Matt Yglesias

What Do Bond Traders Think They Know

We see here the past 30 years worth of interest rates on 30 year US government bonds:

And here’s the CBO’s projection for the volume of debt, with the “alternative fiscal scenario” being what the CBO considers to be the most realistic projection based on current policy:

It’d be interesting to know what the people buying these bonds think is going to happen. Not inflation, based on these yields.

What Caused the Budget Deficit?

David Leonhardt has a nice article breaking down the sources of the growth in the budget deficit. Since Leonhardt works for The New York Times rather than USA Today, they didn’t see fit to illustrate his article with a pie chart, but I made one myself:

— “The first category — the business cycle — accounts for 37 percent of the $2 trillion swing.”

— Second, Bush-era legislation “like his tax cuts and the Medicare prescription drug benefit, [that] not only continue to cost the government but have also increased interest payments on the national debt.”

— Third, “Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000 [...] 20 percent of the swing.”

— Fourth, “About 7 percent comes from the stimulus bill that Mr. Obama signed in February.”

— Fifth, “only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.”

In other words, the very high deficits are not Obama’s fault according to any normal way of assessing political blame. That said, large deficits aren’t a moral failing that we need to hold someone accountable for. Rather, they’re a potential future practical problem that will have to be solved. Doing that will probably require a mixture of higher taxes, somewhat more hard-core health care reform that is likely to pass in 2009, and reductions in defense and possibly Social Security outlays. I don’t really find it especially surprising or alarming that nobody wants to vote for any of those things in 2009. After all, nobody who has to stand for election really wants to do any of that stuff. And the deficit isn’t a problem in 2009 and almost certainly won’t be in 2010. The main issue is whether Congress will be prepared to take tough measures when and if doing so actually proves necessary. Meanwhile, the health reforms being debated in congress will get us some of the way to where we need to be, and also hopefully lay the groundwork for further measures if the best hopes about what’s currently on the table don’t wind up materializing. The simple fact of the matter, after all, is that nobody really knows what the impact of something like comparative effectiveness research will be. It could save a lot of money, or it might not—we might just get healthier while spending a similar amount of money. But if we get it in place sooner rather than later, we’ll know and be in a position to act.

Talking About Taxes

Writing in The Daily Beast, Matt Miller makes two controversial claims. One is that in the medium term—i.e., after the recession is over but not so far in the future that it isn’t worth thinking about—taxes are going to need to be higher than Barack Obama’s FY 2010 budget suggests. The other is that Obama ought to actually say this.

The first, as readers will know, is something I definitely agree with. The second doesn’t strike me as great political advice. I’d like to see Obama’s rhetoric leave the door open to this sort of thing. But the “groundwork” needs to be laid in the first instance not by the president, but by the Matt Millers and Matt Yglesias of the world—pundits with no voters to face—and int he second instance by some politicians in congress. In particular, it would be nice to see some of the self-described “deficit hawks” from the Blue Dog Caucus or the Bayh Bunch mention every once in a while that there’s a revenue element to deficit reduction.

Why We’re Summitting About Health Care

Given that there’s no particular health care plan that’s yet got nearly the level of legislative momentum behind it for anyone to be worried about it passing or failing, it may not be immediately obvious to people why the White House is bothering to hold a health care summit today. The reason is that securing agreement on the meta-issue that “there should be large-scale health care reform in the near future” is more important than it might seem. Specifically, the prospects for any particular reform measure passing get much better if the budget resolution can pass with an adequate level of headroom for a plan to fit into. Consequently, there’s not only no need to discuss particular reforms but in many respects it would be counterproductive to do so. Instead, we’re talking about “reform” and the need for it.

Specifically, there’s something of a three-part philosophical divide. On the one hand, there are those who are looking to take action. On the other hand, there are those who just don’t believe it would be advisable to work toward a guarantee of affordable insurance for all. These people tend not to be too clear about what they’re saying, because it’s unpopular, but Cato’s Michael Cannon with his scornful talk of “the church of universal coverage” is an exemplar in forthright advocacy of this position. Some members of this faction are actually somewhat obsessed with the idea that we need to reduce the number of people with health insurance by fiddling with the tax code to try to unravel the large risk-pools that make the employer-backed system viable. I think you actually get a lot of interesting ideas about the details of the health care delivery system from this crowd, since they’re less invested in trying to come up with politically practical proposals and aren’t afraid to offer some real talk to the more-insidious-than-people-realize doctor’s lobby. But if you want to do big reform, there’s obviously not much you can say or do to persuade anyone who’s philosophically convinced that the government role in health care should be minimized and that loose talk of universality is a dangerous stalking-horse for Stalinism.

Then you have people working for major reform. The goal here is to create a system that guarantees access for everyone. You sometimes get into disputes that I regard as mostly semantic about whether you should count as “universal” a system in which a small number of non-sick people don’t necessarily have insurance but are in a position to take advantage of guaranteed issue and community assistance to get insurance should they decide they need it. But this is actually not a particularly gaping policy void, though you may sometimes hear otherwise during primary campaigns. There are a bunch of different goals here. By acclamation, we’re not supposed to talk about the goal of providing health care to the uninsured minority, because they’re a minority of the population and they have low SES, low proclivity to vote, and little political clout. But I’m about the justice, damnit, so I’ll offer this chart:

That number is almost certainly higher today because the economy has lost 3.6 million jobs since the start of 2008. A one percentage point rise in the national unemployment rate causes 2.4 million people to lose employer-sponsored health coverage, according to Urban Institute researchers. Of these people, 1 million rely on Medicaid or the Children’s Health Insurance Program and 1.1 million end up uninsured. [...] The number of newly uninsured would be much higher if it weren’t for people enrolling in Medicaid and CHIP. Rising unemployment rates since the last Census report imply that an additional 3.2 million Americans now rely on Medicaid or SCHIP. Congress recently provided more resources for Medicaid and CHIP, but if it had not, states would have been forced to cut eligibility for these programs. Without federal assistance, many people now on Medicaid or CHIP would likely become uninsured as well.

