Saturday, November 26, 2011

Forget Hillary Clinton, How to Balance the Budget by Doing Nothing

It Isn't Going to Happen
It seems that not a week goes by that some journalist or political commentator finds the need to discuss the possibility of President Obama dumping Vice President Joe Biden to put Secretary of State Hillary Clinton on the ballot as his VP candidate in 2012.

The case goes something like this - Biden is flub-prone and doesn't do a lot for the ticket.  Secretary Clinton is wildly popular, as evidenced by a myriad of polls that show her respect.  Plus, you get the bonus of having the still-beloved ex-President Bill Clinton out, more actively fighting for the ticket.

All interesting, but it isn't going to happen.  It is nearly unprecedented for a sitting President to stand for re-election with a new Vice-President.  FDR did it, but it was after two full terms in office.  Gerald Ford ran with a different guy (Bob Dole) than the sitting VP (Nelson Rockefeller), but that was an unusual administration, as neither Ford nor Rockefeller had stood for election for either office (Ford had been appointed VP by President Nixon after Spiro Agnew's resignation in 1973, Rockefeller was appointed by Ford after taking the reins from Nixon after his Watergate resignation.)  McKinley ran for re-election with a new VP (one Teddy Roosevelt) but his original VP, Garrett Hobart, had died in office. 

To find a situation where a sitting President ran for a second term with a new VP candidate when his first-term VP candidate was still alive, you have to go all the way back to Ulysses S. Grant in 1872.  Simply put, it isn't done.

And with good reason.  Vice Presidents have only a marginal impact on Presidential races - after all, can you name one race that was largely decided on the basis of the VP candidate?  And don't say 2008 - Sarah Palin isn't what sunk John McCain, a sour economy did. 

What would the upside to President Obama be?  He would look disloyal and weak.  And that big benefit that Clinton would supposedly bring to the ticket?  Can you name a single swing state he would win BECAUSE of Clinton?  Does Clinton fundamentally change the key issues or the reasons President Obama has high disapproval numbers?  And does anyone really think Clinton would be as popular as she is now if she were a candidate for public office, re-subjected to the scrutiny the press reserves for politicians? 

It isn't going to happen, Pete Dupont (the former governor of Delaware and one-time Presidential aspirant, who is the latest to purvey this theory), so let's just stop talking about it.

The Solution: Do Nothing!
Think the deficit problem is incredibly complex and that the failure of the super committee just shows how intractable our deficit problem is?  Nonesense!

Let me show you how easy it is to balance the budget.  And our politicians don't even have to do a thing.

Here's the simple math.
This year's deficit is estimated to be around $1.099 trillion.

All you have to do is the following:
1. Let the Bush tax cuts expire (all of them) - $400B per year
That's right, the Bush tax cuts (really Bush-Obama cuts at this point) cost the treasury about $400B per year.  Of this, about $100B is associated with the cuts to the top bracket, the rest associated with the cuts to the Clinton bracket.  By doing nothing, and allowing the "temporary" cuts to expire at the end of this year, the treasury will collect approximately $400B more.

2. Let the Obama tax cuts expire - $110B per year
President Obama's "temporary" reduction in Social Security taxes by 2% for this year is costing the treasury $110B, as general revenues are being used to cover the gap in the social security trust fund.  Just allow the cut to expire, and that's $110B more in the coffers.

3. Don't extend unemployment benefits beyond statutory maximum - $44B per year
Under ordinary circumstances, people get unemployment benefits for 6 months.  Since the recession started, Congress has been routinely extending those benefits for 2 full years.  Stopping this practice would trim $44B in cost from the budget.

4. Allow the Iraq war to wind down - $159B per year
The Iraq war is costing us a lot of money in both direct costs to the military and costs to the contractors.  The troops are scheduled to leave.  This should be easy spend to wind down.

5. Don't "fix" the alternative minimum tax - $120B per year
The alternative minimum tax was created to keep the very wealthy from using loopholes to reduce their tax rate too far.  The AMT amount was not indexed to inflation, but Congress routinely passes "fixes" aimed to keep the AMT focused squarely on the very wealthy.  Allowing it to not index, as current law allows, would essentially take those same loopholes away from upper-middle class taxpayers.  This yields $120B per year in savings.

