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Treasury Deficit Study II
On Thursday I posted on what I described as a ""Treasury Tax Study," but which is more of a deficit study. The study was initiated at the request of former Secretary Paul O'Neill and represented his interests in long-term federal budget issues. Max Zawicky" posts on the study here, providing some background and a critique of its methods. The first reference to the study I have seen is an a Boston Globe op ed piece by two economists from May 19, which may be found here "An economic 'menu of pain' ". I learned about the Globe editorial at
Where did the tax bill come from?
The Wall Street Journal had a good article in last Friday's paper (5-23-03) on the origins of the tax bill. ("Bush's Tax Cut: Victory - at a Cost" by Bob Davis, Greg Hill, and Shailagh Murray).
The story is presented in part as a conflict between the Treasury Secretary, Paul O'Neill, and Glenn Hubbard, Chairman of the Council of Economic Advisors and Lawrence Lindsey, head of the National Economic Council - a conflict that O'Neill lost.
Here's an abstract of the story up to the point Bush unveils his tax package in January. Note that this stimulus bill has its origins early last summer, Bush proposed it in January, Congress passed it in late May, and (I understand) money from the first cuts begins to come in July. Here is an example of the enormous lags in fiscal policy.
Early evolution of tax reform
The bill had its origins almost a year ago when Bush asked for suggestions to stimulate the economy. The Journal story notes that a pessimistic forecast on the economy in early 2003 was delivered by Lawrence Lindsey at about that time. It's not clear from the story if the forecast stimulated Bush's request, or came afterwards. At any rate, his economic advisors begin compiling policy ideas following the forecast. Among their suggestions was a proposal for the elimination of the double taxation of dividends. Carter had proposed this reform in the 1976 election but hadn't followed through on it, and it had languished since then.
Glenn Hubbard, the CEA Chair, nurtured the dividend idea and kept it alive. Hubbard had worked on a similar idea in the first Bush administration. "A quiet Midwesterner who had taught at Columbia University, he had surprisingly good political skills. They won him points with senior White House officials who tired of the bickering among the economic team." Hubbard got a window of opportunity at the Waco Economic Summit last August. Charles Schwab gave a speech promoting dividend tax reform, and Hubbard "made sure" Bush heard it. Bush liked the idea.
[Bush's interest appears to be stimulated by a respected financial figure from outside the administration (Schwab), familiarity with the issue based on his experiences as a businessman, and a sense of fairness or justice(?) - its the right thing to do. Note that later in the story he chooses the more radical of the options he's been presented. - Ben]
Paul O'Neill loses influence
Treasury Secretary O'Neill was skeptical about the need for short term stimulus, and more focused on long term fiscal reform (See the posting earlier this evening: "Treasury Tax Study" ). Moreover, his political skills were not good.
"Sometimes, Mr. O'Neill skipped meetings of top officials, sending a lower official whose views didn't carry much weight. other times, white House officials didn't invite him. Meanwhile, his opposition to any shorter-term plan fed White House suspicions that Treasury officials would use leaks to undermine the tax plan, further isolating Treasury from decision making."
In a November 26 meeting Bush "signaled his support for the broadest possible tax cuts...In the end, Mr. Bush decided on a plan that cost $726 billion, about twice what administration deficit hawks had been pushing" The final decision to go for a $726 billion tax cut bill was made at Christmas in Texas. "Mr. Bush introduced it in January before the Economic Club of Chicago..."
Why didn't poor people get the child credit?
The New York Times reports today (along with many other papers) that:
"Most taxpayers will receive a $400-a-child check in the mail this summer as a result of the law, which raises the child tax credit, to $1,000 from $600. It had been clear from the beginning that the wealthiest families would not receive the credit, which is intended to phase out at high incomes.
"But after studying the bill approved on Friday, liberal and child advocacy groups discovered that a different group of families would also not benefit from the $400 increase — families who make just above the minimum wage.
"Because of the formula for calculating the credit, most families with incomes from $10,500 to $26,625 will not benefit. The Center on Budget and Policy Priorities, a liberal group, says those families include 11.9 million children, or one of every six children under 17."
"A spokeswoman for the Republicans on the House Ways and Means Committee, Christin Tinsworth, noted that the provision was included in an agreement reached last week by Representative Bill Thomas, Republican of California, the committee chairman, and Senator Charles E. Grassley, Republican of Iowa, chairman of the Senate Finance Committee.
"That agreement would have cost $380 billion, but it fell apart when an important swing senator, George V. Voinovich, Republican of Ohio, said he could not approve any bill that exceeded $350 billion. To satisfy him and the Senate, Ms. Tinsworth said, the child credit provision was dropped, along with other costs."
