Thursday, December 27, 2012

Let's All Go Cliff Diving But Please Don't Mess With the Federal Debt Limit

So, it certainly appears that we are headed over the fiscal cliff (kind of a misnamed and bad analogy if you ask me...modest across the board tax hikes and spending cuts are hardly a "cliff", but I'll go with the commonly understood language), barring an eleventh hour deal.

There are a few ways that things could still play out differently - Speaker Boehner could decide to allow a vote on extending lower tax rates for those below $250K, which seems almost sure to pass with near universal Democratic support and a smattering of Republicans who think that something is better than nothing.  I could also still see a "kick the can down the road" type of bill that delays the sequestration.

But frankly, I'm happy to go cliff-diving.  It'll be fun to watch the federal deficit shrivel up to a fraction of its former self overnight.  We'll actually be living within our means (or closer to it) when the cliff happens.

Alas, it will almost surely be temporary.  President Obama is no doubt looking ahead to January 3rd, when the new Congress goes into session and he has more House and Senate seats to work with.  He still obviously won't have a majority in the House or the 60 seats to stop a filibuster, but the difference between having to win over 17 House Republicans instead of 25 and 5 Senate Republicans instead of 7 will make a difference in how good a deal the President can get.

Regardless, we will survive a few weeks of Clinton-era tax rates, fragile economy and all.

The meatier issue staring us in the face is the debt-ceiling, which the country is scheduled to hit on Monday.  There is a little time on the clock - similar to last year, the Treasury can buy some time by not making pension contributions and delaying paying for other expenditures - typically these tricks can buy about two months, although they will likely buy longer than that if we also go over the cliff and borrowing needs are a lot less.

Coinciding with the debt ceiling issue is the issue of the remaining budget for Fiscal 2013.  The continuing resolution that everyone agreed to in order to avoid this showdown at election time covered funding of the federal government through March of 2013.  Beyond that, new legislation will need to be passed.

I mention these two issues together, because it poses an obvious question - why are Republicans threatening to mess with the debt ceiling again?  They have control over what we spend beyond March.  The House can choose to pass much smaller appropriations, if it deems fit to do so.  Charge less on the credit card if you wish, but quit threatening not to pay the bill.  The whole notion that congress can refuse to permit the debt that is necessitated by laws it passed seems absurd every time it comes up.  And failure to raise the debt ceiling will have much more severe consequences over the long term than going over the fiscal cliff for a few weeks.

Let's hope rational heads prevail and it doesn't come to another default showdown.  But given the history, anything is possible.

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Friday, December 21, 2012

The GOP is Playing a Very Bad Game of Chess - But Does That Mean Anything for a Cliff Deal?

December has not exactly been the GOP's proudest moment.  They have been out-flanked every step of the way by the Democrats and have looked disorganized, unreasonable and even downright silly.  Two events cap how badly they have navigated the fiscal cliff debate:
(1) McConnell Filibusters Himself
President Obama, as part of one of his offers on the cliff, had proposed as part of the resolution, that Congress do away with the need to periodically increase the debt ceiling.  The President's thinking was - Congress has to authorize all of the actual expenditures that lead to a debt-ceiling hike being necessary in the first place, so the vote is redundant and all it does is create conflict and risk the US credit rating.  The GOP, of course, has no desire to give up leverage on the debt ceiling, which they hope to use to extract additional spending cuts, including entitlement reform.

Hoping to embarrass Obama by showing how little Democratic support his proposal hid, Mitch McConnell proposed a bill that would permanently eliminate the cap on the debt ceiling.  His thinking surely was that Democrats in the Senate were not ready to sign off on such a bill.  The only problem is that they absolutely were and Senate Majority Leader Harry Reid moved quickly to vote to pass the bill.

All of this put McConnell in the position of realizing that this bill that he has proposed, but opposed, would actually pass.  McConnell promptly filibustered a vote on his own bill in order to kill it.  That's right, HE proposed the bill, then filibustered it.

That's a high score on the stupid-meter if I've ever seen it.

(2) Boehner Better Get a Plan C
There is no doubt about the going-in GOP position to the negotiations - that they didn't want any income taxes to go up (they were less worried, as far as I can tell, about payroll taxes going up, but income tax rates were critical.)  The House has already passed a bill, essentially with only GOP votes, to extend all of the tax rate cuts at all income levels.

Realizing that there was no way that the President was going to sign off on such a bill and that he would likely slam the GOP for holding middle-class tax cuts hostage to tax cuts for the very wealthy, Boehner rallied this week around a "Plan B" - a plan to extend tax rate cuts for everyone under $1 million in income.  Surely, he must have thought, if the President vetoes that bill (or the Senate refuses to take it up), it will be the Democrats who will be blamed for holding middle class tax cuts hostage, since he would have compromised and agreed to let rates rise for the richest.

There was only one problem with Boehner's plan - his own caucus didn't support it.  Boehner had to suddenly cut bait and not even vote on the proposal yesterday, after it became clear it would fail broadly in a floor vote.

So the GOP is clearly is disarray at the moment, and the polls reflect this.  His approval rating is up to 56% in the Gallup poll (and at similar rates in other recent polls), the highest in over 3 years.  A solid majority (52%) believe that the GOP needs to give more on the fiscal cliff, while a much smaller minority (40%) believe that the President hasn't given enough.

All of that said, I don't know how this will play out.  Knowing how badly they've fumbled and that the nation is uniting against their point of view, the GOP should give ground.  A conservative friend of mine, certainly no fan of the President or the Democrats (he told me the last time he voted for a Democrat was a state senate race in Virginia in 1988), put it very clearly - "we had an election over this.  We lost.  We need to get over it."  But the modern GOP is a complex animal.  Certainly Boehner and the mainstream Democrats in the Senate from purple states (see John McCain or the departing Scott Brown) want a deal.  But the Tea-Party loyalists who won primary battles on the basis of their ideological purity, may not care a whiff that the public is against them.  If they can't even get behind a $1 million+ rate hike increase, what are the odds that they can support a deal that the President can live with?

The best chance for a deal is a coalition of most of the Democratic party with the most moderate elements of the GOP.  Until the new House is sworn in come January, there are only 193 Democrats in the House, with 218 votes needed to pass a compromise, meaning that any deal that attracted all of the Democrats would need 25 Republican votes.  Realistically, any deal that attracted significant GOP support would likely lose some Democratic support from the far-left, so a more realistic scenario might be a deal that say wins all but 20 of the Democrats and wins 45 Republican votes.  Such a deal would require some hard selling in the House by Boehner and Pelosi.

In the Senate, assuming the deal is not deficit-reducing and subject to reconciliation, which is a safe assumption since the "base case" of going over the fiscal cliff is likely far more deficit-reducing than anything that will be agreed to, you would need all the Democrats and Democratic-leaning Independents plus 7 Republicans to break a filibuster.  There are a lot more moderate Republicans in the Senate, so this seems a much easier goal to reach with a deal than in the House.

Of course, come January, both the Senate and the House become more Democratic, meaning a deal would require less GOP support to pass.  And with Congress headed home for the holiday and not due back until December 27th, the time window to get a deal done before the cliff goes into effect is running short.

I think at this point it is 50/50 that we get a deal before the New Year.  Unfortunately for congress and the President, the Mayan Zombie Invasion (or whatever nonsense was supposed to happen today) didn't happen, so they will have to deal with this issue.

Expect a deal of some sort early in the New Year if we don't get more 11th-hour heroics in the next week and a half.  It might look something like having rates rise on those making over $400 or $500K, having Social Security indexed to chained CPI rather than regular CPI-U, patching the AMT and repealing some of the DoD sequestration cuts.

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Wednesday, December 12, 2012

Is Anyone Really Surprised by the Disfunction in Washington?

The hand-wringing in the press and in commentaries has been predictably vicious this week - why can't Washington work together?  Why aren't our elected officials reaching compromise?

My question is - is anyone really surprised that we are approaching the edge of the "fiscal cliff" without a solution?

There is nothing in the history of negotiations between House Speaker Boehner and President Obama that indicates a strong capability to come to compromise.  And interestingly, those are probably the two most moderate voices in the room - Boehner's caucus consists of a lot of die-hards who have no interest indealing while Boehner actually wants a deal and many on the left would be happy to let negotiations fail and blame the GOP.

I always knew that if there was going to be a deal - and there still could be - although a "grand bargain" that permanently solves problems around revenue and entitlements seems increasingly unlikely (another interim patch seems more likely) - it would happen in the 11th hour.  Politics these days simply doesn't allow anything different.

Let's face it - the House GOP and the Democrats in the Senate and the White House were elected by different constituencies to do different things.  And they are both representing what they ran on.

So how did we elect people with such divergent agendas?

Well - we did - but not the way you might think.

Democrats got 1% more votes than Republicans in House races this fall.  Democrats won the national congressional vote 49.1% to 48.1%, a smaller, but still decisive margin from President Obama's popular vote total.  In other words - very few people actually split their tickets to get the result we got.