6. Allow the Sequester Cuts - $120B per year
Since the deficit panel failed, the automatic "sequester" cuts of $120B per year are scheduled to kick in in about 14 months, with 50% applying to defense and 50% applying to non-entitlement domestic spending.  These cuts happen automatically, unless Congress acts to change the law.

Total savings from doing nothing: $953B per year.

Okay, I didn't totally solve the deficit - there would still be a $146B shortfall.  But $146B is a mere 1.0% of GDP, a rate at which the overall debt would decline significantly (we can expect GDP growth plus inflation to be equal about 5-6%, even using conservative estimates, meaning a 4-5% reduction in the effective debt levels.)

The approach is balanced ($323B in spending cuts and $630B in tax "increases", with all the tax increases being the expiration of "temporary" cuts.)

And all the government has to do to make it happen is nothing.

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Friday, November 18, 2011

There Will Be Blood, Why Does Every Budget Action Have to Be Such a Drama?

The Guns Turn to Newt
 Poor Mitt Romney.  Do you remember that girl or guy that you really liked in high school?  The one for whom you did sweet things.  You let her (or him) copy your homework.  You gave her a ride when she needed one.  You were always there as a shoulder to cry on.  But you were always the best friend, never the boyfriend.  She liked you, but she was always falling in love with some other guy, never appreciating what was right in front of her.

Mitt Romney was a Republican that managed to win in Massachusetts.  While there, he governed as conservatively as that blue state can be governed.  He worked across the aisle - because he had to.  He had a record of restraining spending and taxes.  He was popular, with Republicans and Democrats alike.  He left office with a strong economic record.  He's also a well-spoken, smart, good lucking (and amazingly young looking for his age) guy who was successful in business before he was successful in government.

But it appears poor Mitt can't ever close the deal to get that elusive date with the GOP girl. 

First, Donald Trump, a blow hard who was utterly unqualified in almost every way to be President led poor Mitt in the polls.  That's okay, Mitt must've thought, every girl wants to date a wild man once before she settles down with a stable guy.  Donald's time came and went quickly.

Then Rep. Michele Bachmann, straight out of the lunatic wing of the party surged ahead of him in the polls.  That's okay, Mitt must've thought, everybody wants to date a pretty face, but that girl will come back to me once she realizes she can't carry on an intelligent conversation with the congresswoman.  And leave Michele the GOP girl did.

Next, the GOP girl had a fling with Texas Governor Rick Perry.  Old Mitt must surely have thought, hey, I know that southern twang is sexy, but is she every going to notice the guy right in front of her?  I mean, this guy is an idiot once you get past his accent and hair!  Oh well, surely she'll come around to me next.

But it wasn't Mitt next.  Tired of dating politicians, the GOP girl decided she wanted a smooth talker.  You know, who'd been out in the world.  Someone who could turn a phrase and tell a joke.  Herman Cain was boyfriend number 4, right up until he sexually harassed her.  Mitt was there for the GOP girl, a shoulder to cry on.  Maybe, at long last, he'd get that date.

But it was not to be, at least not yet.  The GOP girl decided she wanted a father figure.  The wise, intelligent guy who'd been around the block.  She wanted a date with Newt Gingrich.

And Mitt waited and waited.....

Gingrich is already ahead in some national polls and only 2 points behind in New Hampshire (New Hampshire!) in one poll.  Will he fall like the last 4 challengers to Romney?  It's too early to tell.  I said to bet on Romney from day 1 and I'm still betting on him to take the nod in the end.  So are the Intrade betters, who peg Romney's chances at winning the nomination at 69%.

You see, even though Newt has been in the race since jump street, he has never really been tested.  All of the other candidates have been playing nice with Newt because, up until now, he hasn't represented a threat.  Don't count on that next Tuesday.  Romney and company will be going for the jugular and we'll have to see how Newt stands up to the pressure.  He has a checkered past, personally (some ugly divorces and infidelity), politically (remember, he was ousted from the speaker's seat in shamed disgrace) and professionally (how'd those big consulting deals with Fannie Mae go?) and we can expect to be reminded of that directly.

