Priorities and the Ryan Budget

Matt Yglesias has a post detailing some findings from the Tax Policy Center on Paul Ryan's budget. In short, the Ryan budget proposes revenue-neutral tax reform and provides the tax rate goals but doesn't explain what loopholes will be closed to get there. The Tax Policy Center took the tax rate goals of the Ryan Budget and demonstrated that the distributional consequences are pretty skewed. Here's Yglesias:

Of course since rich people start out with higher after-tax incomes than the middle class, that larger percentage increase in after-tax incomes expands to an enormous gap in actual dollars. The poorest 20 percent of American households would receive, on average, a $60 tax cut. The middle 20 percent would get $1,961. The top 1 percent would get $227,420. The results are so skewed that I couldn't come up with a legible way of presenting them visually, but if you go up to the top 0.1 percent they get $1.2 million on average.

If the tax reform is revenue neutral than the distribution will be somewhat different depending on which loopholes get closed. More Yglesias:

It's difficult to say, however, without the details. And that's what's pernicious about this half-specific approach to tax policy. It's fine that Ryan doesn't want to usurp the role of the Ways & Means Committee, but by naming specific tax rates without naming specific tax deductions he's created a very confusing situation in which it's difficult to say what the consequences of this approach would really be.

The fact that we can't graph the final distribution of the changes is annoying, but by giving a "half-specific"outline of his tax policy Ryan has made his priorities crystal clear. The specificity given to the tax rate reductions signals that reducing rates (especially for wealthier individuals) is the number one priority of tax reform for Republicans. By not laying out which loopholes he would like to close, Ryan has made it clear that deficit neutrality is of secondary importance. The fact that he doesn't mention a distributional goal suggests that he really doesn't care about this at all. 

It would be fun to be able to graph a final distributional outcome to his plan, because in all likelihood it would perversely favor really wealthy individuals. But to the extent that a budget is about laying out the political priorities of a party, the Ryan budget gives us exactly that. As a political document, the budget isn't confusing at all. If Republicans return to power they will cut taxes, might try to close some loopholes, and won't really care who shoulders the burden/gets the benefit. The loophole tease is new, but the rest is old hat.

Federalism and the Modern Republican Party

Last night, I was listening to Matt K. Lewis and Bill Scher on bloggingheads discuss CPAC. One point that was brought up was the increasing number of prominent Republicans who have taken the position that gay marriage is a "state issue" and the federal government should leave it alone. This is Marco Rubio's position.

In certain respects, this is clearly a dodge. Gay marriage is a generational issue and young people across the political spectrum overwhelmingly support it. If the Republican party is to have a future it will need to eventually support gay marriage or at least become indifferent about it.

What is more interesting, however, is thinking about the role of federalism in modern politics. Federalism can mean two different things: 1) the federal government has less power and the states do more; or 2) the states are given the power to craft solutions that address local needs, because they are more adept at dealing with local issues. As political parties and interest groups become more centralized and nationally based, Federalism--as advocated by the Republican party--is increasingly become more like the first version. Large interest groups now have the capacity to enforce party discipline at the state level. If you are a Republican legislator in Minnesota and you vote in favor of gay marriage, the National Organization for Marriage (NOM) will spend money to defeat you in the next election. Likewise, Bob McDonnell didn't get invited to CPAC this year, presumably because his transportation bill included a tax hike. Same for Chris Christie, whose support for gun control in New Jersey meant he wasn't coming.

The best example of this phenomenon is Mitt Romney. Romney was the governor of Massachusetts,one of the bluest states. The people of Massachusetts were in favor of universal healthcare in their state. As governor, Romney basically crafted a solution that met the goal of universal coverage but did so in a way that preserved the private market for insurance. One could see this as a triumph of federalism, where a Republican governor met the needs of his state, without eliminating the market-based system favored by conservatives. But when he ran for President in 2008 and 2012, party leaders and conservatives didn't really see it this way, and he had to distance himself from this policy. (Note: it obviously didn't help that Obamacare was based on his Massachusetts plan)

In certain respects, this makes sense. Political parties should be ideologically coherent, and interest groups want to promote their positions at both the state and federal level. But this presents a real challenge for true supporters of federalism. Well funded, centralized interest groups and party leaders can stifle the ability of state legislators to find workable solutions that are favored by their constituents. If federalism means anything, it's that the voters of Virginia, and their elected representatives, are the people best suited to make decisions about how to fund Virginia's highways, and that a few leaders of the ACU (who put on CPAC) shouldn't really have much influence on that process.

In an era when highly centralized interest groups are able to exert pressure on state representatives, is there any room for real federalism?

Lawrence Kotlikoff's Strange Ideas

Lawrence Kotlikoff is out with an angry column at Yahoo. The premise is that Paul Krugman and others are spreading "dangerous fiscal fables" and that the American debt situation is absolutely dire. At one point he claims that our policies amount to "fiscal child abuse plain and simple".