So how did the GOP swing a House majority with 1% less votes than the Democrats?  It all comes down to districts and there are 3 principle causes of the districting advantage for the GOP that leads to a House that is so different from the national vote:
(1) Inherent Demographics
Democrats tend to live in cities.  Republicans tend to live in suburbs, exurbs and the countryside.  This alone wouldn't create a House imbalance.  But it's a question of proportion.  Take Pennsylvania as an example - in the City of Philadelphia, Democrats win about 80% of the vote in a normal election.  In outlying Bucks County, Republicans normally win about 60% of the vote.  If you look at three congressional districts, one in Philadelphia and two in Bucks County, you will get 1 Democrat and 2 Republicans in congress, even though the total vote between the three districts will be roughly 50/50.
(2) Gerrymandering
Every 10 years, the 50 states (or at least the 43 that have more than 1 House seat) redraw district lines.  In a few states this is done by a non-partisan judicial commission.  In most states, however, lines are drawn by the state legislature and the Governor.  In 2011, when lines were being redrawn, Republicans controlled completely 25 state legislatures with 9 that were either split-control or nonpartisan and only 16 controlled by Democrats.  Republicans also controlled redistricting in big prize states like Texas, Florida and Pennsylvania.  When you get to draw the lines, you will draw them in a way that favors your party - mainly by concentrating your opponents in a few districts and spreading out your supporters to win more districts.
(3) The Voting Rights Act
The Voting Rights Act of 1965 did a great many things intended to support the electoral rights of minorities in the United States.  One aspect of the law required the creation of "minority majority" congressional districts - that is, principally districts with high concentrations of black voters intended to promote the election of black congressmen.  While the law did serve that purpose - black representation in Congress increased significantly, it also created inherent gerrymandering, in a way that favored the GOP, since it essentially concentrated black voters in a few districts, creating a few overwhelmingly Democratic districts but many more mildly Republican districts.

Items 1 and 3 have existed for a long time (at least since the 60s), but in the past, other forces gave the Democrats more parity - from the 60s through the 80s there were a large swath of Southern Democrats who largely got wiped out in the Republican takeover of 1994 (and finished off in the past few years.)  Also, the urban-rural and black-white vote polarization has actually increased significantly over the past 20 years.  And Democrats controlled far more state houses in the past 50 years than they did until the Republican gains in 2009 and 2010.

All of this leaves us with a situation where Democrats would have to win the national congressional vote by at least 2% in order to win the majority in the House - not an impossible task in the right year, but a pretty big intrinsic disadvantage.

All of this leads us to the balance of power that we have today - and our present confused, divided nation.

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Sunday, December 2, 2012

An Emboldened President Obama Lobs a Gernade, Is This the Ultimate Long Game?

I recall the tax debate of 2010 quite well.  President Obama had campaigned in 2008 on extending the Bush tax cuts for those making less than $250K per year and not continuing them for everyone else.  The debate took to the Sunday airwaves, but in the end the President blinked.  All of the Bush tax cuts were extended for two years, in addition to a new Social Security tax reduction of 2% for the next two years.  In the end, it was darn close to a complete victory for the GOP on taxes at least - although really very little happened to reign in the structural sources of spending.

We are 29 days from the fiscal cliff this time, so there is still a chance for the President to blink, but he is acting anything but compromising this time around.  His opening volley to the GOP, delivered by Treasury Secretary Tim Geithner to House Speaker John Boehner, is everything that liberals would want and conservatives would hate.  It includes:
* Allowing the Bush tax cuts for those making over $250K to expire
* Further reducing tax deductions on the wealthy to raise additional revenue
* Reducing Medicare benefits to upper income taxpayers
* Reducing farm subsidies
* Claiming credit for cuts that are naturally happening in Defense from the wind down of the wars in Iraq and Afghanistan

The GOP predictably hated the proposal.  It is basically a non-starter in the conservative GOP House.  I suspect it was quite obvious to the President that this would be the case.  I'm not sure he cares.

The President's basic negotiating mistake in almost every key piece of policy in his first term was negotiating from weakness.  The President has been giving away the farm before the conversation started and then negotiating from the compromise.  And often, there has not been a GOP counter-proposal, so the President has wound up negotiating with himself, putting forward increasingly conservative policy proposals until the GOP decides to accept one.

What the President is doing is daring the GOP to make a counter-proposal.  He's put forward the most popular tax increases - solid majorities favor raising taxes on the wealthy and put forward fairly vague promises of spending cuts against programs which are not particularly popular.

He is basically saying - "your move, John Boehner".

On the one hand, the President appears to hold all the cards this time:
* The Bush tax cuts WILL expire for everyone with no action, as will all the sequester spending cuts and the GOP is powerless to stop it without agreement from the Democrats
* Obamacare taxes and health insurance exchanges WILL take place under current law
* The President doesn't have to face re-election again - the House GOP does - you would think they have the larger incentive to get something done.

The GOP has held on to one card, however, and that is the federal debt ceiling.  It will need to be extended in 2013 and they can again hold it hostage for their goals, in spite of the potential damage to US credit.  But even on this topic, the President could go bold and claim constitutional authority to pay debts that are the result of previously authorized spending, although the constitution is fairly explicit in giving Congres the power to borrow money, not the President.  But it would likely be tied up in court for a while and be very bruising to the GOP's public image.

Did the President play a very long game to construct this situation?  There is a solid argument for it.  The "fiscal cliff" was set-up by three pieces of legislation that the President negotiated:
* The 2009 passage of Obamacare, which set the bulk of the associated taxes to go into effect on Jan 1, 2013
* The 2010 extension of the Bush tax cuts, which set them to expire on Jan 1, 2013, along with the payroll tax reduction
* The 2011 debt ceiling deal, which set the automatic sequestration cuts to go into effect on Jan 1, 2013

I noted all of this when I wrote about my proposal to whack the deficit by doing nothing - and that is certainly still an option available to the President.

Nobody in Washington wants to eat that many peas at once.  But, in negotiations that it appeared to everyone he was losing in 2010 and 2011, the President set up this gun to the head, where he can negotiate back from a policy base where all of the above things happen and, because of the timing he set up, he can do it all without having to worry about another election.

So, what will happen?

Privately, most in the GOP concede that they will have to give some ground on tax rates, although no one is talking about it in public.  A possible compromise would likely look something like this:
* Allow rates to go up some, but set the threshold higher than $250K.  It might look something like a 37 or 38% rate on incomes over $500K or $750K.
* Give some ground on Capital Gains and Dividends, allowing rates to rise, but not to the full level of ordinary income - perhaps increasing rates on both from 15% to 20%.
* Increase premiums in Medicare on higher income seniors
* Some reductions to domestic discretionary spending and defense spending, but less than would be automatically implemented in sequestration
* Some type of bi-partisan commission to study more fundamental tax reform.

The GOP realizes they have to give some ground to the President and that his hand is strong this time around.  But they probably won't give away the whole farm.

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Wednesday, November 28, 2012

The Idiocy of Grover Norquist...and Why the GOP Is Right to Abandon Him

When economics become a religion, we should all be concerned.  Few moral issues are black and white, but clear cut cases do exist - I think that we would all agree that rape is always immoral (most of us wouldn't even quibble over whether or not it is "legitimate" rape), so is child pornography and infanticide.  But in economics, decisions are rarely clear cut - they invariably involve complex trade-offs.  Most of us would agree that free markets are generally more efficient than government control - but few of us would want to leave national defense, police work or workplace safety up to the private market. 

So when people start treating economic concepts like religion - on either the right or the left, be very worried.  Grover Norquist has been an economic theologist for a long time.  Norquist has never worked in the real world - he has worked for lobbying groups, been a speechwriter and, most famously, founded "Americans for Tax Reform", a group essentially dedicated to a singular concept - that taxes should never go up - under any circumstances.  Norquist's lack of practical experience isn't, in and of itself, worthy of dismissing all of his ideas - many great thinkers spent their careers in either academia or the political sphere.  But it does help to explain his black and white view of a decidedly gray world.

Norquist's crowning achievement is his "Taxypayer Protection Pledge", which has been signed by 219 House Republicans and over 39 Republican Senators (no current Democrats have signed the pledge.)  The pledge states, simply, that an elected official will "oppose any and all efforts to increase the marginal income tax rate for individuals and business; and to oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates."

This pledge is pretty on its face absurd.  Think about this hypothetical situation: a massive economic crisis happens and Congress, whether wise or stupid, decides to eliminate all taxes for 1 year and finance the government solely on debt.  Under the terms of Norquist's pledge, taxes would have to stay at zero, otherwise you would be supporting an "effort to increase the marginal tax rate for individuals and businesses".

But maybe the pledge doesn't apply to TEMPORARY tax cuts, you might say.  But that's exactly what we are talking about in the current fiscal cliff debates - tax cuts that were made on a temporary basis in 2003 and extended on a temporary basis in 2010.  The Bush/Obama tax cuts were never passed into law as permanent cuts.

Norquist says the government has a spending problem and he is clearly right.  But it also has a revenue problem - the federal cut of US GDP has never been lower in the past 60 years - and 60 years ago we didn't have Medicare, Medicaid, Homeland Security, the EPA, OSHA or a whole lot of other things that we take for granted as basic functions of government these days.

Norquist's pledge is absurd - and he has no standing to "require" Republicans to adhere to it - he isn't a government official and doesn't directly represent anyone other than himself.  Yet, for too long, GOP candidates bought into Norquist's nonsense lock, stock and barrel.  