There will be blood....and the President is in the White House laughing about how a guy with 42% approval might be a favorite to win a second term.

Another Last Second Budget Move, Another Bipartisan Deadlock
Congress has passed another interim spending measure, attached to a so-called "minibus" appropriations bill that funds a few smaller departments (Agriculture, Transportation, HUD, Justice and Commerce) while extending funding for all other government agencies for another month, setting up yet another lovely drama for December, just before the Christmas break.  The bill is called a "minibus" because it combines several departments, but not all the departments as would be the case in an "omnibus" bill.

With this backdrop, the deficit reduction Super Committee appears deadlocked, although they may reach another magical, dramatic, 11th hour compromise (sarcasm intended.)  Even if they don't, the ominous sounding automatic cuts to discretionary and defense budgets won't even take effect until 2013, so Congress will have plenty of opportunity to change the law to avoid the cuts and kick the can down the road again.

The choices to solve the deficit are simple.  I wish everyone involved would put just 1% of their hubris aside and actually negotiate in good faith.  The GOP ISN'T going to get a deal that doesn't involve tax increases.  And the Dems AREN'T going to get all the money from the rich while not touching entitlements.  It doesn't work that way.

Where is that third party when you need it?

Wednesday, November 9, 2011

Why the CBO Won't Use GOP Growth Estimates, Red State Socialism

Do Lower Taxes Mean Higher Tax Revenues?
The idea that you can cut tax rates and gain higher revenue by increasing economic growth is not a new idea.  President John F. Kennedy argued for the reduction of top marginal rates in order to spur economic growth (albeit when top marginal rates were over 90%.)  Ronald Reagan famously fought for lower rates, to the consternation of his eventual Vice President and Successor to the Presidency, George Herbert Walker Bush, who, in perhaps the most famous political quotation of the past 30 years, called Reagan's plan "Voodoo Economics".  Economist Arthur Laffer sketched a curve on a napkin for Reagan once that showed tax revenues declining after a point when you increase rates.

I've written extensively before on this topic.  But it is becoming a burning issue today.  Congressional Republicans are attempting a very nuanced method of proposing a path to financial sustainability.  We all know that they have been in favor of significant spending cuts (other than defense spending.)  They have also opposed any tax increases.  Their latest line of argument is that they are supported increased revenue by supporting decreased taxes.  They have been bemoaning the fact that the non-partisan Congressional Budget Office (CBO) refuses to consider increased revenues as a result of increased economic growth from tax cuts.

At the extremes, the GOP hypothesis is easy to understand.  The so called Laffer curve, which shows tax revenues going up quickly when the first few taxes are instituted, then flattening out and eventually declining makes sense in that we would all agree that a 1% tax will generate more revenue than a 0% tax, since 0% will always yield no money and 1% will always yield at least some money.  Similarly, a 100% tax, I think we would all agree would crush an economy.  So the question isn't if the Laffer curve theoretically works, it is if it is meaningful in the range of taxes that we are talking about in this country.

From 1934 through today federal taxes have ranged between 4.8% of GDP (in 1934) and 20.9% of GDP (in 1944).  For most of post-World War 2, they have stayed in a relatively narrow range between 14.4% (in 1950) and 20.6% (in 2000).   Taxes right now are right at the lowest level they have been since World War 2, at 14.9% of GDP in both 2009 and 2010.

Utilizing the tax data (from the CBO) and GDP growth data (from the BEA) I went searching for a correlation.  The scatter plot of the two data series is below:

It is very hard for me to see any sort of correlation in these data, but there is a mild one.  A simple regression line shows that higher taxes do, in general lead to economic growth.  For every 1% increase in taxes as a percentage of GDP (approximately a 7% tax increase at today's rates), there is a reduction in GDP growth by about 0.6%.  This relationship explains only about 12% of the total difference between GDP growth in the years shown.

The Pre-World War 2 and World War 2 data may distort the information for a couple of reasons.  Prior to World War 2, government spending was at such a low level (keep in mind, there was no Medicare or Medicaid) and economic growth was so distorted from the great depression that the data may not be meaningful.  Similarly, World War 2 itself was a period of unprecedented and unequaled government spending which would likely distort the statistics.