Then we have the people in the middle. These are people, and you find them in both parties, who happily concede the need to reform the health care system. But they think the time isn’t right. Maybe we should wait until we solve the economic crisis, end the war in Iraq, stabilize Pakistan, and balance the budget and then sometimes in the dim mists of the future we can reform the health care system. Maybe we “can’t afford it” right now.

The problem with this view is that we can’t afford not to do it. The problems in the health care sector are not the cause of the current recession, but they are both a drag on the economy’s long-term ability to grow and the primary driver of long-term budgetary challenges. It gets much easier to get ourselves out of the current economic hole if there’s a reason to believe that the foundations for more robust growth and a sustainable fiscal path are being laid at the same time. And those things can’t really be done without health reform. Meanwhile, as the chart on loss of insurance indicates, the recession doesn’t make the health care crisis more avoidable, it makes it more acute. The status quo is bad enough that there are a lot of ideas, including some ideas that aren’t very good, that would be a lot better than indefinite continuation of the status quo. The task of the day is to persuade people of that fact and get a budget in place that creates the possibility of putting something better in place.

Newt Gingrich Leading Insane Conservative Effort to Close Deficit By Reducing Revenues

If this Washington Post article is to be believed, I think some prominent Washington figures may need a course in remedial math:

And Republicans have made it clear that they intend to try to shift the economic debate toward concern about the federal deficit.

They are also preparing to use the ballooning deficit to renew their push for additional tax cuts. Groups including the Club for Growth and GOP leaders such as former House speaker Gingrich say such cuts would do more to improve the economy than the spending plan would.

The reporters on the piece, Michael D. Shear and Paul Kane, might have observed that a deficit is, by definition, a shortfall between revenue and spending. Thus, it’s extremely difficult to envision circumstances under which “additional tax cuts” would prevent the deficit from ballooning. As this handy chart indicates, ballooning deficits are strongly correlated with either fighting World War II or else governance dominated by a desire for “additional tax cuts”:

Unfortunately, Bush-era macroeconomic management has managed to produce much worse outcomes than we saw during the Reagan years so in the extremely short-term it’s not possible to turn this trend around. In the medium-term, however, the administration is proposing to tackle ballooning deficits by making the deficit smaller—higher revenues and lower expenditures. One possible conservative approach to this would be to argue for more aggressive deficit targets, achieved by more stringent spending restraint. Another would be to argue for higher deficits, achieved by more tax cuts. The idea encapsulated in the Post article, that Gingrich and the Club for Growth have a plan for smaller deficits achieved by more tax cuts is ridiculous. Fortunately, neither Gingrich nor the Club have any formal legislative authority and there’s nothing stopping those Republicans who, unlike Gingrich, weren’t hounded out of office a decade ago, from governing with common sense.

Stimulation Time

There’s always reason to be a bit skeptical of election year calls for economic stimulus packages from congress, but Lawrence Summers is a bigger deficit hawk than I and says it’s a good idea:

“I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.

That comes via Brad DeLong who also agrees. Now of course the problem that enters the picture is that the most effective kind of stimulus is the kind that puts spending power in the hands of the sort of low-income individuals who have a high propensity to spend the money. But conservatives, though happy to spend vast sums of money on all kinds of things, remain rigidly opposed to spending money on programs to help poor people. Thus, given the filibuster rule, it’s extremely difficult to pass a sensible stimulus package. On the other hand, successful stimulus would do a lot to help the electoral fortunes of conservative politicians, so there’s at least some chance the right’s leaders will put self-interest ahead of fanatical loathing of assistance to low income people.

The Obama Tax Plan

Jason Furman and Austan Goolsbee, economic policy guys for Barack Obama, have an op-ed in The Wall Street Journal defending their man against accusations of being an economy-wrecking tax-hiker. They point out that Obama’s conservative critics should have little credibility on this issue:

They said President Clinton’s 1993 deficit-reduction plan would wreck the economy. Eight years and 23 million new jobs later, the economy proved them wrong.

They also point out that the real difference between Obama and McCain is in terms of the distributional impact of their tax policies:

Sen. Obama is focused on cutting taxes for middle-class families and small businesses, and investing in key areas like health, innovation and education. He would do this while cutting unnecessary spending, paying for his proposals and bringing down the budget deficit.

In contrast, John McCain offers what would essentially be a third Bush term, with his economic speeches outlining $3.4 trillion of tax cuts over 10 years beyond what President Bush has already proposed and geared even more to high-income earners.

Last, they argue that Obama won’t even raise taxes by very much:

Overall, Sen. Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP — the level of taxes that prevailed under President Reagan.

All of this is true. Unfortunately, the third part is a little too true. As Furman and Goolsbee say in the first passage I quoted, the lesson of the 1990s is that a tax burden in the neighborhood of 20-21 percent of GDP is perfectly consistent with very robust economic growth. At the same time, we have growing public sector needs in terms of health care, education, and transportation infrastructure. Under the circumstances, it would probably be expedient for the federal spending share of the economy to go higher than the level of tax revenue that was coming in during the Clinton administration. Obama is proposing to leave tax revenues considerably lower than where they were ten years ago. The political rationale for what he’s doing is clear enough, and I think it makes sense for Democrats to avoid leading with their chins on taxes, but at the same time making the case for, at a minimum, a return to Clinton-era revenue levels shouldn’t be very difficult.