Treasury Tax Study
This story has been getting a lot of play today. The Financial Times is reporting here ("US 'faces future of chronic deficits' ") on a U.S. Treasury study begun under former Treasury Secretary O'Neill that projects very large future deficits.
"...The study's analysis of future deficits dwarfs previous estimates of the financial challenge facing Washington. It is roughly equivalent to 10 times the publicly held national debt, four years of US economic output or more than 94 per cent of all US household assets. Alan Greenspan, Federal Reserve chairman, last week bemoaned what he called Washington's "deafening" silence about the future crunch."
Kent Smetters, former Assistant Deputy Treasury Secretary for Economic Policy was not the principal author, but was more highly placed, and maybe in a better position to understand the role of the study and the reactions to it by administration officials. His interview quotes him on the origins and progress of the study. Much of the press coverage has suggested the admnistration deliberately deep-sixed this study because its estimates of large budget deficits might have undercut the tax proposals this year. Not so says Smetters:
"KS: The work was never meant to be a Treasury study. It was meant to be some internal thinking, something for O'Neill. It was meant to be an internal part of thought process on how to reform the budget - in particular, budget accounting...
"...O'Neill is a very engaging and smart guy. He hired me in June 2001 as his deputy assistant secretary - six months before he even hired an assistant secretary - in order to get a jump-start on working on Social Security reform. Especially before September 11, 2001, I was meeting with him two or three times a week, primary to talk about social security reform. It became very clear very early that a big part of the problem is the whole language we're using in this debate, which is being driven by the current budget accounting framework. The current budget accounting has all these biases against trying to reform Social Security in a way that increases the amount of funding in the system. It doesn't track the Social Security liabilities at all. So that a lot of potential reforms appear to be bad since they would increase the debt held by the public ?
"FT: They don't account for the reduced drain from future unfunded liabilities.
"FT: The cost, but not the benefits in the form of future unfunded liabilities avoided
"KS: That's exactly right. So what happens is that you have a bias against pre-funding because you see only the increase in debt held by the public but not any of the reductions in the present value of future Social Security obligations since they are not being tracked. O'Neill understood this instantly. It took him 30 seconds to understand this. He was very engaged. He pretty much let me do my own thing, but he was very engaged on this.
"FT: He was engaged in having this process develop and produce some very significant results?
"KS: Absolutely, but the outlet for this was never to be a Treasury study, but to create internal discussion and hopefully reform the president's budget framework - to slowly start to change how people think about the budget framework to track these hidden obligations.
"It was something that was very engaging, but obviously when the Secretary went, when the NEC director Larry Lindsey went...
"FT: Lindsey was also interested in this?
"KS: Yes. Everyone pretty much was interested in this. Lindsey and O'Neill were very engaged on this. The same with Mitch Daniels. Everybody was pretty enthusiastic about this. But the thing is Lindsey went, O'Neill went. It's perfectly reasonable that the new guys came in, they're hit with this, and they need some time to think about it. The Boston Globe article was written by two brilliant economists. But, in my opinion, that piece maybe made it sound too much like some kind of a conspiracy to kill honest accounting in order to save the tax cut, or something like that. It really wasn't. The new guys said, hey, this is something that could go to a press within a week, and this is just a completely radical new way of looking at the budget.
"FT: So there wasn't any high-level conspiracy?
"KS: No, there wasn't. This point has to be really emphasised. In fact, if you look at this framework, the tax plan looks great. You see 99 per cent of all the liabilities are Social Security and Medicare. That's even after including the president's original $750 tax-cut plan proposal. The estimates correspond directly with the OMB budget so it includes all the policy proposals he originally wanted. It included the full elimination of the dividend tax. Only a very small part of the imbalance actually comes from the rest of the government - only $600bn of the $44,000bn. Almost all of it is Social Security and Medicare. This is hardly stuff the Administration would kill because they're afraid of the tax plan looking bad.
"FT: Indeed, they did include the 75-year projections for Social Security and Medicare?
"KS: Yes, but those estimates are problematic for a number of reasons. They underestimate the problem by two-thirds when you do it correctly into perpetuity, which is really the way economists think about this. The 75-year projections represent only one-third of the problem. Also, there was sort of a rush job on those numbers, so they actually didn't calculate them under OMB assumptions. They just got the Social Security and Medicare actuaries to give them the numbers under Trustees assumptions which are much more conservative.