If I limit the data to 1945 and beyond, the scatter plot looks as follows:
As you can see from this chart, there is no correlation in the Post-World War 2 data.  A regression line explains exactly 0% of the variation.  In other words, there is no meaningful evidence in the range that we are currently operating in that level of taxes within that range (from 14% to 21% of GDP) has any impact on economic growth whatsoever.

I'm fully prepared for a deluge of comments from the right on this chart.  I'd ask this - send me numbers not arguments.  If I'm not looking at the data correctly, I'd love to discuss it.  What I'm not interested in is partisan talking points.  The evidence, of yet, doesn't bear them out.

No wonder the CBO won't score the GOP's budget proposals with big extra growth assumptions backed in: there is no evidence it will happen.

Why the Republican States Are Socialist Republics
Okay, I'll admit it, the headline is deliberately extreme to grab your attention.  Plus, I thought conservatives would already be seeing red (no pun intended) after reading my above post on taxation that I'd just go ahead and get all the anger out of the way at once.  The issue I'm bringing to light is about how federal money gets collected and how it gets spent.

You see, the dirty little secret is that most conservative states are heavily subsidized by the federal government at the expense of most liberal states.  It isn't a deliberate conspiracy and there are many reasons.  Firstly, conservative states tend to, in general, be a lot poorer than liberal states.  Mississippi, Alabama, Arkansas, Louisiana, etc. all have very high rates of poverty and low incomes while states like California, Connecticut, New York and New Jersey tend to sport lots of high income individuals and while all have pockets of heavy poverty, it is nothing like the level seen in the deep south.  Secondly, conservative states tend to be smaller (think of all the red flyover states) and due to the structure of the Senate (two senators per state) therefore get a disproportionate share of the federal dole.  Finally, our system of agriculture subsidies tends to favor red states, since big ag tends to live in red states and receives big dollars from the government for growing crops (or not growing crops.)

For purposes of this exercise, I'm going to categorize states as "red", "blue" or "purple".  A "red" state will be a state that voted for the Republican Presidential candidate in the last 3, a "blue" state one that has voted for the Democrat in the past 3 cycles and a "purple" state one that has split its Presidential vote.

By that measure, the following 18 states are categorized as blue:
Washington, Oregon, California, Hawaii, Minnesota, Wisconsin, Michigan, Illinois, Pennsylvania, Maryland, Delaware, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, Vermont and Maine

The following 22 states are categorized as red:
Alaska, Arizona, Utah, Idaho, Montana, Wyoming, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas, Missouri, Arkansas, Louisiana, Mississippi, Tennessee, Alabama, Kentucky, Georgia, West Virginia and South Carolina.

The following 10 states are categorized as purple:
Nevada, Colorado, New Mexico, Iowa, Indiana, Ohio, Virginia, North Carolina, Florida, New Hampshire

There are probably some quibbles you could make with this list.  It seems weird to not have Pennsylvania on the list of purple states.  It's also odd that Indiana qualifies but Missouri (a traditional swing state does not.)  But minor questions aside, I think most would agree that in general this methodology generates a good breakdown of the country. 

The figures below use research from The Tax Foundation, which is publicly available here.

On average, for every $1 in federal taxes paid, the states receive the following benefits by category:
Red States: $1.40
Purple States: $1.10
Blue States: $0.94

The figures don't appear to average to $1 since the blue states that pay heavy taxes relative to their benefits are much larger than the small states that receive a disproportionate share of the benefits.

The most subsidized states?
New Mexico (a purple state) because of the cost of Indian reservations and systemic poverty in rural areas plus a large number of military bases and Mississippi (a red state) because of extreme poverty - they receive $2.03 and $2.02 respectively for each dollar in taxes paid.

The most subsidizing states?
New Jersey (a blue state) due to high levels of wealth and relatively few urban areas and Nevada (a purple state) due to heavy taxation on gaming revenues - they receive $0.61 and $0.65 respectively.

So if we are going to have a conversation about smaller government, let's start with a discussion about state equality.  If every state only received the level of government benefits that New Jersey and Nevada do, we could balance the budget today.

