Budget

The Time Is Right to Get Rid of the Debt Ceiling

A much more attractive ceiling. (Flick/Richard Carter)
Kevin Drum has written a very helpful explainer on everything you'd want to know about the fiscal cliff/curb/staircase/trap, and near the end he reminds us that the debt ceiling is going to come up again early next year. "However, an agreement to raise the debt ceiling will almost certainly be part of the negotiations surrounding the fiscal cliff." Which is good, but I'd like to suggest that Congress go a step further. Instead of raising the debt ceiling, meaning we'd have to revisit the issue again in a year, why don't they go ahead and eliminate it once and for all? Just because something has been around for three quarters of a century, that doesn't mean it's in any way useful, and this is one little legislative artifact we can do without. Before last year the debt ceiling was raised 75 times since its creation in 1939, and nearly all of those increases were nothing more than an opportunity for the opposition party of the moment to give a few floor speeches railing against the...

Get Out the Union Vote

(Flickr/Wisconsin AFL-CIO/Justin Geiger)
Despite setbacks in several states, the American labor movement came out a clear winner in Tuesday’s elections. Most important, they played a key role in ensuring the re-election of President Obama, and contributed significantly to Democratic Senate victories in hotly contested races in Massachusetts, Ohio, Wisconsin, and Virginia. How effective were the unions’ massive voter-education and mobilization programs in the swing states? This year, for the first time, the network exit polling didn’t ask whether respondents were union members, though it did ask if there was a union member in their household. Historically, while union-household voters are more pro-Democratic than voters with no union members at home, the gap is smaller than that between actual union members and non-members. Also historically, union membership doesn’t make much of a difference among, say, African-American women, who are going to vote Democratic at a 95-percent rate whether or not they belong to a union. Where...

Who's to Blame for the "Fiscal Cliff" Misnomer?

Flickr/su-lin
Now that the election is over, the next big item on the government's agenda is dealing with two sets of changes that are scheduled to begin at the start of 2013. The first involves changes to the tax code: The Bush income tax cuts will expire, bringing rates back to where they were during the Clinton years, and so will the payroll tax cuts enacted as part of the 2009 stimulus package and later extended. The second set of changes is the "sequester," under which a series of rather dramatic cuts to government spending will take place. Collectively, these events are being referred to by everybody as the "fiscal cliff," a term that is both misleading and dangerous. Which got me wondering: Where did it come from? And whose fault is it? I'll keep you in suspense on that for a moment, but here's a good brief explanation from Jonathan Chait about why the term "fiscal cliff" is such a misnomer: But here is a case where a bad metaphor has caused everybody to think about the matter in exactly the...

Why Obama Needs to Restart the Conversation on the Economy Now

When the applause among Democrats and recriminations among Republicans begin to quiet down—probably within the next few days—the President will have to make some big decisions. The biggest is on the economy. His victory and the pending “fiscal cliff” give him an opportunity to recast the economic debate. Our central challenge, he should say, is not to reduce the budget deficit. It’s to create more good jobs, grow the economy, and widen the circle of prosperity. The deficit is a problem only in proportion to the overall size of the economy. If the economy grows faster than its current 2 percent annualized rate, the deficit shrinks in proportion. Tax receipts grow, and the deficit becomes more manageable. But if economic growth slows—as it will, if taxes are raised on the middle class and if government spending is reduced when unemployment is still high—the deficit becomes larger in proportion. That’s the austerity trap Europe finds itself in. We don’t want to go there. This is why...

Turning the Cliff into a Launch Pad

One part of the dreaded fiscal cliff actually presents an opportunity that could be good politics and good economics. The temporary two-point cut in the payroll tax expires January 1 (along with the Bush tax cuts). The $1.2 billion sequester also kicks in. Deficit hawks of both parties have been saying that it’s irresponsible to extend the payroll tax cut, while defenders of Social Security like the American Association of Retired Persons (AARP) are opposed to an extension for fear of diverting revenue from the Social Security trust fundsand adding ammo to the crusade for cutting back the system’s benefits. But there is a nice opportunity here to turn a lemon into lemonade. The economy is hardly robust enough to inflict a two-point tax increase on working people. For two-income households, that’s a four-point increase. That means, say, a $2,400 tax hike on a $60,000 family income. Nobody is going to remember that this was temporary; they will simply experience it as a tax increase on...