Republicans have started backing away from the pledge.  Lindsey Graham, Saxby Chambliss, Peter King and Tom Cole have all more or less disavowed the pledge.  They are right to.  Hopefully more courageous members of the Republican party will abandon the religious lunacy and join the real conversation as to how we put our budgetary house in order.

Sunday, November 25, 2012

What Will a Second Term Obama Cabinet Look Like?

One of the predictable patterns in American governance is changes to the Presidential cabinet in the second term of an administration.  Very few department heads last the entire 8 years of an administration - the George W. Bush administration had only one (Elaine Chao at the Labor Department) and the Clinton administration had only four (Janet Reno at Justice, Donna Shalala at Health and Human Service, Bruce Babbitt at Interior and Richard Riley at Education.)

Note that for purposes of this discussion, I am only talking about department heads and not Presidentially-designated "cabinet-level" policy advisors such as the Chief of Staff, who attend cabinet meetings but don't have direct responsibility for governing and are not confirmed by the Senate.

The reasons for this are fairly obvious.  Eight years is a heck of a long time in any one job, but particularly one that is so high profile, stressful and subject to public criticism as running a large portion of the government.  And cabinet officials don't make a ton of money - current pay scales for cabinet-level positions are $191,300 per year - a lot of money if you are the average middle-class tax payer but a tiny amount compared to comparable executives in private industry, who would typically make millions for running groups that large.  So, most cabinet officials want out eventually.

If politics weren't involved, you'd see a distribution of cabinet officials leaving - some would leave after 2 years, some would leave after 3 and so on and so forth.  But obviously politics are involved and Presidents generally don't want to deal with high-profile cabinet appointments in the middle of an election season, so cabinet-officers are generally asked to stay at least through an election, which creates a pent-up demand for departures at the beginning of a President's second term.

President Obama's cabinet actually appears to be relatively more stable than most.  After George W. Bush won re-election in 2004, within the next year, he had changes at State, Treasury, Defense, Justice, Interior, Agriculture, Commerce, Health and Human Services, Education, Transportation, Energy, Veterans Affairs and Homeland Security, in addition to having already made a change at Housing and Urban Development.  President Obama isn't looking at nearly that level of change.  He has already made a change at Defense (Leon Panetta replaced Robert Gates, who was a holdover from the Bush administration) and has a current vacancy at Commerce (after the bizarre resignation of John Bryson, who was actually Obama's second Commerce Secretary, who was involved in a hit and run after an apparent seizure.)

Of all the cabinet seats, here is what is likely to happen in the next year:
The Big 4 (The 4 largest and most important departments - State, Defense, Justice and Treasury)
State - Hillary Clinton - likely to depart as she has repeatedly stated that she probably will not stay for a second-term.  Will President Obama pick a fight with John McCain and nominate Susan Rice over GOP protestations led by McCain or will he go with a "safer" pick?  This one could be a real filibuster fight.
Defense - Leon Panetta - also likely to depart although the President may be able to persuade him to stay on a little longer to sort out the other seats first - Massachusetts Senator John Kerry appears to be the leading candidate here.  I would be surprised if Kerry had an issue getting confirmed.
Treasury - Tim Geithner - likely to depart.  Jack Lew is the lead candidate to replace him.  He has both the private industry (Citigroup) and public sector (head of the OMB) experience and would likely be non-controversial.
Justice - Eric Holder - likely to stay.  He's not liked on the right at all, but Obama has shown a lot of loyalty to him and he doesn't need to be confirmed to stay.

The Other Seats:
Commerce - Rebecca Blank (acting) - this is an obvious vacancy that the President has to address.  The role has been technically vacant since June with undersecretary Blank filling the interim role.  The President is actually a pretty big fan of Blank's and might look to make her role permanent.
Interior - Ken Salazar - likely to stay - at least for now.  This is Salazar's dream job.
Agriculture - Tom Vilsack - likely to stay - despite some earlier staffing controversies, Vilsack hasn't been particularly high profile and he seems to enjoy the work.
Labor - Hilda Solis - likely to stay for now - Solis doesn't have a resume that would land her naturally in a big private industry lobbing job and labor will be interesting in the next few years with Wal-Mart protests and such - plus President Obama is likely to look for her to stay, knowing that any appointment to this seat would be controversial.
Health and Human Services - Kathleen Sebelius - very likely to stay - if you are going to do this job, wouldn't you want to be around for Obamacare implementation?
Housing and Urban Development - Shaun Donovan - likely to stay - he is one of Obama's closest trusted advisors from Chicago and though HUD has not been a focus, I think Donovan enjoys the work.
Transportation - Ray Lahood - likely to depart - Lahood has basically said he is burned out and looking to move on.  The lone remaining Republican in Obama's cabinet would be an interesting role to replace.
Energy - Steven Chu - 50/50 to depart in the next year - Chu didn't really get the deal he bargained for - the brilliant scientist thought he would be overseeing implementation of meaningful global warming policy around cap and trade.  It hasn't materialized and Chu may want to get out of government.
Education - Arne Duncan - likely to stay - Duncan is another one of Obama's Chicago-era friends, has received lots of bi-partisan praise for his reform-minded approach to education and his willingness to incorporate Republican ideas.
Veterans Affairs - Eric Shinseki - seems likely to stay - I really have no intel on Shinseki, who hasn't been very high profile, but he hasn't given an indication that he is leaving.
Homeland Security - Janet Napolitano - 50/50 to depart in the next year - this is a burnout, thankless role and Napolitano has taken a lot of heat.  Obama is very loyal, however and if Napolitano wants to keep taking the heat, I'm sure he would let her.

It is very likely that none of the vacancies, other than the current one at Commerce will occur prior to the New Year as the President has likely asked his cabinet officials to hold on until after the debate on the fiscal cliff is resolved, which seems likely to stretch right up to December 31st.  But they will be front-and-center in 2013 as the President seeks to remake his cabinet.

One of the many reasons that second-term Presidents tend to get less done is that they burn out the A-players in their cabinet in the first term and are stuck with the B-team in their second term.  How much of that happens in the Obama administration remains to be seen, but there is no doubt that he will have some vacancies to fill.

Thursday, November 22, 2012

What Real Tax and Spending Solutions Would Look Like, How Liberal Or Conservative Were Our Presidents?, Giving Thanks

The Real Reform We Won't Get
As fiscal cliff negotiations continue, it has become obvious to me that the field on which the game is being played is a small one.  We are arguing over a 3.6% difference in top marginal tax rates (between 36% and 39.6% for those making over $250K) and over "draconian" spending cuts which amount to $120 billion per year, split evenly across defense and domestic spending.

While it is good that we are having a serious conversation about how to reduce the deficit, it strikes me that the plans are not nearly bold enough.

Republicans are right to call for more fundamental tax reform - our labyrinth of deductions (home mortgage, child tax credits, earned income tax credits, charity, energy efficiency, state and local taxes, passive activity investing depreciation and on and on), exemptions and special rates for differing kinds of income (e.g. carried interest, which is essentially the salary of hedge fund managers as well as dividends and capital gains) produce a system where, on paper, the rates appear to be a smooth escalation from 10% at the low end to 36% at the high end, but in practice, 47% of Americans pay no income tax and Mitt Romney pays but 14% or so (not a criticism of Romney or the 47%, a criticism of our tax code.)

Our other taxes are a patchwork as well - Social Security taxes are actually regressive, hitting the first $110K of income only - so someone who makes $50K pays twice the rate that someone that makes $220K and 10 times the rate of someone who makes $1.1 million.

Corporate taxes are similarly a mess - high marginal rates (35%) but huge companies which can declare profitability to shareholders using one set of accounting methods, can take advantage of the patchwork of accelerated depreciation, favorable inventory accounting and a maze of credits to not be profitable on paper and pay no taxes (see General Electric for an example.)

Both parties are squarely to blame for this mess.  Carve outs, exemptions and deductions are among the most popular ways to give back to your constituents and everybody from Ronald Reagan to Bill Clinton to George W. Bush has expanded that patchwork in some form or fashion.

Fundamental tax reform would start with a few basic principles:
(1) The tax rates that you pay should be simple, transparent and consistent
(2) We should not attempt to tax people into poverty, but everyone else should pay a share of the tax burden that they can reasonably afford
(3) Taxes should be about generating revenue, not about encouraging or discouraging behavior

Simpson-Bowles provided the framework, which both Mitt Romney this Presidential cycle and now House Republicans have embraced - "broaden the base" by lowering deductions and exemptions and therefore be able to lower marginal rates and still increase revenues.  The issue with what the GOP is proposing is that they don't seek to do away with the deductions that really cost money - such as home mortgage interest and charity.  And they don't want to address the disparity in rates charged between "regular" (i.e. earned) income and capital gains and dividends.

On taxes, here is my simple proposal:
* Every individuals tax treatment is the same - this will avoid marriage bonuses, marriage penalties, etc.  Right now, if you are a working class family with one income, marriage is a huge tax boon.  If you are upper-middle class and have both spouses working, it's a huge penalty.  Let everyone pay taxes on their income.
* Treat all income equally - whether it is capital gains, carried interest, earned income, dividends, bond interest, whatever.  Add up everything you made last year.
* Exempt the first $35,000 per year in income and index that amount for inflation.  That is approximately the poverty level income for a family of four - a generous exemption that would ensure that no one is taxed into poverty.
* Apply a simple 20% tax rate to all income above the $35,000 level, regardless of source.