Saturday, November 5, 2011

Is Cain Imploding On Purpose?, The Big Map: Electoral College 2012

Could You Have Scripted This?
I don't know if Herman Cain has ever sexually harassed anyone.  I'm not even sure exactly what the former head of the National Restaurant Association is accused of.  Sexual harassment is a very broad charge that can mean a lot of things to a lot of people.  Is Cain accused of distasteful jokes or outright blackmail?  Where things he said or did unwise or illegal?  Nothing is clear.

Many years later, people still have arguments about Clarence Thomas and the veracity of Anita Hill's allegations.  But Anita came forward.  She faced the man she was accusing.  She was specific in her charges, faced cross-examination and made her case. The Thomas confirmation hearings may not have been any fun to the parties involved, but they had a fundamental sense of fairness.

Herman Cain's accusers have not stepped forward.  We know no specifics of the allegations against him.  There is no evidence offered, no cross examination.  It is a charge that, for lack of some kind of evidence, or at least a live witness or two, probably shouldn't bear on our decision-making in the Presidential election.

Except that we live in the real world.  In the real world, in a Republican primary, being charged with sexual harassment could make you look very beatable, especially by a formidable machine like the Obama campaign.  And in the real world, you aren't strictly innocent until proven guilty, once a charge has been made, however thin the evidence, you have to respond.

And except for that fact that Herman Cain seems to be doing everything in his power to inflict maximum damage on his campaign from this charge.  He has bungled things at every turn.  He has not been forthcoming with the facts (that he was accused at one point and that the charges were settled.)  He has claimed memory lapses (would you FORGET having settled a law suit about sexual harassment?)  He has given contradictory accounts.  It is vintage Herman Cain (see abortion, see border fences, etc.), except that none of this is cute or endearing when you are charged with something serious.

It makes me wonder if Cain is looking for a way out.  He was supposed to make a few points, land a few speaking gigs and have the ear of the American people for a time.  In his wildest dreams, maybe he'd land a gig at Fox News.  He wasn't supposed to WIN.  I don't think Cain want to be President, perhaps never did.  Maybe this is his way out.

Will all of this cause the troops to rally around Romney?  Probably not -- the Tea Party just can't stand the guy and some mainstream Republicans are starting to find his constant flip-flopping annoying at best and revealing of a lack of character at worst.  But Romney is still what they are going to get.  Perry continues to look less and less attractive the more he talks.  There has been talk of a "Newt rally" but it is stalled around 12% and he comes with all kinds of baggage and not much likability.  Ron Paul is way outside the GOP mainstream.  The other candidates are struggling to stay even in the low single digits.  It's going to be Mitt.  Don't say I didn't tell you so.

The Big Map
If it is Romney, then we have an interesting race on our hands.  National polling is close, but the state-by-state battles are fascinating.  If it's anyone other than Romney, just color the grey states blue right now.  But in Romney vs. Obama, it is a broad battleground, mostly among states that Obama won in 2008.

The map below was created with the help of, which is a great site that has a lot of electoral college information on it.

So, we can see that there are 190 electoral votes at this point that are reasonably firmly in the Obama column and 169 that are reasonably firmly in the Romney column with 179 electoral votes up for grabs.  Note that all the swing states listed are states Obama carried in his victory in 2008, except for Arizona, which is looking closer this time since one John McCain is not on the ballot.

Let's examine these swing states one-by-one.  Note that my "advantage" is often the current leader in the polls, but not always, as I consider history and trend as well.

Florida - 29 Electoral Votes
Voting History: Last 5 elections - 2 Democratic, 3 GOP (voted for Bush in '92, winners otherwise)
Vote Versus National Vote in 2008: +4.4% Republican
Trending: Republican (slightly)
Current polling: Pick 'Em
Advantage: Romney, but weakly

Pennsylvaina - 20 Electoral Votes
Voting History: Last 5 elections Democratic (voted for Gore, Kerry and 3 winners)
Vote Versus National Vote in 2008: +2.5% Democratic
Trending: Republican (slightly)
Current polling: Obama up by an average of +5%
Advantage: Obama, fairly strongly

Ohio - 18 Electoral Votes
Voting History: Last 5 elections - 3 Democratic, 2 GOP (voted for winner every time)
Vote Versus National Vote in 2008: +2.6% Republican
Trending: Republican (slightly)
Current polling: Obama up by an average of +4%
Advantage: Obama, but weakly

