The Pete Davis Archives
Glenn Hubbard's and John Cogan's Wall Street Journal op-ed this morning seems persuasive until you consider that their premise is wrong, their math is misleading, and they fail to explain the real reason federal revenues have risen as a share of gross domestic product over the past 25 years.
First the wrong premise -- Hardly anyone is proposing to allow the 2001 and 2003 marginal tax rate cuts, marriage penalty relief, or child tax credit to expire in 2010. Senators Obama and Clinton have repeatedly promised to extend those tax cuts for all but the very wealthy. Senator Clinton defined wealthy as those making over $250,000 a year.
Second, Hubbard and Cogan examine only the past 25 years, starting in fiscal year 1983, when President Reagan's tax cuts first took full effect, driving federal revenues down to 17.5% of GDP from 19.6% when he took office in 1981.
I've spent a lot of time in the middle of the "Starve the Beast" and "Supply Side Tax Cut" debates. I formulated the Roth-Kemp tax cut in early 1977 and, after working to scale it back, helped pass it in 1981 as the Republican tax economist on the Senate Budget Committee. I formulated the Earned Income Tax Credit in 1975 and have worked for Democrats too. I hold myself out as a non-partisan Washington economist. My main goal all along has been to improve tax and budget policy. I won't claim much success, but I would offer some observations.
Yesterday afternoon, the Senate cleared the way to pass a $14.9 b. housing stimulus bill, H.R.3221, next Tuesday, that won't stimulate housing much. They did that by killling Senator Durbin's (D-IL) amendment to give bankruptcy judges the power to rewrite first mortgages. That was a deal-breaker for the mortgage lending industry. It was also the only thing that might have helped those facing foreclosure, albeit as the cost of raising future mortgage interest rates for the increased risk that future mortgages might be written down.
When I was flying small planes in the Congressional Flying Club, taking a break from the tribulations of tax and budget policy, the first thing you did when you encountered heavy weather was to turn off the autopilot. You didn't want heavy, but dangerous, automatic corrections under those conditions. No doubt, you would end up off course, but at least the wings were still attached.
The problem with automatic corrections for entitlements is that they would raise taxes and cut benefits at exactly the the wrong time in the business cycle. In addition, our political leaders just won't accept automatic adjustments because heavy corrections would prove politically dangerous.
This morning, Treasury Secretary Hank Paulson unveiled the long-awaited financial regulatory reform proposal of the President's Working Group on Financial Markets, which he heads. President Bush and Secretary Paulson are to be commended for the breadth of this proposal and for its principled and thoughtful approach. Admittedly, the proposal won't do much for the immediate financial crisis, but it would avert some future crises.
Replacing our hodgepodge of overlapping and ineffective financial regulation with a comprehensive, sensible, and lower cost system makes all the sense in the world. Many in the financial markets support these reforms.
For a policy wonk, Washington dashes your best hopes so often, it's a cliche. Last night, as I sat freezing above home plate one out away from a 2-1 home opener win in the top of the ninth for the Washington Nationals over the Atlanta Braves, I knew it was too good to be true.
Sure enough, Nats catcher Paul Lo Duca failed to stop an overthrown fastball in the dirt and the tying run scampered home from third. A thunderous groan went up at the prospect of another Washington sports debacle -- in extra innings on a cold night to boot.
Then, with two outs in the bottom of the ninth, Ryan Zimmerman hit a 1-0 fast ball over the center field wall on a rope for a walk-off home run. It doesn't get any better than that in Washington.
Stan, U.S. public education has always been a real market. Unfortunately, it gets manipulated too much and suffers from institutional decay. If functions surpisingly well in some ways, in higher education and research, and surprisingly poorly in others, K-12. That those with the means overcome the impediments is a story as old as our founding as this Encarta article describes.
At 2 p.m. today, Treasury Secretary Hank Paulson presented the annual Social Security and Medicare Trustees Report. The good news is that the solvency of the trust funds hasn't changed much over the past year. The Social Security Trust Fund will remain solvent until 2041, and the Medicare Trust Fund until 2019.
Most Americans believe Social Security won't pay equal-value benefits in the future. Most Social Security experts say Social Security can be kept solvent well beyond the retirement of the Baby Boomers over the next 20 years with relatively modest changes to the GROWTH of future benefits and to payroll tax rates. Even if nothing were done, after 2041, Social Security could still pay 75 cents per dollar of benefits due into the future.
On Sunday, March 16, the Federal Reserve crossed a big line directly bailing out a non-depository financial institution and our fifth largest investment bank, Bear Stearns, for the first time since the Depression. The Fed forced Bear Stearns out of existence by loaning J.P.Morgan Chase $30 b. to purchase it at a fire sale price of $236 million on Sunday after Bear Stearns stock closed with a market valuation of $3.5 b. on Friday, March 14th.
The transaction raises a lot of questions. The ones I would like to deal with are: Why didn't the Fed just let Bear Stearns go bankrupt? How big a windfall was this for J.P.Morgan Chase? What risks does this Fed action pose for the future?
We don't know why the Fed took this action. Their press release announced the action in one sentence without any explanation.
I'm not so sure a second stimulus bill will be enacted this year, although Congress will certainly try. President Bush is likely to veto it and receive enough Republican support to avoid an override.
A second stimulus bill has already been sketched out. It would include an extra six months of unemployment benefits, additional money for food stamps, children's health care, and state infrastructure, an increased loss carryback for businesses, and maybe an extension of renewable energy credits that expire at the end of this year.
President Bush sees a second stimulus bill as unnecessary and expensive. Congressional Democrats see a win-win. If they overcome Mr. Bush's objections they get credit for the increased spending, and, if they don't, they get a campaign issue.
Too often, Washington spends more time fighting for political advantage than agreeing on policies that might actually help the economy.
Steve Forbes' Monday (3/17/08) morning interview on CNBC deserves comment because he recommended ignoring market valuations and urged federal intervention in currency markets that would cost U.S. taxpayers a lot of money.
Forbes recommended suspending the SEC's "mark to market" valuation rules for U.S. financial firms because many products, mortgage-backed securities in particular, are not trading now, or are trading a unusually low valuations. The rules allow the use of computer model valuations when there are no market prices, which Forbes also dismissed. This is unusual behavior for a staunch adherent of the "free market."
Markets anticipate; politicians react.
Last fall, professional investors asked me when Uncle Sam would bailout subprime lenders.
"It's not going to happen as long as President Bush is president," I said.
"But won't the collateral damage to innocent investors and financial institutions force them to?" they responded.
"The Fed will pump up liquidity. That's it." I said.
"That won't help those who need it very much."