You could do your taxes on a post-card.  No more complex forms to fill out.

The revenue effect would be as follows.  There are approximately 155 million people in the workforce and assuming that most of them meet the $35,000 threshold, there would be about $5.4 trillion in income exempted from taxation.  But there is about $13.4 trillion in total income available, leaving $8 trillion subject to the 20% tax or, in other words, generated revenue of $1.6 trillion.
That's a big increase from the $1.2 trillion that is currently collected each year in income taxes.

But wouldn't this system be less progressive?

Actually no.  The $35,000 exemption provides a high degree of progressiveness while avoiding the trap of loopholes for higher incomes.

The effective tax rates paid at various income levels would be as follows:
At $35,000 you would pay an effective tax rate of 0%
At $50,000 you would pay an effective tax rate of 6%
At $75,000 you would pay an effective tax rate of 10.7%
At $100,000 you would pay an effective tax rate of 13%
At $200,000 you would pay an effective tax rate of 16.5%
At $500,000 you would pay an effective tax rate of 18.6%
At $1 million you would pay an effective tax rate of 19.3%
At $10 million you would pay an effective tax rate of 19.9%

So it is actually a very progressive and simple system that generates a ton of income.

So who pays more?
(1) People who currently take big advantage of deductions - generally upper-middle class people who have large homes and therefore large mortgages and live in high tax states.  I think we'd all agree these folks can pay a little more.
(2) High income earners who have a high percentage of their income in the form of dividends and capital gains versus ordinary income.  I think most would agree that the Mitt Romneys of the world can afford to pay 19.9% instead of 14%, right?
(3) Middle-class homes with lots of kids.  Right now, if you make $50,000 and have lots of kids, there is a good chance that you don't pay any income taxes.  Under this plan, you'd owe $3,000 per year.  This is probably the toughest sell in this plan, but don't we want everyone who can afford it to contribute a little?

By adopting this fair, simple, plan, we cut the deficit by $400 billion per year, about the same amount as if we simply let the current tax rates revert as will happen if nothing is passed, but this is a far more fair system that encourages economic activity by having a low marginal rate and eliminates a lot of the inherent unfairness in our system.

On the spending front, we'll deal with 3 basic categories - defense, entitlements and everything else:
On defense, we currently spend about $716 billion per year.  This includes about $298 billion spent on personnel, supplies and military housing with the balance being spent on equipment, R&D and construction.

I would not touch the money spent on personnel - we need troops and we have an obligation to pay them a reasonable rate and feed and clothe them.  But there is over $400 billion spent on equipment that could be cut dramatically.

Adjusting for inflation, spending on personnel, supplies and housing has risen by 25% since 1993.  All other military spending (equipment and R&D) has risen a whopping 84%.  Returning this spend to inflation-adjusted 1993 levels by cancelling programs such as new fighter jets we don't need (it's been over 60 years since a fighter jet was used in combat), nuclear subs (which have never been used in combat) and the like would yield a savings of $190 billion per year.

On entitlements, there are no quick fixes, as we have current obligations to current retirees that no one wants to touch.  Presently, we spend about $1.6 trillion per year on Medicare and Social Security and take in about $900 billion per year in the taxes that fund them.  This is a little deceptive in that this year includes the 2% payroll "tax holiday" that takes about 15% of the tax revenue away from the system, but we clearly still have a problem and it is getting worse with rising health care costs and increased life expectancy.

My proposals are fairly straightforward:
(1) Allow the tax holiday to end as planned
(2) Raise the Medicare retirement age from 65 to 67 for those presently 50 and under
(3) Adjust the Social Security increase from the CPI-U to the Chained CPI-U
This essentially adjusts the cost-of-living increases for social security to more accurately reflect the underlying economics - CPI-U assumes that people keep buying the same things regardless of their cost, Chained CPI-U assumes people modify their buying behavior to prices - for instance, people might buy chicken instead of pork if pork prices rise more than chicken.  The effect of this would be a gradual slowing of the increasing rate of payout in social security payments.
(4) Cap Medicare expenditures at current rates per person, adjusted for inflation
This cap would have the effect of requiring trade-off decisions if medical inflation continues to outpace general inflation.  Yes, this is a form of rationing - it would likely mean that you couldn't get every available treatment at will.  But there is no way to give everyone every treatment at will and contain costs.  It would put pressure on the system to get more efficient.
(5) Eliminate the payroll tax cap on Social Security
Tax all income, not just the first $110K.  Someone making $250K can afford to pay the same rate as someone making $110K.

These changes would not have a dramatic immediate effect on the deficit, since most manage the future rate of increase of spending, not cut current spending.  These actions would reduce the current deficit by about $365B, but would reduce future deficits but far more than that over time and make the system more solvent.

On all other spending,
The choices are tough.  I definitely do not want to cut funding for infrastructure spending, which is one of the highest dollar returns that a government can invest in and is sorely needed.  And I certainly don't want to cut things like the Veterans Administration - our budget situation can't let us not fulfill our obligation to our veterans.  I'd propose the following:
(1) Eliminate Farm Stabilization (a.k.a. farm subsidies)
I've never understood why we subsidize large factory farms out of the federal budget.  The broad availability of crop insurance and the large capital that companies like Monsanto and ADM have at their disposal make this utterly unnecessary.  Eliminate it entirely and you save $13B.
(2) End Extended Unemployment Benefits
Under normal circumstances, you can collect unemployment for 6 months.  Under current law, we have extended it to almost 2 years.  This makes sense at the front-end of an economic shock.  But at this point, if you haven't found work in your field, it's time to accept work in another field.  Reverting to normal unemployment payouts would save approximately $40B per year.
(3) Reform Federal Pensions
Federal pensions are among the most generous out there - far more generous than in private industry - and are costing $127 billion per year and growing.  Make a 401K contribution match, similar to private industry, but end the practice of guaranteed lifetime income for federal workers - no one in the private world gets such benefits anymore.  Assuming that you could cut 25% of the cost (a very conservative assumption), you would save $32B per year.
(4) Manage FDIC Rates
We have the unusual situation right now where the FDIC is running a deficit because of the large number of bank failures - historically it has turned a profit - the FDIC should adjust it's insurance rates to make up for the increased risk it has experienced, as any insurance company would do.  This would save $28B per year from the current deficit.

All told, I'd cut $113B out of discretionary spending without touching, infrastructure, VA benefits, food stamps or education.

So if you add up all these numbers:
$400 billion from tax reform + $365 billion from entitlement reform + $113 billion from discretionary spending reductions = $878 billion in deficit reduction.

Against a $1.1 trillion deficit, that's a pretty awesome year one down payment.  And if we also capped other programs at the rate of inflation, you could take care of the rest as the economy naturally grows (eventually!) and costs on other programs come down as more people find work.

Of course, all of this won't happen, but I wanted to dream for a moment about what would be possible if we didn't view the world so myopically.

Liberals vs. Conservatives
What defines a liberal versus a conservative?

In social terms, it is complex, but in economic terms, I think there is relative consensus - a conservative wants smaller government and lower taxes and a liberal wants larger government and therefore higher taxes.

The conventional wisdom is that Republicans generally pursue more conservative policies, Democrats more liberal policies.  Reality, as always, is a little more complex than that.

I've looked at US Presidents since World War 2 and analyzed what happened during their administrations on taxes and spending.  I've looked at the net CHANGE in taxes and spending as a percentage of GDP during their administrations versus the absolute levels since every President has to deal with a baseline budget coming in.

The obvious limitation of this methodology is the composition of Congress.  For instance, a liberal President might want to spend more, but a hostile congress could have blocked the spending or vice-versa with a conservative congress.  So, we'll discuss that impact with the numbers.

Looking at the four quadrants that are possible, I've assigned the four descriptions:
(1) Deficit Hawks
These Presidents have the attribute of HIGHER taxes and LOWER spending.  In other words, they shrunk government but also paid the bills.
(2) Deficit Spenders
These Presidents have the attribute of LOWER taxes but HIGHER spending.  They effectively grew the size of government, but didn't pay for it.
(3) Liberals
These Presidents pursued a larger government policy - higher taxes and spending.
(4) Conservatives
These Presidents pursed a smaller government policy - lower taxes and spending.

Deficit Hawks: Clinton, Obama
Deficit Spenders: W. Bush, H.W. Bush, Ford
Liberals: Carter, Johnson, Kennedy
Conservatives: Reagan, Nixon, Eisenhower

The chart is actually quite stunning in showing how much of an outlier the W. Bush administration was.  Government spending increased by 7% of GDP from 2001 to 2009 going from 18.2% of GDP to 25.2% of GDP.  Meanwhile, taxes fell from 19.5% of GDP to 15.1% of GDP.  The net result is that in that 8 years, a budget surplus of 1.3% of GDP turned into a massive deficit of 10.1% of GDP.

