The balanced budget amendment introduced by Senate Republicans yesterday contains a striking error. As written, it would limit federal spending much more than they claim or, I suspect, intend (I said the same back in 2011, when this first came up).
Requirement to Balance the Budget. With limited exceptions, the federal budget must be balanced.
Presidential Requirement to Submit a Balanced Budget. Prior to each fiscal year, the President must submit to Congress a balanced budget that limits outlays to 18 percent of GDP.
18 Percent Spending Cap. With limited exceptions, Congress must limit outlays to 18 percent of GDP.
That 18 percent figure is in line with average tax revenues over the past four decades, but well below average spending, which has been about 21 percent.
RECOMMENDED: 3 views on best way to curb US debt
On Wednesday, the House will vote on a bill to delay the upcoming debt limit showdown. The bill includes no spending cuts, no tax increases, and no platinum coins of unusual size. Instead, it will “suspend” the debt limit through May 18 to give lawmakers time to pass a budget in each chamber. To give them extra incentive, it also includes a new twist: If they fail to pass a budget by April 15, it will withhold their pay.
Here are five things you should know about the bill.
1. The bill doesn’t just suspend the debt limit, it raises it.
Section 1(a) of the bill suspends the debt limit through May 18. You might think that the current limit would go back into effect on May 19. And it would, except for section 1(b) which increases the debt limit to reflect new debt issued between now and then.
The bill thus increases the debt limit by an amount to be determined later. That unusual structure lets lawmakers tie the debt limit increase to a specific date, rather than an amount. It also means they get to increase the debt limit, presumably by several hundred billion dollars, without having to expressly vote for such an amount. It’s a less transparent, and therefore less painful, way to increase the debt limit. ( Continue… )
“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”
So R.I.P. platinum coins of unusual size.
The administration has previously ruled out another oft-discussed debt-limit safety valve, overriding the limit based on the 14th amendment. So “Plan B” discussions will now move to two other alternatives that have been bandied about: prioritizing payments or, as Ed Kleinbard suggested the other day, issuing scrip like California did a couple years ago. Of course, issuing scrip *is* prioritizing payments, but with the added feature (or complication) of a written, transferable IOU.
Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:
1. A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.
Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.
RECOMMENDED: Top 10 richest Americans
That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit. ( Continue… )
When first starting a new business, entrepreneurs are not well served when they view themselves as builders or architects. That is the wrong frame of mind.
When entrepreneurs enter the market with a predetermined view of what they are going to build or design they run the risk of creating a business that does not really fit with what the market wants.
Steve Blank, successful entrepreneur and author, cautions entrepreneurs to learn the difference between the searching stage of launching a new business and the executing stage. ( Continue… )
A much-deserved Nobel prize today for Lloyd Shapley and Alvin Roth for their theoretical and practical work on designing markets. In particular, matching markets where you don’t have prices to help you.
This year’s Prize to Lloyd Shapley and Alvin Roth extends from abstract theory developed in the 1960s, over empirical work in the 1980s, to ongoing efforts to find practical solutions to real-world problems. Examples include the assignment of new doctors to hospitals, students to schools, and human organs for transplant to recipients. Lloyd Shapley made the early theoretical contributions, which were unexpectedly adopted two decades later when Alvin Roth investigated the market for U.S. doctors. His findings generated further analytical developments, as well as practical design of market institutions.
Traditional economic analysis studies markets where prices adjust so that supply equals demand. Both theory and practice show that markets function well in many cases. But in some situations, the standard market mechanism encounters problems, and there are cases where prices cannot be used at all to allocate resources. For example, many schools and universities are prevented from charging tuition fees and, in the case of human organs for transplants, monetary payments are ruled out on ethical grounds. Yet, in these – and many other – cases, an allocation has to be made. How do such processes actually work, and when is the outcome efficient?
Along with his colleague David Gale, Shapley provided theoretical answers to these questions based on the idea of finding stable allocations (i.e., allocations in which no one would later have an incentive to change their mind). Roth then studied how those answers apply in real markets, e.g., designing algorithms to match doctors to hospitals.
Roth also blogs at the aptly-named Market Design. What did he write about yesterday? How Nobel Prices correlate with chocolate consumption.
P.S. For a moving example of how well-designed matching markets improve human lives, see this post about kidney exchanges.
You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:
1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.
Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts.
But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.
2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.
TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.
3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.
In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).
The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)
4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.
Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.
5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.
Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.
As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.
Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.
Today’s jobs data exceeded expectations. Payrolls expanded by 114,000 in September, in line with expectations, but upward revisions to July and August added another 86,000 jobs, so the overall payroll picture is better than the headline.
The big news, though, is that the unemployment rate fell to 7.8%. That’s big economically and symbolically. Indeed, it’s so big that conspiracy-mongerers are suggesting the BLS cooked the numbers to help President Obama get re-elected. Let there be no doubt: That’s utter nonsense.
Other numbers also indicate an improving job market: the labor force participation rate ticked up to 63.6%, the employment-to-population ratio rose 0.4 percentage points to 58.7%, and the average workweek increased by 0.1 hours. All remain far below healthy levels, but in September they moved in the right direction.
Despite the drop, unemployment and underemployment both remain very high, as well. After peaking at 10% in October 2009, the unemployment rate has declined a bit more than 2 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 14.7%.
As you may recall, the U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work. One anomaly in the September data is that the unemployment rate fell from 8.1% to 7.8%, but the U-6 remained unchanged at 14.7%. Why? Because the number of workers with part-time work who want full-time work spiked up from 8.0 million to 8.6 million.
Almost everyone in Washington wants to lower the corporate tax rate. President Obama wants to go from today’s 35 percent down to 28 percent. Governor Romney and Ways and Means Chairman Camp want to get to 25 percent.
There’s just one problem: paying for it. To offset the costs of cutting rates, policymakers will need to roll back tax preferences, each of which has powerful defenders.
To illustrate the challenges, the Committee for a Responsible Federal Budget just released a nifty corporate tax reform calculator that shows how your revenue goals and willingness to cut tax preferences affect what tax rate you have to accept.
Bottom line: going low is harder than it sounds.
My most popular blog post, by a long shot, was this one in July 2011 explaining why almost half of Americans paid no federal income tax. If you are interested in some context behind Governor Romney’s now famous remarks about the 47 percent (TPC calculated it as 46 percent for 2011), please check it out.
One item I didn’t mention in that post is that the number of taxpayers not paying federal income tax should decline over time. As the economy recovers, higher incomes will boost the fraction of households that pay federal income tax.