"FT: Mr Gokhale has a somewhat harsher interpretation of all this than you do Sure, they see a set of numbers and they want to digest them first, but the question is: There were all these other numbers in there...why did a lot of other numbers that were presented to them at the last minute make it in, and why did this number not? The whole point of this number is to provide a simple, easily understood, transparent, comprehensive measure of the government's full long-term imbalance
"KS: My reading of what happened is simply this: If, in fact, these perpetuity numbers where calculated by the actuaries themselves then they would have found their way into the budget. The old guys did not need to have the numbers calculated by the actuaries because they had followed the project and understood them. But the new guys did not have the time to study them in much detail before the budget was going to press. And so if the actuaries had calculated them and, therefore, provided some distance, they might have gone to press."
Dynamics of Economic Policy Making Power in the Bush Administration
The organization chart only tells you so much. Here are three articles on the fight for economic policy influence in the Bush Administration.
This August 2002 Washington Post column, available through Brad DeLong's web site, describes the loss of Treasury Department influence in the current administration, and the impact of this loss on the Department - "Treasury Departures Hurt Staff Morale "
This Spring 2003 The International Economy article by Fred Barnes describes the loss of influence by Treasury under Secretary Paul O'Neill, and the efforts by the new Secretary, John Snow, to make up the lost ground: "The Incredible Shrinking U.S. Treasury"
This Fred Barnes article, from the Winter 2003 International Economy plots the interacting trajectories of the Administration's economic policy heavyweights: "The Four Horsemen of Bush Economic Policy" This covers more than the four horsemen of the title, but it is a little dated, important characters have left the administration or changed their positions since the article was published.
Josh Bolten replaces Mitch Daniels
President Bush is appointing his Domestic Policy Advisor Joshua Bolten to replace retiring Office of Management and Budget director Mitch Daniels. Here is his offical biography:
From 1999 to 2000, Josh Bolten was Policy Director of the Bush-Cheney 2000 Presidential campaign and the Bush-Cheney Presidential Transition. From 1994-1999, he was Executive Director, Legal & Government Affairs for Goldman Sachs International in London. In the previous Bush administration, Josh was General Counsel to the U.S. Trade Representative and Deputy Assistant to the President for Legislative Affairs. Previously, he was International Trade Counsel to the U.S. Senate Finance Committee. Josh is a graduate of Princeton University and received his J.D. from Stanford Law"
"During the 2000 campaign, Bolten was Bush's policy director, and during the Florida recount he was a top lieutenant to James Baker. He worked as a lawyer in the Reagan administration's State Department, and he served as a staff attorney for the Senate Finance Committee from 1985 to 1989. In the first Bush administration, he worked as general counsel for the U.S. trade representative and as the White House's deputy assistant for legislative affairs.
"Bolten is publicity-shy—the rare profile of him always mentions that he didn't want the story written—but he has received some attention for his relationship with Bo Derek. The Austin American-Statesman says the two are just friends but that the relationship has included "several briefings" and a motorcycle ride. (Bolten owns a Harley.)"
Dr. Kristin Forbes named to Council of Economic Advisors
Dr. Forbes, from the Sloan School of Management, was named to the Council last week. Daniel Gross points to work by Dr. Forbes suggesting a correlation between inequality and growth in this Slate column: "Dr. Inequality. Bush's new economist has a curious prescription.". The column has links to Forbes' resume and her American Economic Review paper on inequality and growth. Here's an Associated Press story about the nomination - "MIT professor tapped for Bush's economic council" Forbes needs Senate confirmation. Bush has also nominated Gregory Mankiw of Harvard and Harvey Rosen of Princeton to the other two slots on the Council.
Forbes was Deputy Assistant Secretary for Quantitative Policy Analysis, Latin American and Caribbean Nations, in the International Affairs Division of the Treasury earlier in this administration, and left some months ago. Last summer Brad DeLong posted a Washington Post article on policy making and staff turnover at Treasury along with some of his own commentary, here: "Treasury Department Staff Losses.". DeLong described eight Treasury economists who had recently left (including Forbes) as:
Jane Austen's investment tips
From the Economist:
Why do we spend so much on health care?
Robert Shapiro (a former Clinton administration undersecretary of commerce and currently a Brookings Institution fellow and private consultant) summarizes the economics behind the current health care cost crisis in this Slate column: "Premium Blend. Why is it so difficult to provide universal health care?". I learned about this from the blog Asymmetrical Information.
Impacts of Global Warming on Alaska
From today's Anchorage Daily News: "State is touted as the canary in the global warming coal mine".
25th Anniversary of Proposition 13
Brad Joondeph at A Taxing Blog notes that the 25th anniversary of California's Proposition 13 (which imposed strict constraints on property taxation) is coming up on June 6. Joondeph links to several San Jose Mercury News stories and editorials about the impacts on California public finance, here: "Proposition 13 turns 25".