So how did this happen?
The spending increase basically comprised three things - the spending on the wars associated with Iraq and Afghanistan and the creation of the Department of Homeland Security, a large increase in Medicare spending associated with the prescription drug program and massive spending at the end of his term dealing with the financial crisis - including TARP and higher cost for programs like Food Stamps and Unemployment as the economy tanked.

The tax receipt reduction was principally the byproduct of the 2003 tax cuts that Bush pushed through that slashed rates across the board.

So how influential was congress in this mess?
From 2001-2003, Republicans controlled congress.  From 2003-2007, Republicans controlled the House and Democrats the Senate.  From 2007-2009 Democrats controlled both chambers.

So, breaking it down by era, we can look at the changes that happened during each stage:
From 2001 to 2003 - taxes fell 3.2% of GDP and spending increased 1.5% of GDP
From 2003 to 2007 - taxes increased 2.5% of GDP and spending was flat
From 2007 to 2009 - taxes fell 3.4% of GDP and spending increased 5.5% of GDP

The big hits to taxes came at first with the Bush tax cuts and then with his early attempts at tax stimulus in 2007 as the economy headed south (along with the decrease in taxation caused by reduced profits at large corporations.)

The biggest spending hit was clearly TARP and the fallout from the recession, but the prescription drug program and expansions in discretionary spending which happened under an all GOP watch also contributed.

So, in the case of Bush, the blame is somewhat shared and the numbers are exaggerated by an economic crisis, but we were clearly on an irresponsible path far before then.

The biggest deficit Hawk on our list is Bill Clinton.  Clinton faced a Democratic congress from 1993-1995 and a Republican Congress from 1995-2001.

1993-1995 saw a 0.8% of GDP reduction in spending and a 0.9% of GDP increase in taxes
1995-2001 saw a 2.4% of GDP reduction in spending and a 1.1% of GDP increase in taxes

Interestingly, the 6 years of GOP-control looked a lot like the 2 years of Democratic control in terms of trend.  The Democratic congress set tax hikes in motion and reduced military spending - the GOP congress reined in domestic discretionary spending.  So there is some shared credit, but also a clear trend with Clinton.

The other President whose numbers may appear surprising is Obama.  The conventional wisdom is that deficits have exploded under Obama thanks to prolific stimulus spending.  In fact, spending has fallen modestly and tax receipts are up modestly.  This is partly deceptive, since Obama's "base" includes emergency TARP spending that has lapsed.  But it also speaks to the mess that Obama inherited in the budget, with 10%+ deficits in the baseline.

What parties say and what Presidents do often diverge.  Leadership is about more than party membership.

Giving Thanks
Today is Thanksgiving and as I have traditionally done, I wanted to give thanks for some things that are great about our nation.
* Thank you to the soldiers who go to far-flung dangerous lands to guard our freedom.  And thanks to Congress and the President for giving brave gay soldiers equal standing.
* Thank you to the voters of Oregon and Colorado for forcing politicians of both parties who don't want to talk about the failed "War on Drugs" to deal with the issue.
* Thank you to the poll workers who worked long hours to protect the most sacred rite of our republic - the integrity of the vote.  Here's to hoping politicians finally make common, secure voting technology a priority in the coming year.
* Thank you to FEMA and all of the volunteers and emergency workers that made an awful storm on the east coast a little less awful.
* Thank you to everyone who ran for public office this past election - win or lose - for putting themselves out there and giving us choices
* Thank you to everyone who works Thanksgiving day so that we can enjoy it with our families - cops, fire fighters, grocery store workers - thank you to all of them.

I hope that you are enjoying turkey and football with your family today - or whatever your personal Thanksgiving tradition is.  And if you are working today, thank you again, and I hope that you get some time with your family.

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Saturday, November 17, 2012

The Early Field for 2016 - Things Are Wide Open in Both Parties, Revisiting an Economic Model from July

Who Will Run in 2016?
It's classic in political circles.  The day after the election, a friend of mine, who happens to be a staunch Republican, after paying off a $20 side wager that we had on the election outcome (we had an even odds bet that in order to collect on my end three things had to happen: a. The President had to win the popular vote, b. The President had to win the electoral vote and c. Democrats had to retain control of the Senate - this is further proof that you should make bets based on facts not emotion - like a sports fan, he bet on his favorite team rather than the likely winner), said simply "just a little over 1,400 days until the next election".  And so it is.  Politics is eternal and the 2016 field is already forming.

Assessing the field at this early stage is obviously incomplete.  People can decide not to run.  Unexpected candidates can emerge.  A lot can change.

But at the same time, it's highly unlikely that someone that those of us who sit in political circles have never heard of will win either party's nomination.  In ever election cycle since World War II, the ultimate nominees have been a sitting or former Governor, Senator or Vice-President with the lone exception of Dwight Eisenhower, a phenomenally popular general.

Harry Truman was a sitting President who defeated Thomas Dewey, the Governor of New York
Dwight Eisenhower, a General in World War 2, twice beat Adali Stevenson, the Governor of Illinois
John F. Kennedy, a Senator, defeated Richard Nixon, former Governor of California and former Vice President
Lyndon Johnson, then the sitting President, defeated Senator Barry Goldwater of Arizona
Richard Nixon beat Senator Hubert Humphrey of Minnesota and then Senator George McGovern of South Dakota
Governor Jimmy Carter of Georgia bested the sitting President, Gerald Ford
Former Governor Ronald Reagan of California beat Carter, then defeated former Vice President and Governor of Minnesota Walter Mondale
George H.W. Bush, the sitting Vice-President, defeated Governor Michael Dukakis of Massachusetts
Governor Bill Clinton of Arkansas then bested Bush and also defeated Senator Bob Dole of Kansas
Governor George W. Bush of Texas beat sitting Vice President Al Gore and then bested Senator John Kerry of Massachusetts
Senator Barack Obama defeated Senator John McCain and then bested former Governor Mitt Romney of Massachusetts

So it seems highly likely that the next two nominees either hold or have already held a Senate seat, a Governor's seat, the Vice Presidency, or some combination of the 3.

So who are the likely stars? 

Let's start with the Democrats:
Democrats have a bid of gap in good governors, thanks to some of the big Republican takeaways of Governor's mansions in 2009 and 2010.  The GOP holds 29 of 50 governors seats and the Democrats hold only 20.  Still, 20 is a pretty big field to draw from and there are some high-profile politicians with a lot of skill in that mix.

Among governors, the most likely candidates are:
(1) Andrew Cuomo of New York
The popular son of Mario Cuomo, the man who famously missed the Presidency by declining to run in 1992, a year he seemed a sure lock on the nomination if he wanted it, might go where his father didn't.  He is a strong public speaker, as was his father and brings a fantastic resume, having run Housing and Urban Development under Bill Clinton, been Attorney General in New York and now Governor of one of the largest states in the country.  Party loyalists love Cuomo and he is popular in New York.
(2) Deval Patrick of Massachusetts
In his second term as Governor of Massachusetts, Patrick successfully survived the 2010 GOP rampage that took out many of his peers.  He was one of the party's favorite speakers at the 2012 DNC, with his speech that Democratic-loyalists felt destroyed the story of Mitt Romney's success as Governor in Massachusetts.  Patrick is a likable, smart guy who is also clearly a gifted orator.
(3) Martin O'Malley of Maryland
O'Malley is the current Governor of Maryland and former Mayor of Baltimore.  He is extremely well respected in the Democratic party and well-liked in his home state, although he hasn't yet established a high profile outside of political circles.
(4) Tim Kaine of Virginia
Technically still a Governor, Kaine is about to become the United States Senator from Virginia (Virginia has a single term limit on Governors.)  He is a fierce ally of President Obama's and has performed extremely well in swing-state Virginia in some tough state-wide races.  He is also a very likable, down-to-earth guy.
(5) Brian Schweitzer of Montana
The gun-slinging, social libertarian leaning centrist Governor of Montana has an everyman appeal, a quick political wit and a proven ability to win in Republican areas of the country.  He's a rising star in the party and we should watch him.

 Interestingly, even though the Democrats have a lot of Senators, there are not a ton of viable candidates out of the Senate.  Many Democrats there are either long-standing Senators who don't appear to have an interest in the Presidency (such as Barbara Mikulski in Maryland) or poor national figures, who can win locally but would be a disaster in a national race (such as Harry Reid of Nevada.)
Here are the ones that I could see running and winning
(1) Dick Durbin of Illinois
The fiercely loyal Obama supporter and majority whip in the Senate is known for building consensus int he Democratic party and getting things done legislatively.  He's not the most inspiring of speakers, but is clearly both intellectual and pragmatic, two useful traits in the Presidency.
(2) Kirsten Gillebrand of New York
Gillebrand has been an absolute rock star in the Senate.  Plucked out of virtual obscurity from her suburban House seat by then Governor David Patterson to appointment in the Senate, many speculated that she might not make it long in office.  Instead, after winning election to a partial term decisively, she went on to be one of the big influence makers in the Senate, brokering a deal on both the 9/11 first responders relief bill and the Don't Ask, Don't Tell repeal.  She is likable, down-to-earth and one of the hardest working Senators.  She just won a full term this year without serious competition.
(3) Elizabeth Warren
The newly-minted Senator-elect from Massachusetts in perhaps the most beloved political figure on the left and figures to be a force in the Senate.  She comes with baggage form this year's race though, including a very nasty campaign fight with Scott Brown and open questions about whether she lied about her ethnic heritage to gain an advantage in academia.

