rejections of it that were ignorant and overstated.

A word on his life as a public intellectual, although it's unrelated to the Prize as such. While I have confidence in my own judgments and feel that they usually end up being vindicated, he certainly was right and I was wrong about Bush, say, in 2000 - he got there several years before I did, at a point when I thought that, despite the wacky tax and budget proposals, Bush would be reasonably safe and not that different from his dad. At the time I thought he was too selectively harsh against one side. This reflected that I didn't realize the full enormity of things, or how different it was from politics as usual, for several years after that. So unless it was just a lucky strike, Krugman truly deserves the Cassandra Prize as well (since Cassandra was disbelieved but right)

Some conservative economists I know will be gnashing their teeth. Not, however, Greg Mankiw, who offers a couple of links describing the economics work and criticizing (though reasonably and interestingly) the op-ed columns.

Friday, October 10, 2008

Budget deficit update

According to Martin Sullivan in the 10/6/08 Tax Notes, the budget deficit for 2009 could end up as high as $914 billion, or 6.2% of GDP, both of which would be all-time national records. This would reflect scoring the financial rescue plan on what seems the correct basis, if it can be done sufficiently accurately, which is to treat only the excess of outlays over the estimated present value of future receipts as a write-off.

Some time back I posted seemingly dire GAO estimates of rising budget deficits and public debt. Under those estimates, the deficit would not reach this level, relative to GDP, until the mid-2020s. So much for that.

True, this is a temporary phenomenon, reflecting both special outlays related to the financial meltdown and the counter-cyclical effects of a recession that, while it may be long-lasting, is merely part of the overall business cycle. In other words, it's reasonable to assume that annual deficits will decline again in a few years and only start rising again when baby boom retirement and the entitlements explosion really takes off.

Still, this is a huge hit on the amount of cushion that we have if we delay dealing with the long-term fiscal gap. Especially when one keeps in mind that there seem to be frequent adverse shocks. E.g., 9/11 followed by the Afghanistan and Iraq wars was one, and now this is another. While reasonable long-term forecasts won't treat a given adverse shock the same as a permanent change in tax and spending levels, they also shouldn't assume that there aren't going to be any more adverse shocks.

Yes, there are occasionally favorable shocks as well (e.g., the totally unanticipated revenue surge of the late 1990s, from some mix of real economic growth and the Internet, etc. bubble). But I'm putting my chips on a predominance of adverse shocks in the years ahead.

To put it all in perspective, if we manage to contain the current financial crisis it will be by virtue of using some of the fiscal cushion that we still have to buy ourselves out of trouble. But given everything else that is happening and not happening in Washington and the economy, this merely brings the fiscal crisis closer. That one, when and if it comes, will make the financial crisis look like a Sunday school picnic, and by definition we won't be able to buy our way out of it.

Thursday, October 09, 2008

Doug Holtz-Eakin, your thesis advisor is calling

His latest public statement was to the effect that Obama opposes the new McCain bailout plan because Obama just wants to help Wall Street, not Main Street.

Doug, did anyone tell you that the McCain plan is a direct pay to Wall Street, giving them face value rather than just market value for bad mortgages? Indeed, isn't it partly your plan? (I'd assume you helped draft it.)

Insert joke of choice here about Doug's earlier claim that McCain deserves credit for inventing the Blackberry.

This is a bit of a sensitive topic for me, because if McCain wins the election I will be praying that Doug gets to exert some influence on economic policy. After all, the alternatives in setting a McCain Administration's economic policy are presumably Steve Schmidt and Phil Gramm.

But O for the days when, say, Glenn Hubbard could represent an Administration with absymal budgetary policies and yet carefully avoid saying anything in public that was definitively false.

I recall, for example, Glenn's artistry (pointed out, almost but not quite with rueful admiration, in a blog entry by Brad DeLong many years back) when asked whether Bush's unending budget deficits would eventually raise interest rates. Option (a) would have been to admit that this was true. Glenn didn't want to do that. Option (b) would have been to lie and say it was false. Glenn didn't want to do that either. Option (c) was gracefully, almost imperceptibly (if you weren't watching carefully) to re-phrase the question as whether one or two years of budget deficits should be expected to raise interest rates. Then you could confidently and correctly say: No, as a matter of accepted economics that is incorrect. And that was what Glenn did.