Kotlikoff's main argument is that the way we measure the debt is wrong, and that instead of just looking at what we owe on our government bonds, we should consider the entire "fiscal gap"--all of our future fiscal commitments based on current law--as the relevant measure. According to Kotlikoff, the U.S. fiscal gap is $222 trillion.

This strikes me as a silly way to think about policy. Kotlikoff says there is no difference between the short run and the long run in terms of budget policy, but this is clearly wrong. Budget projections are based on underlying assumptions about what the future will look like. When the CBO creates their fiscal projections they make a bunch of assumptions about things like economic growth, health care costs, etc. They also assume no relevant policy changes. These assumptions are less likely to be accurate the further into the future you project, for obvious reasons. A hypothetical 75 year CBO budget projection from 1800 would have missed the Louisiana Purchase, the War of 1812, The Civil War, the end of slavery, and the industrial revolution in America. The CBO projection from 1900 would have missed the Great Depression,two world wars, and the cold war. The CBO projection from 1960 would have missed the entrance of women into the workplace, the end of the cold war, globalization, and the great recession. As time passes, a bunch of important stuff happens that isn't foreseeable 50 years in advance.

Kotlikoff feels like we should aim to balance the budget on the infinite horizon. But the preceding paragraph should reveal the ridiculousness of this exercise. Things change. Maybe the coming cyber war with China will require us to divert most of resources to computer hacking. Maybe the singularity will arrive. Maybe economic growth will stop entirely. Maybe we will have cures for diseases and less people will be sick. Maybe we will reform our immigration policy to allow more young people to move here. Who knows? The point being that what really matters isn't how much money we say our government is going to transfer from working people to retired people in 2080, but whether the above things--or a bunch of things that we haven't even thought of--will happen.

The crazy thing is that from a certain perspective Krugman and Kotlikoff basically agree. Kotlikoff is essentially arguing that the current budget deficit is pretty trivial and what really matters is paying for health care for seniors in 2030. When you argue that the relevant fiscal number is $222 trillion, you are basically saying that the $845 billion deficit for fiscal year 2013 isn't really that important in the grand scheme of things. This is what Krugman thinks! Which is why he endorses a temporary fiscal stimulus to boost output and get us back to full employment.

The question of future health care costs is important, and is something we will need to address, but thinking of it purely in terms of budgets totally misses the issue. Raising the medicare age just moves the costs from the government to private citizens, and effectively raises them, because as Steve Brill's epic health-care piece in Time magazine demonstrated, health care is a lot cheaper when the government uses monopsony power to bargain it down. The health care challenge is to figure out how to reduce these costs even further. According to the CBO, health care inflation is slowing. What else can we do to reduce costs? Give visas to doctors from other countries who are willing to treat the elderly on the cheap? Increase the scope of practice authority for nurse practitioners? Death Panels?

The point is that health care policy, and budget policy generally, aren't about making CBO lines match up, but about economic growth, reducing costs, and moral questions about how we distribute resources within a society.

Kotlikoff also claims that hyperinflation is on the way. This is something he has been saying for a the last few years despite inflation continuing to come in at below the Fed's 2% target. But if he is really concerned about "fiscal child abuse" than he should favor inflation because it redistributes money from creditors/savers (mostly the elderly) to debtors (mostly young people). He doesn't seem to see it this way, though.

The Ryan Manifesto

Derek Thompson has one of the best takes on Paul Ryan's new budget. The whole thing is must-read but one part in particular caught my attention:

But this budget is as notable for what it cuts as for what it doesn't cut. Social Security, defense, and Medicare -- together making up about half of the federal budget -- would scarcely be cut at all. After all, it's hard to win a Republican election if you abandon old voters and the defense industry.

Anyone who has been following the budget debates of the last two years would recognize that there is only one place where a long-run deficitreducing "Grand Bargain" can be found: Social Security. Obama has supported the idea of using chained-CPI to reduce benefits and shore up the program's long term fiscal position. Whatever the merits of this proposal (I don't really like it), this is where the Grand Bargain is. Obama's in favor of it, he seems to think he can get some congressional Democrats on board, and conservatives have been yelling about reforming entitlements for years. Additionally, unlike Medicare-voucherization, this isn't a qualitative change to the program, it is basically a reduction in benefits that can be sold to the public as a wonky fix. As a result, we don't need to argue about whether or not it will save us money or how it will affect medical costs--our actuarial predictions will likely be pretty spot-on. If what you care about is reducing the government's long term fiscal obligations, chained-CPI is what you want to be talking about in this political environment.

That is why it's kind of crazy that Ryan doesn't include it (or any other social security reform) in his plan. I think this is pretty revealing. Besides wanting the (non-elderly) poor and middle class to shoulder the burden of deficit reduction, Ryan doesn't actually care about putting forward a plan that has any realistic chance of passing.

For what its worth, Paul Ryan's budget is a pretty honest statement of Republican political priorities. It should be read as a manifesto on government, not a real budget proposal.