Perhaps the most intriguing possibilities are neither sitting Governors or Senators.  Here are my top three:
(1) Hillary Clinton
If she runs, the former Senator and current (but supposedly soon-to-be-departing) Secretary of State would be the immediate front-runner.  She has said she isn't running, but many in political circles don't believe her.  It's hard to see her losing the nomination if she ran, but then again, it would have been hard to see her losing going into 2008 too.
(2) Joe Biden
The former Senator and current Vice President first ran for President in 1988, a full 28 years before the 2016 election cycle.  He has hinted repeatedly about running in 2016.  As sitting Vice-President, you have to put Biden in the mix, but his penchant for gaffes and his lack of ability to build support in either 1988 (when he dropped out after a plagiarism scandal) or in 2008 make him a longer-odds candidate, in my opinion.
(3) Cory Booker
The Mayor of Newark is perhaps the most intriguing wildcard in the race.  The Rhodes Scholar was seen a few years ago as a rapidly rising star on the national scene.  He has taken it slow, remaining as Mayor for 6 and a half years and building a stellar reputation for the city's turnaround.  Personal superhero stories about Booker abound, including personal pulling a person from a burning building and shoveling snow to clear snowed-in residents.  Booker is rumored to be contemplating running against Governor Chris Christie next year, which would set up an epic showdown of powerhouses from the two parties.  If Booker wins, he's definitely in the mix in 2016.  Rumors of his homosexuality (Booker has never been married and has never been seen dating) could still be a detraction on the national scene, but the voting public has shown an increasing acceptance of gay people in elected office.

On the Republican side, the field is loaded with talent, mostly from the broad range of Governor's seats they hold.

(1) Chris Christie
The brash, straight-talking New Jersey Governor has become a national star.  He is favored to win re-election next year (although a race against Cory Booker would probably be a pick 'em race) and has received accolades nationally for both his managing of New Jersey's finances and his response to Hurricane Sandy.  Christie may be to brash for the national scene and might be to moderate for the current GOP, but he can't be ignored as a candidate.
(2) Mitch Daniels
The libertarian-leaning conservative from Indiana is the guy that many people wished had run this cycle for the GOP.  He is pragmatic and broadly-appealing in his home state, if not a particularly inspirational speaker.  He will leave office in 2013 due to term limits.  He chose not to run in 2012 and may not be interested in the office, but if he is, he is surely in the mix.
(3) Bobby Jindal
The Louisiana Governor may have finally overcome his odd and creepy State of the Union response in 2009.  He has a fantastic biography and has been a very effective Governor in Louisiana.  He has also been storming the national scene preaching GOP inclusion since the election, a message that is much needed for a party that lost virtually every constituency except older married white women and older white men.
(4) Susana Martinez
I've had my eye on the conservative, well-spoken Governor of New Mexico since she took office.  She won election in a blue state, holds views that are acceptable to the right-wing of the party while also holding the distinction as the highest-ranking elected Republican official of Mexican heritage (she was born in El Paso, in case you were wondering about eligibility.)  Watch her if she is interested.
(5) Nikki Haley
The South Carolina Governor ran an impressive campaign in 2010 that brought her to the Governor's Mansion.  She is beloved in the party, popular in her home state and a fresh face for the GOP.  Definitely one to watch.
(6) Bob McDonnell
The Virginia Governor, who will be term-limited out of office in 2014, is respected as a strong leader, an excellent speaker and a solid conservative.  He's on virtually everyone's list of potential nominees.

The GOP doesn't have a great field of Senators at the moment, as compared to their stacked field of Governors, but there are a few worth mentioning:
(1) Marco Rubio
The Senator from Florida is already taking trips to Iowa.  He's loved by the Tea Party, has a fantastic personal story and is a great orator.  He isn't that accomplished yet, but arguably, neither was President Obama when he first ran.
(2) John Thune
The youthful-looking South Dakota Senator makes every insider's list.  He is a key influence-maker on the hill, but he is not a particularly great public speaker and is virtually unknown outside of Washington, DC.
(3) Rand Paul
It seems likely that libertarian Rand will carry forward the mantle that his father carried for super-limited government.  I can definitely see Rand running, but it's tough to see him winning the nomination.

There are a few who are not sitting Senators or Governors who intrigue me.
(1) Jeb Bush
The former governor of Florida is, in many ways, what his brother George W. was not - he is a true compassionate conservative, having taken a pragmatic, inclusive view of governing and he is a smart and articulate guy with broad appeal.  They also still love him in Florida.  His biggest issues are that he may be too moderate for today's GOP and that the Bush name may be so tarnished as to exclude him.
(2) Rick Santorum
The former Senator from Pennsylvania surprised everyone to finish second in the running this time around.  I've written extensively about how the GOP tends to nominate the "next guy in line".  Could that be Santorum next cycle?  His radical views on social issues are a problem in a general election, but Santorum has a lot of assets, not the least of which is one of the strongest work ethics I've ever seen.

Could we see a legitimate third-party candidate in 2016?  As with most cycles, it is unlikely, but let's look at the prospects:

(1) Michael Bloomberg
The Mayor of New York has the financial resources to make a go of it.  The Republican-turned-Independent has run the largest city in the US and is well liked.  He has both business and governing background.  He would get real votes.  I'm just not sure he is interested - he turned down a window to run in 2008 and 2012.

(2) Charlie Crist
The former Republican-turned-Independent Governor of Florida represents a pragmatic, moderate voice in a sea of polarized partisanship.  But he couldn't even win as an Independent in Florida for a Senate seat - so can we really think he could beat two major party candidates nationally?  And where would the money for his campaign come from?

(3) Lincoln Chafee
The Rhode Island Governor is yet another Republican-turned-independent.  Often called the "last moderate in the Senate" (not quite true), Chafee won as Independent in Rhode Island.  His long time in politics might give him the donors to get his campaign off the ground.  And his liberal social views and moderate economic views make him a great match for the evolving electorate.

The field will no doubt shift and change, but these 11 Democrats, 11 Republicans and 3 Independents represent a lot of the likely field.

Does Economics Tell Us Everything?
Back in July, I built a linear regression model based on the absolute unemployment rate and the change in unemployment rate that projected that Barack Obama would win 52% of the 2-party vote for President.

The current tally for the Presidency?
Barack Obama 63,448,632
Mitt Romney 59,634,222

Obama's % of the two-party vote? 51.5%.

Guess what?  It's the economy, stupid.

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Sunday, November 11, 2012

Full Report Card: Presidential Race, First Look - 2016

Now that Florida has been called, I can officially admit that I got one state wrong in the Presidential race.  I feel good about getting 49 out of 50, an improvement of one state from the 48 out of 50 that I called right in 2008.  I also feel good that my only miss was by far the closest state in the race.  However, what I feel less good about, is that I clearly under called President Obama's support virtually across the board. 

Based on the currently counted ballots (which are not 100% complete still as there are still absentee and military overseas ballots to count in some states, but is about 98% complete nationally), here is what happened state by state versus my projection:

On a national level, it appears that Obama will finish at approximately +2.7% (50.6% for Obama, 47.9% for Romney and 1.5% for minor third-party candidates), an error of 1.8% and a bias of 1.8% for Romney.

To remind those of you who aren't statistics junkies - error is how wrong the projection is, bias is how much the projection favored one candidate versus reality.  In the case of a single point of data, like the national vote, they will be the same, in the case of the 50 states, they will be different since if I project two states and in one case I under projected Obama's vote total by 2% and the other I over projected his vote total by 2%, my average error will be 2% (the absolute amount I missed each state by), but my bias will be 0% (since I missed equally in both directions.)

As you can see, my average absolute error was 3.9% for all 50 states plus DC with an average bias of 1.9% for Mitt Romney.  The average error is higher than my national error because the average weights all states equally, while the national vote is influenced by a number of states that were called much more closely.

In the relatively close states, those decided by 10% or less, my average error was 2.3% and my average bias was 2.2% for Romney.  It makes sense that I called these states a lot more closely since there was a wealth of polling data in those states, versus virtually none in a lot of the non-competitive states.  The fact that the bias and error were so close speaks to the fact that with the exception of Ohio and Indiana, all of the other states showed a bias for Romney.

In total, I give myself a grade of about a B+ on calling the race.  On the plus side, I got 49 states right and an absolute average error of 3.9% across all 50 states is actually quite good given the limitations of public polling.  I ding myself some because clearly there was an almost across-the-board pro-Romney bias to the projections.  This speaks to the fact that while I had been saying and most pollsters had been polling a race somewhere between 2004 and 2008 in terms of turnout model, the actual turnout closely resembled 2008, showing the strength of the Obama team's ground game.

I don't see these results and find a need for a radical shift in my methodology.

But I do see the need to make one tweak.

Scott Rasmussen has generated a great deal of controversy over the past 8 years by publishing polls that are out of the mainstream of other pollsters.  

This year:
* He missed the national vote by about 4%, with a Pro-Romney bias, among the worst of the national polls
* In Ohio, he missed by 2% - Pro-Romney (worst of all polls), Colorado by 5% - Pro-Romney (worst of all polls), Wisconsin by 7% - Pro-Romney (worst of all polls), Iowa by 7% - Pro-Romney (worst of all polls) and on and on

In every close state, dropping Rasmussen from the averages would have improved the accuracy of my calls.