I personally would not be comfortable spinning even to that degree, which is one reason why I do not thirst for public life, and thus would reject any offered post be it in a campaign or the government post-election. But if you do it that way you preserve a lot more of your academic reputation. Doug ought to take note, but I fear it's too late.

Staying calm in tough times

What do you tell yourself when, by market measures, your net worth declines by, say, a couple of hundred thousand dollars in the course of a week? (I haven't checked, but for someone my age with retirement saving it's a fair guess.)

I tell myself that all that's really changed is the median prediction for the future by a bunch of over-excitable folks who are playing Keynes' famous beauty contest game (trying to figure out who everyone else will think everyone else thinks is the winner).

In other words, though I accept the efficient capital markets hypothesis in the sense that I don't believe I can systematically make money by betting against market valuations, what's happened, I tell myself, is almost on a par with, say, the feeling a baseball fan should have if his team has a bad week in mid-August and the ESPN baseball analysts respond by downgrading the team by ten rungs or so in their weekly Power Rankings. There's arguably more heat than light to the change if you don't have to convert to cash any time soon.

Now, if only I could stay so serene about other things.

Monday, October 06, 2008

The time I met John McCain

Okay, I haven't told this story here yet. It was 1999. I had a book coming out soon on Social Security. Someone at NYU who handles press relations told me that Good Morning America was going to have John McCain stop by to discuss Social Security privatization (this being before that term was forbidden), and if I came I could ask him a question. For sure? I asked. Yes, she answered, the flacks at GMA assured me that you will get to ask a Social Security question on a widely watched national television show. OK, she knew the press angle better than I did.

For the record, while I considered Social Security privatization completely pointless, I wasn't by any means flat out hostile like most in my post-2001 political camp, and indeed had sketched out an idea that I called progressive privatization. What I liked about privatization, while recognizing that the stock market investment aspect was pointless and that it did nothing to ease the program's fiscal problems, was its being one way of clarifying the tax-benefit relationship for individual recipients that current Social Security assiduously obscures. You can read about it here or here.

Well, you know what Gore Vidal once said about being on television and one other thing - you can never have enough of either, he said - so, being next to unacquainted with the former, I headed up to midtown at some ungodly earthly hour, in order to get there by 6 am (or maybe it was even 5:30).

When I got there, I discovered that I had been totally scammed by the GMA flack, who had duped my NYU PR contact. They just wanted warm bodies to fill the room, most of them seemingly off a tourist bus. Everyone got to submit an index card and they would pick 3 to ask Senator McCain. Anything above the 6th grade level was definitely not wanted. (This had nothing to do with McCain but rather with the presumed TV audience for GMA.)

I should have just left, but like a cowed sheep in a herd of antelopes - I'm trying the Tom Friedman trick here of mixing and mangling the metaphors; it works (commercially) for him - I stayed around. Assiduous viewers (a couple of family members) got to see a couple of shots of me glowering from the back of the audience during McCain's gig, because I was so angry about having been conned to go there under false pretenses and way too early in the morning. The inconvenience, the disrespect, the lost sleep, the fact that I felt so used and foolish - but I digress.

At the end of the segment, they went to commercial and also were going to use a different part of the set for their next segment. So McCain, doing his duty as a politician, went through shaking hands with everyone in the crowd. No big thrill to me, though this was nothing particular against him; I simply don't have huge excitement about any of these guys, even though at the time I rated him much higher than I do now. But I didn't leave the set right away, because I wanted to find someone from the show to whom I could complain about having been lured there under false pretenses when all they wanted was a room full of warm bodies.

So I passed by McCain one more time. Thinking I wanted to shake his hand again, he snarled at me: "I already shook your hand!" (And "snarled" really is the right word here, though I don't mean to suggest he was out of control.)

This was a bit amusing given how little his or any other senator's hand means to me. Had I been a little quicker, I might have said something like "Relax, it's not like you're the Beatles or something."

I got two things out of it, a story to tell my Tax class later that morning (focused more on my mission of folly than McCain, but he supplied the capper), and a GMA long-sleeved T-shirt that I still wear in cold weather.

Friday, October 03, 2008

IRS Chief Counsel Donald Korb steps down

Courtesy of the Tax Prof blog, I gather that IRS Chief Counsel Don Korb has stepped down effective no later than next January 19, so that the next Administration can start right out with his successor.