Mitt Romney's Debt Explosion Plan

Writing for CNN, Peter Hamby reports that Team Romney will move to deficit and debt as its theme for this week. Part of that includes a set of talking points on how President Obama has added trillions to the debt, and will add trillions more if he isn’t removed from office. To wit: President Obama has racked up more than $5.5 trillion in debt over the past four years, putting our national debt above $16 trillion—and in a second term he’ll let it climb to $20 trillion. He also broke his promise to cut the deficit in half by the end of his first term, instead presiding over four straight trillion-dollar deficits. Middle-class families are facing a $4,000-a-year tax increase just to service the debt President Obama has already racked up and the new spending he has proposed. Missing from this, of course, is the fact that Romney has no interest in deficit reduction; if he did, he wouldn’t have a tax plan that cuts rates across the board, lowers taxes on investment, and doesn’t specify new...

(Fiscal) Cliffs Notes

(Flickr/Matthew Wilkinson)
The most bizarre thing about the deficit and the campaign is the fact that the risk of a fiscal cliff—which everyone agrees will crash the economy—is being used to justify a slightly smaller fiscal cliff. There are several players here, so the arguments are worth sorting out. Herewith, some Cliffs Notes: What is the fiscal cliff? It comes in three parts. On January 1, the Bush tax cuts expire. This means that in the first pay period of the new year, more taxes are taken out of everyone’s withholding. Second, the temporary two-point cuts in payroll taxes expire too, so everyone’s Social Security and Medicare taxes go up as well. Third, the dreaded “sequester” of automatic budget cuts, the toxic fruit of the Republican blockade of a normal budget deal back in 2011, kick in. Oh, and extended unemployment benefits expire, too. What would all this fiscal tightening do to the recovery? It would create a new recession, according to the Congressional Budget Office (CBO), Fed Chairman Ben...

How January's Fiscal Cliff Turns into a Gentle Hill by February

Regardless of what happens on Election Day, at the beginning of next year more than $600 billion in tax increases and spending cuts automatically go into effect. That’s equivalent to about 5 percent of the entire U.S. economy—more than the projected growth of the whole gross domestic product next year. The problem is, if we fall off this fiscal cliff, we plunge into recession. That’s because the cliff withdraws too much demand from the economy too quickly, at a time when unemployment is still likely to be high. The Congressional Budget Office projects real economic growth will drop at an annual rate of 2.9 percent in the first half of 2013, and unemployment will rise to 9.1 percent by the end of next year. As Spain and Great Britain have demonstrated, launching fiscal austerity at a time when a nation’s economic capacity is substantially underutilized causes the economy to contract. This makes the debt even larger in proportion to the size of the economy. Rather than reassure global...

Better Know a Ballot Measure

(Flickr/radarxlove and jamelah e.)
When Oregon voted on the nation’s first ballot initiative in 1904, the idea—as high-school civics teachers have told students ever since—was to take power away from the industries that ran the state legislature through bribes and corruption and return it to the people. In those days, corporate interests dominated and corrupted state politics all across the United States. Mining and railroad companies loomed particularly large, buying off entire legislative chambers and putting lawmakers on their payroll. The emerging progressive movement thought it had found a way to fight back: Give citizens the ability to create their own legislation and put it up for a popular vote—a process known as the initiative. There was also the referendum, a tool citizens could use to veto laws at the ballot box. These ballot measures offered a way for the grassroots to make their voices heard. As your civics teacher might have told you, several states would soon join Oregon in using the new power of “direct...

Netanyahu and the Magic Marker

The Israeli prime minister waxes hyperbolic on Iran, overshadowing discussions on the solutions that exist for the Middle East's political woes.

AP Photo/Seth Wenig
(AP Photo/Richard Drew) Prime Minister Benjamin Netanyahu of Israel addresses the 67th session of the United Nations General Assembly at U.N. headquarters Thursday, September 27, 2012. H istory will show that Iranian President Mahmoud Ahmadinejad’s speech Wednesday at the United Nations General Assembly, which was the usual farrago of pseudo-historical philosophy and conspiratorial Zionist-bashing (and, mercifully, was the last by the term-limited president), was overshadowed by something even more cartoon-like: A drawing of a bomb, complete with lit fuse, used by Israeli Prime Minister Benjamin Netanyahu to show Iran’s progress toward a nuclear-weapons capability. Just to make sure his message was clear, Netanyahu used a magic marker to draw a red line showing where Iran’s uranium enrichment must be stopped. Twitter lit up with mocking references to Wile E. Coyote soon after. But it remains to be seen who will have the last laugh. “Poking fun at Netanyahu's cartoon bomb is all well...