In 2008, his misses weren't as outrageous (he missed the national vote by about 1.5% Pro-McCain and missed most of the swing states with a Pro-McCain bias, but not as severely), but clearly Rasmussen is not equally likely to be wrong on either side.

Accordingly, going forward in 2016, if Rasmussen continues polling, I will be considering the Rasmussen poll to be a partisan poll rather than a non-partisan poll for purposes of my averaging.

First Look - 2016
Yes, I know, I should probably let President Obama enjoy the moment for a few days before I start writing about the 2016 race.  But, it's been 5 whole days since we had an election!  Plus, the President doesn't have to worry about 2016, since he won't be in the mix.

First, let's have a look at the map and what we learned Tuesday night about the states that may be in play in 2012.  Let's first assume that states that were D+10 or R+10 (that is, voted 10% more Democratically or 10% more Republican than the nation as a whole) are more-than-likely not going to be in play in 2016 either.  They could flip if there is a landslide election, but are probably irrelevant to a close race.  We'll take a look at the ones between 10-15% for those rare exceptions such as Indiana in 2008, but anything above 15% is solidly out of play.  

These states give us the following:
Safe Republican (>+15% R)
Utah, Wyoming, Oklahoma, Idaho, West Virginia, Arkansas, Kentucky, Nebraska, Alabama, Kansas, Tennessee, North Dakota, South Dakota, Louisiana, Alaska, Texas, Montana.

Strong Lean Republican (+10-15% R)
Mississippi, South Carolina, Arizona, Missouri, Indiana, Georgia

Lean Republican (+5%-10% R)

Toss-Up (Between +5% R - +5% D)
North Carolina, Florida, Ohio, Virginia, Colorado, Pennsylvania, Iowa, New Hampshire, Nevada, Wisconsin

Lean Democratic (+5% - +10% D)
Minnesota, Michigan, New Mexico, Oregon

Strong Lean Democratic (+10-15%D)
Washington, Maine, Illinois, New Jersey

Safe Democratic (+15% D)
Connecticut, Delaware, California, Massachusetts, Maryland, New York, Rhode Island, Vermont, Hawaii, District of Columbia

As you can see, including all the states that are either greater than D +5% or greater than R +5% yields an electoral map that is 217 Democrats, 191 Republicans.

Looking at the swing states, we can understand where the fights may take place.  We'll look at 2012 position relative to the national vote, the history in the last 7 election cycles (which saw 4 Democratic wins and 3 Republican wins nationally) and the trend the past 8 years:

North Carolina:
2012 Rating: R +4.9%
History Last 7 Elections: 6 Republican, 1 Democrat (Obama in 2008)
Trending: Democratic - (R +10.0% in 2004, R +6.9% in 2008, R +4.9% in 2012)

My Notes: North Carolina had never been a swing state until 2008, when Barack Obama pulled off a shocker in the state.  It's trend was similar in 2012 to 2008.  It is still more conservative than the nation as a whole and its socially conservative demographics are changing.  If the trend continues in the next 4 years, it will be a swing state in 2016, but one that still favors the GOP in a close race.

2012 Rating: R +1.8%
History Last 7 Elections: 4 Republican, 3 Democrat (Clinton in '96, Obama in '08 & '12)
Trending: Mixed (R +2.6% in 2004, R +4.4% in 2008, R +1.8% in 2012)

My Notes: Florida is definitely a swing state, but one that has consistently favored Republicans in very close elections.  While 2012 saw the closest match to the national vote since 2000 (when it was R +0.5%), there is no clear trend here and it always appears to be on the Republican side of the ledger.  Florida seems unlikely to be decisive in 2016.

2012 Rating: R +0.8%
History Last 7 Elections: 4 Democrat, 3 Republican (matched national results)
Trending: Mixed (D +0.3% in 2004, R +2.5% in 2008, R +0.8% in 2012)

My Notes: Ohio is the swingiest of swing states, picking the Presidential winner every year since World War 2.  It has no clear trend in either direction and is likely to mirror the national vote again in 2016, favoring whoever wins the national vote.

2012 Rating: D +0.3%
History Last 7 Elections: 5 Republican, 2 Democrat (Obama in '08 and '12)
Trending: Democratic (R +6.8% in 2004, R +0.8% in 2008, D +0.3% in 2012)

My Notes: The growth of Northern Virginia has swung the balance of power in Virginia.  It could certainly be winnable by a strong Republican candidate in 2016, but all of the demographic trends favor it going Democratic in a close election.

2012 Rating: D +2.0%
History Last 7 Elections: 4 Republican, 3 Democrat (matched national results except went for Dole in '96)
Trending: Democratic (R +2.3% in 2004, D +1.9% in 2008, D +2.0% in 2012)

My Notes: Hispanic population growth have turned this traditional swing state from a lean Republican to a lean Democratic orientation.  If Republicans can't cut into the Democrats 3:1 edge with Hispanic voters, they will struggle here in 2016.

2012 Rating: D +2.5%
History Last 7 Elections: 6 Democrat, 1 Republican (Bush in '88)
Trending: Republican (D +4.9% in 2004, D +3.2% in 2008, D +2.5% in 2012)

My Notes: The last several cycles, Republicans have invested heavily against this large electoral prize only to come up significantly short.  Republicans are chipping away at the Democratic edge here, however, as growth in Democratic Philadelphia slows and Republican Pittsburgh is resurgent.  I expect Pennsylvania to be legitimately in play in 2016.

2012 Rating: D +2.9%
History Last 7 Elections: 6 Democrat, 1 Republican (Bush in '04)
Trending: Democratic (D +1.7% in 2004, D +2.5% in 2008, D +2.9% in 2012)

My Notes: Iowa has been more Democratic than the nation every election cycle since 1988 and is trending that way now.  Agriculture is still strong but other sectors of the economy are starting to eclipse it.  I see it as favoring the Democrats in 2016.

New Hampshire:
2012 Rating: D +3.1%
History Last 7 Elections: 4 Democrat, 3 Republican (matched national results)
Trending: Mixed (D +3.8% in 2004, D +2.5% in 2008, D +3.1% in 2012)

My Notes: New Hampshire keeps picking winners.  It is a swing state, but one that consistently favors the Democrats by a few points.  It is also only 4 electoral votes, which makes it less likely to be decisive in a close race...although it certainly was in 2000.

2012 Rating: D +3.9%
History Last 7 Elections: 4 Democrat, 3 Republican (matched national results)
Trending: Democratic/Mixed (R +0.2% in 2004, D +5.6% in 2008, D +3.9% in 2012)

My Notes: Growing Hispanic population and growing Democratic Hispanic margins pushed the state from a true swing state to a lean Democratic state in 2008.  That lead has moderated somewhat, but demographics will continue to swing to the Democrats unless the GOP can make inroads with Mexican Hispanics.

2012 Rating: D +4.0%
History Last 7 Elections: 7 Democrat, 0 Republican
Trending: Mixed (D +2.8% in 2004, D +6.9% in 2008, D +4.0% in 2012)

My Notes: No Republican has won Wisconsin since Ronald Reagan ran the table in 49 states in 1984.  Paul Ryan no doubt helped the GOP some in 2012 and the Scott Walker revolution showed that the state is swingable, but this seems like a tough climb for the GOP in 2012.

Of note, if you take the 2012 and make the national popular vote exactly even, keeping the same leanings of the states, the Republicans pick up North Carolina, Florida and Ohio, giving them 253 states.  Democrats pick up the balance of the states, giving them 285 electoral votes.  This is the structural advantage the Democrats have, that I spoke of often during the 2012 race.

The easiest pick-up in a close race from there would appear to be Virginia, but there are two problems.  One, winning Virginia would still give the GOP only 266 electoral votes, meaning they would also need Colorado.  Second, Virginia is trending Democratic.  A more plausible scenario is to pick up Pennsylvania, which is trending their way of late, which would give the GOP 273 and the win.

Next time, I will look at the potential 2016 candidates for both parties since, for the first time since 2000, both parties will have a more-or-less open field.

In December of 2008, when I first looked at the possible candidates in 2012 for the GOP, I said I thought the front-runners were Sarah Palin, Newt Gingrich, Tim Pawlenty and Mitt Romney, with Romney having the edge as the "next guy in line", a distinction that has historically been very important in GOP nominating contests.

I was wrong about Palin running, obviously.  The other 3 did run and Romney did win, although I, along with virtually everyone else, missed projecting the insurgent campaign of Rick Santorum in the race.

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Saturday, November 10, 2012

President Obama to Face Into the Fiscal Cliff, Mitt Romney Exits Stage Left

The Defining Moment of the President's Second Term
Perhaps the most important moments of President Obama's second term will actually come before his second term officially begins.

The negotiations over the so-called "fiscal cliff" will represent the most critical decisions around tax and spending policy that have been made in 20 years.