This is not a surprise, since no one would be expected to want to stay in the Chief Counsel job forever. But I personally will be quite surprised if the new Chief Counsel is ready to be named by January 20. So I suspect that Korb will be asked, perhaps even implored, to stay on, although presumably from his announcement he does not wish to do so.

Suffice it to say that he is leaving large shoes to fill. Don Korb was amazingly energetic, entrepeneurial, and effective in filling the Chief Counsel post. He did a great deal to raise his office's profile and value, both to the government and to taxpayers. He innovated internally and externally, worked hard to strengthen his staff, and provided important outreach and guidance that was good for everyone. The next Administration will be very lucky to find anyone who can match his job performance.

Thursday, October 02, 2008

VP debate - not the comment readers might expect

I really can't watch these things straight through - too tedious and stupid an experience for me.

But I would give a lot of money to put an end to the faux populism that resonates everywhere in American politics. All these durn "regular folks" who want your vote while pretending they have no money and aren't famous & powerful. Not just the supposed hockey mom - it's a phony and annoying tic that apparently is obligatory for everyone. And it's a strange tic to have in a country that is so much less committed to equality than nearly every western European country.

This is not a rant but an observation - there is a trade-off between efficiency and redistribution, which one can reasonably resolve at various points along the continuum, certainly including the American one. But it truly is odd for a country that's so much less egalitarian than the norm to be so rabidly committed to fake gestures of anti-elitism, invariably orchestrated by leaders of elites.

Wednesday, October 01, 2008

A nice heap of sugar

The Senate passed the bailout bill tonight after sweetening it with $150 billion ($110 billion net of offsets) in new tax breaks, including "extenders" that no doubt will soon be extended again. The bill, originally just 3 pages (although that gave the Treasury excessive authority without oversight), now apparently exceeds 450 pages. Good work, guys.

In a country with a massive and growing fiscal gap, the potential $700 billion cost already was a huge problem. Yes, I know in theory the Treasury might even end up turning a profit on this, but the incentive issues and institutional skill set make me skeptical. Other countries have apparently flipped assets for a profit in this setting, but these days, no matter what the task, ours always seems to be the government that can't.

We are converting the financial crisis into a worsening of the fiscal crisis, and while this particular drop in the bucket may be small, it demonstrates once again the fecklessness that really is worse than anything about the current fiscal projections.

Diane Rogers is right: "a teaspoon of sugar helps the medicine go down." But it's also true that sugar all the time eventually wrecks the teeth, the taste buds, and the digestive system.

Thursday, September 25, 2008

2009 NYU Tax Policy Colloquium

It's never too soon. In that spirit, here is the schedule for the 2009 NYU Tax Policy Colloquium, which I will be co-teaching with Alan Auerbach:

(All sessions meet on Thursdays from 4-6 pm in Furman 120, NYU Law School)

1. January 15 – Daniel Shaviro, NYU Law School. The Long-Term Fiscal Gap: Is the Main Problem Generational Equity?
2. January 22 – Alan Auerbach, Berkeley Economics Department and NYU Law School.
3. January 29 – Edward Kleinbard, Joint Committee on Taxation. A Reconsideration of Tax Expenditure Analysis.
4. February 5 – Amy Finkelstein, MIT Economics Department, EZ-Tax: Tax Salience and Tax Rates.
5. February 12 – Dorothy Brown, Emory Law School.
6. February 19 – Yoram Margalioth, Tel Aviv University Law School and NYU Law School.
7. February 26 – Leslie McCall, Northwestern University Sociology Department.
8. March 5 – Michael Doran, University of Virginia Law School.
9. March 12 – David Duff, University of Toronto Law School.
10. March 26 – Emmanuel Saez, Berkeley Economics Department. Details Matter: The Impact of Presentation and Information on the Take-Up of Financial Incentives for Retirement Saving.
11. April 2 – Lily Batchelder, NYU Law School.
12. April 9 – Mihir Desai, Harvard Business School and NYU Law School.
13. April 16 – Mitchell Kane, NYU Law School.
14. April 23 – Thomas Brennan, Northwestern Law School.

Campaigns as a political institution

Presidential campaigns are supposed to provide information so people can make intelligent choices. Partly from the candidates' announced intentions, and the rest from what we can discern about character, temperament, and intellect.