What the Heck Is Quantitative Easing?

A look at the history behind the Fed's latest move

(Flickr/Talk Radio News Service)
Last week, the Federal Reserve announced a third round of quantitative easing, or what is referred to as QE3. This is an open-ended purchase of $40 billion a month, along with a commitment to keep rates low until “a considerable time after the economic recovery strengthens.” Many economic commentators are saying that this is a serious change in economic policy. In order to understand why this is so important to our economy now, it might be helpful to go back to an academic debate about Japan in the 1990s. The era from the early 1980s through the financial crisis was referred to as the “Great Moderation.” It was common for economists to assume that the Federal Reserve and other central bankers could control the economy effortlessly, basically picking the unemployment rate they wanted. Prominent economists who studied macroeconomics, the field created during the Great Depression to study economic crashes, thought everyone in the discipline should pack up and go home. Robert Lucas, a...

Five Things Government Does Better Than You Do

We know a lot less about how to manage money than we think.

(Flickr / Sheffield Tiger)
When Wisconsin Congressman Paul Ryan and other hard-line conservatives talk about cutting the government’s budget, their primary rationale is that individuals can make better decisions with their own money than the government can. As Ryan himself said to an audience at Georgetown University, “We put our trust in people, not in government. Our budget incorporates subsidiarity by returning power to individuals, to families and to communities.” It sounds reasonable—of course we want individuals to have power, and of course we want communities to take care of their neediest members. And since conservatives have done a fine job of portraying the government as full of heartless, inept bureaucrats, allowing people to make their own decisions sounds better than the alternative. The conservative approach to government stems from a basic tenet of free-market economics: that people always act rationally to maximize their own benefits, and that from this rises a general state of well-being for...

Medicare Myths, Debunked

(Flickr/Ann Lobb)
At the moment, the hot issue of the 2012 presidential campaign is Medicare, with the Obama and Romney campaigns trading charges and counter-charges over the health-insurance program for the elderly. Since we at the Prospect love clarifying the muddy and making the complex understandable, we thought we'd unpack the arguments the two sides are making and provide some context so we can all grasp this a bit better. We'll start with the campaigns' claims. Does Mitt Romney actually want to "end Medicare as we know it"? That's the charge Democrats are now making; here's a video the Obama campaign just released: Is it true? The answer depends on your definition of "as we know it." There is no question that Romney would fundamentally transform the Medicare program from what it is now—a single-payer insurer that guarantees coverage to all American seniors—into a "premium support" program in which the government gives seniors vouchers they can use to buy private insurance or stay in traditional...

Playing Defense on the Sequestration Battle

As January 1 draws near, expect doomsday predictions about big national-security cuts to ramp up. 

(AP Photo/Steve Helber)
(AP Photo/Patrick Semansky) I f you’ve been following the news, chances are you have heard of “sequestration” by now. Everyone in national security—from the Pentagon to Congress to industry to the think tanks—seems to agree that the spending cuts would be a menace that deserves to be squelched. But is it? Sequestration is an automatic spending cut inserted into the Budget Control Act of 2011. The cuts were designed to light a fire under the Supercommittee to agree on specific cuts, because failure would mean a blanket slashing of many areas of the federal budget, gutting both parties’ spending priorities. The Supercommittee didn’t accomplish its given task and the cuts remain, so we might theoretically see the first chunks of the $1.2 trillion in cuts (over ten years)—including $55 billion per year in reduced defense spending—take effect in January. Unless the national security establishment stops it first, that is. At about $676 billion (in FY2012), U.S. defense spending accounts for...

Don't Hold Your Breath for a Romney Budget that Makes Sense

If you missed it, Mitt Romney gave a long interview to CNN Money in which he explained his plans for dealing with taxes, cutting the budget, and juicing the economy. The interview is boilerplate Romney—vague declarations about policies he won’t detail—but he does comment on the recent analysis from the nonpartisan Tax Policy Center (TPC). In short, the Center found that Romney’s goal—across-the-board tax cuts that don’t affect revenue—is impossible without raising taxes on most Americans. Romney calls this a “garbage conclusion”: I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today. And second, that there would be a reduction in taxes paid by middle-income taxpayers. Those are the key principles of my plan that the Tax Policy Center chose to ignore. Instead they made various assumptions about what they thought I would do which are not in fact...

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