A combination of President Obama's Health Care legislation, the nature of some of the temporary tax cuts enacted as part of the stimulus (and later extended) and the expiration of the (once extended under Obama) Bush tax cuts, have led the law to converge to where the following things will automatically happen on December 31st or January 1st, absent action from Congress and the President:

* Expiration of the Bush-era tax cuts for all income levels.  Income rates at the low end of the income spectrum would rise from 10% to 15% and at the top end from 36% to 39.6%.
* With expiration of the Bush-era tax cuts, qualified dividend taxes would increase from the present level of 15% to normal income tax levels (up to 39.6%).  Additionally, capital gains taxes would rise from 15% to 20%.
* Inheritance taxes would return to pre-Bush levels.
* Social Security taxes would return to their "normal" levels, a 2% tax increase from the reduced rates of the past 2 years, enacted as part of the stimulus and then extended.
* An additional 0.9% earned income tax on incomes over $200K for individuals and $250K for married couples would be enacted, raising their total income tax rate to 40.2%.  This was part of the health care legislation.
* An additional 3.9% dividend and capital gains tax would take effect for individuals with incomes over $200K and married couples with incomes over $250K.  The combination of this and the Bush-era tax cuts expiring would increase dividend taxes for top earners from 15% to 43.5% and on capital gains from 15% to 23.9%.
* Alternative minimum taxes would revert back to their 2000 levels, essentially wiping out the effectiveness of tax deductions and exemptions for the upper-middle class and above.
* Extended unemployment benefits would end, meaning that the current 73 weeks of extended unemployment benefits available to the long-term unemployed would be reduced to 26 weeks, taking millions out of the benefit.
* Approximately $65B in cuts in defense and $65B in cuts in non-Social Security entitlements and discretionary spending would automatically be enacted.

That's a massive number of tax increases and spending cuts all set to take place at once.  According to the Congressional Budget Office, total taxes from 2012 to 2014 would rise by $774B.  Total spending would stay essentially flat, rising by $33B with a 7% reduction (before inflation) in discretionary spending offset by a 5.9% rise in entitlement spending, spurred by the continued growth in Social Security and Medicare outlays.

In net, the deficit would fall to $387B from $1.128T in just two years, a dramatic reduction and the lowest deficit as a percentage of GDP since the Clinton surpluses and well below the long run average of the Carter, Reagan and first Bush administrations, even after factoring in the potential for a mild recession in 2013 as a result of all the money being sucked out of the system.

The fiscal cliff is actually not bad economic policy - it essentially amounts to finally taking our medicine and paying our bills.  And it seems almost certain not to happen, because no one seems to have the guts to take the consequences of paying our bills all at once, particularly with the significant impacts to middle-class tax payers and the recession potential.

There are 4 plausible scenarios that I see for resolution of the fiscal cliff:
(1) Kick the Can Down the Road
I think this is the most likely scenario.  With only 6 weeks to work, the potential for a compromise that all sides can live with seems unlikely, particularly in a highly polarized Washington.  A bill that averted all or most of the provisions of the cliff for 4 or 6 months, to give the parties more time to work seems likely.
(2) Let It Happen
This, in many ways, is my favored choice, but seems the least likely to happen.  I can envision a scenario where the President digs his heels in on taxes for top bracket payers and House Republicans dig their heels in on not extending anything until the President gives on that issue.  It would be a policy that no one in Congress is advocating, but it has a small possibility of happening.
(3) A Grand Bargain
Congressional Republicans have indicated some willingness to increase revenues so long as tax RATES don't go up.  The President could cut a more revenue neutral deal that caps or eliminates deductions for higher income earners but does not raise rates, in exchange for what Republicans really want, which is deeper discretionary cuts and reforms to Medicare.  I could see a deal where deductions phase out about $200K, the Bush era rates are maintained, domestic cuts are made and Medicare retirement age is raised by a couple of years.
(4) A Partial Compromise
Perhaps they will split it all down the middle.  Top rates go up, but not as much as Obama wants.  Middle and lower class tax cuts are maintained.  Spending cuts are made but not as much as Republicans want.  And entitlements go unreformed.  After kicking the can down the road, this seems like the second most likely scenario.

Whatever happens will have to happen before the end of the year, so it will happen with the old congress and technically during the President's first term.

The End of the Romney Era
When John Kerry lost to George W. Bush, he got to go back to the Senate and chair the Foreign Relations committee.  He is in the running for President Obama's second term cabinet, being among the reported final 3 to run the State Department.

When John McCain lost to Barack Obama in 2008, he also returned to the Senate and became a voice for Republican deficit hawks and neo-conservative foreign policy.

Not since 2000 have we had an election where the loser is likely to fade completely from the political scene.

You see, while Mitt Romney has been running for President for the better part of the past 8 years, he has no post to go back to.  He is clearly no longer the leader of the Republican Party and has no elected office to return to.  There is much that he can do in private life, Al Gore has certainly taken the opportunity to leverage his celebrity for the personal cause of global warming, but it was odd for me to think that after 8 years of seeing Romney on TV virtually every week, he really has no place in either politics or the Republican Party.

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Thursday, November 8, 2012

Beyond the Numbers: What I Said and What Happened

A good, credible commentator continuously examines what he or she felt confident predicting in the past for both accuracy and learning.  It was the lack of this behavior on the part of right-wing commentators that I was screaming about yesterday.  Of course, introspection is made a little easier for me this time around, as my projections came through very solidly.  But, hey, what's wrong with a little victory lap?

Let's revisit the principle arguments made for a Romney victory and the counterpoints I made to those last Friday:
1) President Obama is still under 50% in virtually every national poll.  Undecideds will break late for the challenger and give Romney the narrow victory.

I wrote:
Recent history suggest no evidence of this rule of thumb.  Undecideds in 1980 surely did break for Ronald Reagan over Jimmy Carter late.  In 1984, they broke for Reagan again - this time as the incumbent.  In 1992, undecideds broke evenly.  In 1996, they broke for the challenger.  In 2004, they broke evenly.  There doesn't seem to be a pattern here to support the "rule of thumb" that an incumbent under 50% is in trouble - George W. Bush was under 50% in the polling and got 51% of the vote on election day. 

What happened:
Exit polling indicates that of those who decided in the final days of the election, 50% voted for Barack Obama, 44% for Mitt Romney.  This explains, to a certain extent, why my results had a slight Pro-Romney bias - I had assumed a 50/50 split (the difference is worth about a 0.5% shift in the popular vote.)  Certianly the notion that undecideds break late for the challenger is debunked.

(2) No incumbent President has ever been re-elected to a second term winning less states than he won the first time around and it is impossible to see a path to President Obama winning more states than in 1988.  It's win big or go home for incumbents and Obama cannot win big.

I wrote:
True, but irrelevant.  No one had ever won 49 states...until 1984 when Ronald Reagan did.  Candidates always win their home state - heck, even George McGovern and Walter Mondale did - until Al Gore lost Tennessee and the election with it.  The winner of Missouri always wins the election - until 2008 when Barack Obama won without it.  My point is that you can point to lots of things that are "always" true - until they aren't. 

What happened:
President Obama won re-election by a narrower margin than 4 years ago (approximately 2.5% in the popular vote versus 7.2% in 2008.)  Guess we can cross this one off the "no incumbent President has ever" list.

(3) The polls systemically overestimate Democratic turnout and the actual results will therefore differ from the polls by several percentage points.

I wrote (in a previous post):
Non-partisan pollsters only stock-in-trade, their only incentive is to get things right.  If you consistently get your polls wrong, you are out of the business.  Polls have been wrong before, but almost never because the pollster wanted to get it wrong.  The polls were very accurate in 2008.  Ditto in 2004.  In 2000, George W. Bush got less popular vote than the polls implied late, but that was principally because the release of his DWI conviction appeared to cause a late slide in his numbers that pollsters weren't able to capture in their final polls because it happened too late.
So forget the notion of a vast conspiracy.  The only reasonable way to believe the polls are systemically biased is if they are ACCIDENTALLY biased, that is, the majority of pollsters make an honest mistake in the turnout dynamics of the election.  Now clearly all the pollsters are reading and analyzing the claims on the right - and most are sticking by their guns.

What happened:
To the extent that there was any polling bias, it was Pro-Romney.  Obama outperformed 7 of the 10 polls in my final projection.  In the key swing states, Obama outperformed the projection in Florida, Virginia, Colorado, Pennsylvania, Nevada, Iowa, Michigan and Wisconsin.  Only in Ohio did the President underperform the projection and there only by 0.2%.

Clearly the polls did have a systemic bias - FOR Romney.  Pollsters generally estimated a turnout model between the 2004 and 2008 models when, in fact, turnout of demographics that favored Obama met or exceeded 2008 levels in 2012.

(4) The national polls show a tighter race than the state polls and the national polls are generally conducted by better-established, more reliable polling firms.  It is therefore reasonable to believe that swing states are actually in better shape for Romney than the state-level polling data would indicate.

I wrote:
Generally, the evidence doesn't support this theory.  On average, state-wide polls have been at least as accurate and often more so than national polls on election day...see 2000 for a great example of this.  Secondly, while there are some smaller firms polling in swing states, there are also a lot of large ones - Rasmussen, CNN/OR and Survey USA are all poling Ohio and their results are actually well in line with other polls from smaller firms.

What happened:
The polls largely converged by election day and both showed a slight pro-Romney bias, rendering the argument largely irrelevant.

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