I've had my doubts sometimes about how well campaigns work, in an age of over-the-top media manipulation and contrived narratives, to do what they are supposed to. But can anyone doubt that the McCain campaign has been astonishingly revealing about what an erratic, lunatic child he is?

I was told before the campaign by Republicans who know McCain personally that he is more of a child than an adult, and that he is temperamentally unsuited to be president. Some of the people who have told me this said they couldn't support him, others were doing so anyway and perhaps even found it endearing (the childishness, not the temper).

But can anyone doubt now that he is utterly unsuited to be president? Even the National Review Online and the Wall Street Journal are raising their eyebrows about his latest stunt.

Wednesday, September 24, 2008

Case study in how bitter political fights destroy social capital

I've been thinking a lot lately about Rick Perlstein's Nixonland, which I read and enjoyed while on vacation this summer. While much of it is about the eponymous Trickster, a perennial favorite topic of mine, it's really mainly about a broader trend in our society that Nixon was brilliant and innovative at exploiting but that really goes way beyond his direct influence (i.e., in large part he merely exemplifies its development). This is the bitter division of our country between left and right, or red states and blue states, or however one chooses to characterize it. If the two groups hate each other enough, they can get into escalating tit-for-tat cycles that destroy the social capital that they need to cooperate as well as compete. Cooperation is necessary, for example, in setting (1) mutually accepted rules of the road for political debate that limit how dishonest and destructive it is permitted to get, or (2) the groundwork for the long-term budget deal (with taxes going up and entitlements down) that is indispensable if we are going to forestall a U.S. fiscal collapse. In foreign policy as well, while the notion that politics should stop at the water's edge perhaps always was naive and overly restrictive of needed policy debate, we are in big trouble if foreign policy begins to be set primarily with an eye to its efficacy in bludgeoning or sidestepping the opposition, rather than to serve U.S. national interests.

I had all this in mind - not identifying bad guys, as some of the above may suggest, but lamenting the problem - when I read a blog entry from Brad DeLong describing the cancellation of an Obama versus McCain debate that was scheduled to take place tonight at Stanford, under the auspices of the Stanford Institute for Economic Policy Research (SIEPR). Apparently, Austan Goolsbee was supposed to debate Doug Holtz-Eakin. But then Kevin Hassett replaced Doug, and after that Brad replaced Austan, whereupon Kevin, at least according to Brad, called it off.

Hassett and DeLong have a feud, on which you can get Brad's side at the above link, going back to Kevin's coauthored book, Dow 36,000, which I suppose even Kevin would agree made a prediction that did not come to pass within the suggested time frame of 3 to 5 years after 1999. (Hassett then recouped intellectually with his interesting follow-up, Bubbleology.) But although academics can always squabble over nothing as well as something, or over analytical fine points as well as fundamental political issues, I find it hard to doubt that the great and angry divide in our country had a lot to do with the Hassett-DeLong falling-out.

As it happens, although I am obviously intellectually and politically in DeLong's camp rather than Hassett's, I am friends with Kevin (with whom I co-taught the NYU Tax Policy Colloquium for the first half of the winter 2008 semester) and don't really know Brad personally. Without pointing any fingers or saying anyone is wrong, or even definitively assuming that without the great political divide this wouldn't have happened, I must say it's not only too bad but seems to exemplify the broader problems I've been writing about from time to time in this blog, regarding where our country seems to be headed.

Country last

It's amusing that McCain apparently wants to avoid voting on the bailout, but is eager to have Democrats provide the votes to pass it so that he can then safely grandstand as the noble naysayer. (Details here.)

Having been shamed into a press conference, he's quoted as follows:

"This issue should be - and their vote should be determined in how we can resolve this crisis and get America going again," McCain said. "This is a huge crisis. We know, in the words of many experts and mine, this is the greatest financial crisis since World War II. So to somehow, for the Democrats to say that their vote is going to be gauged on my vote frankly doesn't do them a great deal of credit.

"Their first and only priority should be making sure this economy recovers and get back on our feet again," McCain said.

I guess it logically follows, if we define the decision as purely theirs, that they aren't "putting America first" unless they agree to commit political harikiri, and that he isn't harming the recovery (supposing it to depend on passage of a bailout package) by merely exploiting it politically afterwards. But that doesn't make his stance any less sleazy or destructive of the social and political capital that one needs for government to function adequately in a competitive political environment.