Michigan - 16 Electoral Votes
Voting History: Last 5 elections Democratic (voted for Gore, Kerry and 3 winners)
Vote Versus National Vote in 2008: +9.3% Democratic
Trending: Democratic (strongly)
Current polling: Obama up by an average of +6%
Advantage: Obama, strongly

North Carolina - 15 Electoral Votes
Voting History: Last 5 elections - 4 Republicans, 1 Democrat (voted for Bush in '92, Dole and 3 winners)
Vote Versus National Vote in 2008: +6.9% Republican
Trending: Democratic (moderately)
Current Polling: Romney up by an average of +1%
Advantage: Romney, but weakly

Virginia - 13 Electoral Votes
Voting History: Last 5 elections - 4 Republicans, 1 Democrat (voted for Bush in '92, Dole and 3 winners)
Vote Versus National Vote in 2008: +0.9% Republican
Trending: Democratic (strongly)
Current Polling: Romney by average of +2%
Advantage: Romney, but weakly

Indiana - 11 Electoral Votes
Voting History: Last 5 elections - 4 Republicans, 1 Democrat (voted for Bush in '92, Dole and 3 winners)
Vote Versus National Vote in 2008: +6.2% Republican
Trending: Democratic (strongly)
Current Polling: None available
Advantage: Romney, moderately

Arizona - 11 Electoral Votes
Voting History: Last 5 elections - 4 Republicans, 1 Democrat (voted for Bush in '92, McCain and 3 winners)
Vote Versus National Vote in 2008: +15.7% Republican
Trending: Unclear due to McCain's presence on 2008 ticket
Current Polling: Obama by an average of 5%
Advantage: Romney, but weakly

Wisconsin - 10 Electoral Votes
Voting History: Last 5 elections - 5 Democrats (voted for Gore, Kerry and 3 winners)
Vote Versus National Vote in 2008: +6.7% Democratic
Trending: Democratic (moderately)
Current Polling: Obama by an average of 6%
Advantage: Obama, moderately

Minnesota - 10 Electoral Votes
Voting History: Last 5 elections - 5 Democrats (voted for Gore, Kerry and 3 winners)
Vote Versus National Vote in 2008: +3.0% Democratic
Trending: Republican (moderately)
Current Polling: None available
Advantage: Obama, but weakly

Colorado - 9 Electoral Votes
Voting History: Last 5 elections - 2 Democrats, 3 Republicans (voted for Dole in '96 and 4 winners)
Vote Versus National Vote in 2008: +1.7% Democratic
Trending: Democratic (moderately)
Current Polling: None available
Advantage: Obama, but weakly

Iowa - 6 Electoral Votes
Voting History: Last 5 elections - 4 Democrats, 1 Republican (voted for Gore and 4 winners)
Vote Versus National Vote in 2008: +2.3% Democratic
Trending: Flat
Current Polling: Obama by an average of 3%
Advantage: Obama, but weakly

Nevada - 6 Electoral Votes
Voting History: 3 Democrats, 2 Republicans (voted for winner every time)
Vote Versus National Vote in 2008: +5.3% Democratic
Trending: Democratic (moderately)
Current Polling: Pick 'Em
Advantage: Obama, but weakly

New Mexico - 5 Electoral Votes
Voting History: 4 Democrats, 1 Republican (voted for Gore and 4 winners)
Vote Versus National Vote in 2008: +7.9% Democratic
Trending: Democratic (moderately)
Current Polling: None available
Advantage: Obama, but weakly

All of this would give Obama, very hypothetically a win in the electoral college of 290-248.

If you flip all the "weak" Obama states to Romney, Romney wins 293-245.

If you flip all the "weak" Romney states to Obama, Obama wins 358-180.

Bear in mind, it is WAY early...Romney hasn't even competed in his first primary as of yet.  And there are signs out there that there may be swing states in New England that I'm not even considering - New Hampshire could be in play as the most moderate state near where Romney is from, so theoretically could be other states in the region.  These changes could change the whole composition of the map.

But, very early on, I think we can say that we already have a horse race.  Unless the GOP nominates someone else.

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