Professors, Blogs, and the Iraq War

I enjoyed this back and forth between Dan Drezner and Justin Logan over the differences in prevailing opinion between IR academics and the Washington foreign policy community during the lead up to the Iraq War. Justin's contention is that the foreign policy community was (and still is) way more hawkish than their IR counterparts, and this was due to the perceived negative career implications of being a foreign policy dove at that time in Washington.

I was thinking about this when I read Ezra Klein's recent piece on the "Revenge of the sources". Ezra is responding the Nate Thayer-Atlantic incident and his contention is that the people turning out copy on the internet and not getting paid are primarily the same who used to be unpaid sources for journalists:

That, at least, was the situation until the Internet made the supply of “newsprint” virtually infinite. Now, the people who were once sources can write their own blogs, or they send op-ed submissions or even feature articles to editors looking for vastly more content. Think about Brad DeLong’s blog, Marginal Revolution, or the Monkey Cage. This work often doesn’t pay — at least not at first — but it offers a much more reliable, predictable and controllable form of exposure. It’s a direct relationship with an audience rather than one mediated by a professional journalist.

I think this is right. But I think the implications go beyond the structure of labor in journalism. Academics are now able to play a larger public role in policy discussion. Ten years ago a guy like Scott Sumner could have maybe gotten an op-ed published in a minor newspaper. Now it's probably fair to say he has had some influence on Federal Reserve policy-making. Similarly, everybody and their grandma knows who Nate Silver is, and I think he has changed the way a lot of people think about pundits and election forecasting.

If Logan is right and IR academics are more "realist" in orientation and less hawkish in general, than its interesting to think about how the debate over the Iraq war would have played out in the media environment of today. It is easy to imagine more IR academics playing a larger role in our public discussions. Looking back at some of the commentary in the run up to the Iraq war, it is hard to ignore how "political" its orientation is, and how nonacademic the arguments being made are. There was very little realistic assesment of how the war would turn out, or what the costs and benefits would be. I'd like to think that the widespread existence and mainstream recognition of blogs would have lead to a more healthy, intelligent, and balanced policy discussion. Matthew Yglesias said that one of the reasons he initially supported the war was the feeling that you had to be a supporter in order to be taken seriously in the media environment of the time. If someone like Stephen Walt had been regularly blogging at the time, maybe things would have been different.

Congressional Budgeting

This week the Senate Democrats and the House Republicans are each going to pass their irreconcilable budgets. The Senate is, presumably, going to include higher taxes on wealthier individuals. Paul Ryan's House budget will apparently include the repeal of Obamacare, except for the medicare savings that he supported in his last two budgets but ran against as vice president.

This is all being done to try to give the Republicans a political victory. The House has already passed two unpopular versions of the "Ryan plan" and they feel that the Senate Democrats have been getting an unfair pass by not passing a budget. That is why they used the debt ceiling to force the Senate to pass a budget. I think their assumption is that they will be able to attack the budget from two angles: 1) look how much it raises taxes! 2) look it does nothing about the deficit!

This is all silly, but my hope is that this will be a turning point in Washington. Now that the two respective budgets are on the table, maybe we can turn to something like immigration or climate change. The Republicans and Democrats fundamentally disagree as to the course of government fiscal policy, nothing is really going to change this.

Let's reveal our budgets, move on to something else, and see if anything changes after the midterms.

The House Republicans Won the Last Two Years

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I found this Up with Chris Hayes segment both interesting and incredibly frustrating. As Chris points out at the beginning, the GOP's "no revenue" stance is deeply unpopular and hurts the GOP's image. Most Americans will blame them for the sequester, regardless of the "Obamaquester" spin.

Chris quickly notes that the GOP is succeeding in setting the terms of the debate in Washington and in achieving their substantive goals. But then the conversation kind of switches over to Chris and the three liberal guests lamenting the fact that the GOP and centrist beltway media won't acknowledge how much spending has actually been cut.

This is fine, but I really wish they had spent more time dwelling on the fact that the House GOP's strategy of not compromising and taking the economy hostage over the debt ceiling has been a massive success. Discretionary spending has completely plateaued! And as Chris' conservative guest acknowledged, conservatives don't really care about the deficit--its all about the size of government. The GOP is nominally unpopular and Mitt Romney lost the election, but does that really matter if you are able to pursue your agenda through political obstructionism?

There has been a lot of discussion lately on the need for the GOP to change, in order to be competitive in future presidential elections. But if I were a conservative I would be totally satisfied with the last two years--Obama has been unable to undertake any additional progressive initiatives, while spending has been drastically cut. Would Mitt Romney really have stood a better chance if the GOP had cooperated with Obama? Would a Republican in the White House really have lowered the trajectory of federal government spending?

The GOP should avoid rape gaffes and maybe ease off gay marriage as an issue. But as long as they can hold the gerrymandered House, i'm not sure if being more reasonable and compromising is the correct strategy. Their intransigence has worked wonders in achieving many of their aims. The truth is that in the current American political system it is better to be the party that won't blink first than being the party with the more popular platform.

I wish Chris had spend more time discussing the Republican's substantive victory and what that means for our political system.