Advancing Elizabeth I
Geitner Simmons at Regions of Mind has a short posting on the the administrative arrangements supporting Queen Elizabeth I's visits through the country, here: "Courting opinion, 16th century style". The posting was prompted by President Bush's recent visit to the carrier Abraham Lincoln. The successful monarch and the democratic leader both cultivate public opinion through visits to communities and facilities. Sixteenth and twenty-first century visits have a lot in common - showmanship, need for local knowledge, cultivation of local people, logistical infrastructure.
Not everyone is sad to see Mitch Daniels leave
Madeleine Begun Kane's new song "Bye, Bye, Mitch" (to the music of "Bye, Bye, Love") may be found here: "BYE BYE MITCH".
I learned about this at the weblog of Geitner Simmons "Regions of Mind".
Another change in the Bush economic team
John Irons reports on the resignation of Mitch Daniels, head of the Bush Administration Office of Management and Budget, here: "OMB Director Daniels Resigns". This is not unexpected, a Paul Musgrave posted to his blog last July some Indiana political gossip about Daniels' interest in the 2004 Indiana senate race ("Mitch Daniels - prospects"). In August Stan Collender speculated in Government Executive magazine that Daniels would be leaving soon ("A thankless job"):
"First, he is representing an administration whose budget policies have been inconsistent. It is difficult for an OMB director to maintain credibility when he has to explain how the White House can agree to a farm bill that was $20 billion more than requested while at the same time having to condemn other proposals that are over the president's request by far less.
"Second, Daniels is heading up OMB when there is no consensus about what to do about the deficit. Unlike every other budget director since at least the advent of Gramm-Rudman-Hollings in 1985, Daniels is dealing with a budget debate in which reducing the deficit is not seen as important. That gives Daniels far less authority than many of those who have preceded him.
"Third, Daniels' numbers are often thought of as being very politically motivated, and that has hurt him tremendously. His most recent estimate that the deficit would fall from fiscal 2002 to 2003 was almost dismissed out of hand by many of the other participants in the debate.
"Finally, Daniels has not made things easier for himself. Essentially repeating one of Darman's big failures, Daniels frequently has demonstrated a lack of tact and diplomacy, especially when he has dealt with Congress. Daniels has already had to humble himself once before a key congressional committee for what was included in the budget he produced for the White House last January. Some of his other statements (or their tone) have also angered key representatives and senators from both political parties to the point where his ability to represent the administration on the budget has been questioned.
"Going forward, the credibility Daniels needs will not be easy to re-establish. Even if President Bush somehow elevates Daniels' position in the economic policy-making team, it is not at all clear that his position as budget director would be enhanced.
"It would not be a surprise, therefore, if Daniels leaves OMB soon. Partly because of the nature of the job and partly as a result of problems of his own making, Daniels' almost two years as budget director can be characterized as generally difficult and sometimes turbulent."
Daniels' departure may have negative environmental impacts. Monday's Slate had a column on the Bush Administration and the Army Corp of Engineers by Michael Grunwald: "The Corps Cored. The Bushies take a big bite out of the Army Corps of Engineers budget.". The thrust of the column is that the Bush Administration is the first to be able to exercise some control over the Corps' environmentally destructive pork machine. Daniels' the Administration's "tight-fisted" budget director ("...once spotted picking change out of a toilet in college...") is portrayed as the key to this:
"Location, location, location": Influence in Washington and Economic Policy
John Irons ("CEA: Banished and Vacant") and Brad DeLong ("Space Wars Inside the Topkapi Palace") report on the move of the Council of Economic Advisors office from the Executive Office Building (right next to the White House) to 18th & G St. (somewhere else), and what it means for the influence of the Council.
The Council of Economic Advisors (CEA) was set up under the Employment Act of 1946 to give the President professional economic advice on his policies. Martin Feldstein, a former chair, reflects on how it worked during the Reagan Administration, here at a White House website: "About the Council of Economic Advisers".
Both blog postings ultimately refer back to a Washington Post story that also notes that two of the three spots on the Council aren't currently filled and that the President's nominee for the chairmanship, Gregory Mankiw hasn't been confirmed by the Senate yet. The lack of urgency in filling these posts also suggests a lack of Council influence. Clinton's new National Economic Council got off to a great start under Robert Rubin, but when he because Treasury Secretary it took the Clinton Administration many weeks to fill the position. The NEC lost a lot of influence in that time.
Why does it cost government so much to do things?
Arnold Kling lays out several reasons, including lagging productivity, a disconnect between the services people receive and their payments for those services, and the costs, including the hidden efficiency cost, of using taxes to raise the money. Here: "The Highest-Cost Producer "