UPDATE: What a loon, with his crazy stunt of purporting to suspend his campaign. All he has to do is (as the Obama campaign apparently proposed to him) put his name on a joint statement by the two of them regarding what they'd consider an acceptable deal.

Tuesday, September 23, 2008

Good day

My cold or allergies receded, I was productive and am close to finishing my paper on generational equity/efficiency/political economy and the fiscal gap, the expanded Pavement reissue of Brighten the Corners was announced for mid-November, the Mets won while the Yankees were eliminated, and Paulson got some of the tough questioning that he deserves.

Could the bailout actually make money for the Treasury?

Republican Senator Norman Coleman apparently is arguing that it could.

Theoretically speaking, Coleman actually is potentially right. The deleveraging theory that I've mentioned in earlier posts suggests that assets may end up having market values well below fundamental value in a temporary squeeze where there simply isn't enough money on the "long" side to compete away the windfalls suggested by the spread.

If Warren Buffett, say, indicated that he wants to buy the same bad loans that Secretary Paulson is talking about (supposing that he had enough money), and was willing to pay more than current market value, I would figure that this was indeed happening, and that Buffett might be quite likely to do well.

However, there are several key institutional differences between the hypothetical Buffett scenario and the actual one. The Treasury isn't deciding to go in for any such reason, would have no incentive to execute its buying strategy from a profit-making standpoint (even where socially optimal), and would probably be unable to do it competently even if it tried. Obviously, making money is not exactly at the heart of its institutional skill set.

Hence I would predict huge losses to the taxpayers even though the undervalued-assets scenario is by no means silly. Reinforcing the argument that Treasury's outlays ought to be fully financed under the assumption that they will recover zero, and probably, insofar as arbitrary stated measures matter to political behavior, ought to be included in the budget deficit.

Monday, September 22, 2008

The Paulson Catch-22

While Paulson is generally well-regarded, we don't really know a great deal about him as a public official. From that standpoint, his demanding a close to zero-oversight blank check grant of authority, followed by his calling for a "clean" bill to forestall, not Congressional pork barrel attachments but meaningful oversight, is not encouraging.

Another way of putting it is that his seeking these unfettered powers lowers one's confidence that he should have such powers.

Sunday, September 21, 2008

More on the bailout plan

Imagine that it's January 2009, and that Treasury Secretary Phil Gramm has $700 billion to dole out as he likes to Wall Street companies claiming distress. Phrases that occur to me include Teapot Dome (or perhaps I should say Iraq reconstruction), crony capitalism, and great Republican Party fundraising tool.

UPDATE: Great column by U of Chicago economist Luigi Zingales on the bailout.

Understatement of the day

From Peter Goodman, "But Will It Work?" in today's NY Times, page A-1:

"Some question the prudence of adding [$700 billion] to the nation’s overall debt at a time when the Treasury relies on the largess of foreigners to cover the bills."

The best argument in favor of being so reckless is not an edifying one. If you are going to crash and burn no matter what, why not max out the credit cards first and have a really good time.

On a more serious note, the fact that absolutely no one is discussing financing this wildly expensive bailout is exemplary of why the U.S. is likely headed for a catastrophic fiscal collapse. The core problem is more political than economic. Changing course would be conceptually easy to do though painful in practice. But Republicans have succeeded in utterly banishing from public discourse the idea of a budget constraint. Apparently nothing needs to be paid for. A $2 trillion Iraqi war? Reason to cut taxes. An $18 trillion Medicare prescription drug benefit? No need for financing. And imagine what would happen politically today if Pelosi, Reid, or Obama pointed out that we need to pay for this bailout. They're not that brave, but frankly I don't blame them. Why fall on your sword if no one will listen anyway?

Enacting the bailout without financing is sheer insanity, but it's going to happen beyond a doubt. You may ask: Does it really make sense to increase taxes at a time when we're teetering on the brink of recession? The answer, I'd say, is that it makes perfect sense to announce the tax increase - just not to implement it yet. A tax increase to pay for the bailout, with a deferred implementation date (say, 2010 or 2011) would be stimulative if considered credible, since it would reward accelerating economic activity.