Current Affairs

From FT.com July 4, 2011

FT column: US fiscal crisis is a morality play

The Bipartisan Policy Centre, a Washington think-tank that strives to bring Democrats and Republicans together, just published a report on what might happen if talks to raise the debt ceiling fail. The scenario it describes is grim. Put it this way: the US is contemplating the greatest unforced error in the history of economic policy.

Posted in Current Affairs, Economics, US Economy, US Politics | Permalink

The measure of human happiness

July 2, 2011 12:42 am by Clive Crook

A theme at many sessions at this year’s AIF has been happiness–what it is, how you advance it, how you measure it. Fascinating. Justin Wolfers and Robert Frank had an interesting exchange on this earlier in the week, and I’m continuing to turn their arguments over in my mind.

Wolfers tore into the “Easterlin Paradox”, which is the claim that happiness does not rise with income beyond a certain point. That finding (see Richard Easterlin: Does Economic Growth Improve the Human Lot?) gave rise to the popular view that, for rich countries at least, economic growth is a treadmill. People are struggling to improve their status, and feel happier if they succeed, but the race for status goods is zero-sum. Growth in absolute income cannot raise everybody’s relative position. It allows higher consumption but expands desires at about the same rate. The gain in happiness, if any, is small. For a rich country, the obsession with growth in GDP is an error.

Continue reading: “The measure of human happiness”

Posted in Current Affairs, Economics | Permalink

The X Date: What happens after August 2nd?

July 1, 2011 12:36 am by Clive Crook

The Bipartisan Policy Centre crunches the debt-ceiling numbers. It finds that the the date on which the Treasury will no longer be able to pay all its bills–the X Date–will be “no earlier than August 2nd and probably no later than August 9th.”

What would happen next? There is no precedent, says the BPC. After looking carefully at the Treasury’s projected daily outflows and inflows, the presentation concludes that federal spending would have to be cut immediately by 44%. With decisions then having to be made on a day-by-day basis, prioritizing spending would be very difficult and “the reality would be chaotic”. The government has nearly $500 billion in debt to roll over during August, at a time when a spike in uncertainty plus threatened or actual debt downgrades would be pushing up interest rates.

“The risks are real,” says the BPC. No kidding.

Update: The Committee for a Responsible Federal Budget has updated its “Realistic Baseline”:

Under its Extended Baseline Scenario, CBO bases its projections on current law, which assumes many things that are unlikely to occur, including the expiration of all the 2001/2003/2010 tax cuts and the discontinuation of the regular policy of enacting “AMT patches” and “doc fixes.”

Under its Alternative Fiscal Scenario, CBO lays out a more fiscally pessimistic path, where policymakers increase discretionary spending this decade at the rate of GDP growth, revenues stop growing as a share of GDP altogether after 2021, and the cost controls enacted under Health Carereform (PPACA) are ineffective or overridden after 2021.

CRFB’s Realistic Baseline uses a set of realistic assumptions that fall between these two scenarios and is consistent with a “current policy” path. Under this baseline, debt would rise from 69 percent of GDP today to 88 percent in 2020, 140 percent in 2035, and 437 percent by 2080.

Posted in Current Affairs, Debt, Economics, US Economy, US Politics | Permalink

Reforming US corporate taxes

July 1, 2011 12:18 am by Clive Crook

The US corporate tax code encourages US firms to retain profits abroad. Their taxes are deferred, and only payable when the money comes home. This is a tax-avoidance opportunity and an artificial inducement to firms to invest abroad rather than in the United States. Robert Pozen has a proposal: move to a modified territorial system.

To reform the current system, Congress should exempt from U.S. taxes corporate income earned in foreign countries with an effective corporate tax rate of 20 percent or higher. Such earnings could be repatriated to the U.S., subject to payment of a 5 percent administrative charge. Such a fee, applied in France and other countries, would be a simple way to account for prior deductions from U.S. taxes by American corporations to generate foreign source income — for example, on salaries of U.S. executives who helped start European operations.

At the same time, Congress should end the current deferral system for foreign source income earned by U.S. corporations in countries with effective tax rates under 20 percent. Instead, that income would be taxed every year in the U.S. at a rate equal to the difference between 20 percent and the actual rate paid by the corporation in the tax haven. For example, if an American company generated $100 million of income in Bermuda, which collected $2 million in taxes on that income, the corporation would pay $18 million in U.S. taxes. And if the company repatriated that income to the U.S., it would pay the 5 percent administrative charge.

The plan is not without its difficulties–but Pozen answers the main objections. It is a good idea.

Posted in Current Affairs, Economics, US Economy | Permalink

Does the Supreme Court follow the people?

June 30, 2011 12:44 am by Clive Crook

Jeff Rosen moderated this AIF session featuring Sandra Day O’Connor (former Supreme Court justice), Stephen Breyer (currently on the court) and Larry Kramer (Stanford law professor). I was unfamiliar with Kramer’s book, The People Themselves: Popular Constitutionalism and Judicial Review, though I intend to put that right after listening to his comments.

Kramer’s thesis is that the court has indeed mostly followed shifts in public opinion over the years–and that it has been right to do so. The constitution, he argues, is a majoritarian document, despite frequent claims to the contrary. But it is majoritarian in a restricted sense. The American solution to the “ills” (Madison’s term) of simple majority rule lies partly in slowing politics down through the complexity of the constitutional design. In this scheme, the Supreme Court, as the arbiter of the constitution’s meaning, has greater political independence than other branches of government, but is not, and was never meant to be, entirely independent. It has no electoral accountability, but it has institutional accountability, which resides in the respect it enjoys and needs. Here then is the basic point: To command the public’s respect, the court must pay attention to the public. History, says Kramer, shows this is what the justices have in fact done–even if they deny it, and even if they were unaware of it.

Continue reading: “Does the Supreme Court follow the people?”

Posted in Current Affairs, US Politics | Permalink

Obama’s Passion Deficit

June 29, 2011 10:33 pm by Clive Crook

Joe Klein interviewed David Axelrod at the Aspen Ideas Festival yesterday. It was an outstanding session. Klein explained that he and Axelrod were friends; he did not need to explain that he, Klein, has also been an Obama supporter. But he asked–and kept pressing–pointed, difficult questions about Obama’s unforceful leadership. It was a memorable proof of how a sympathetic and courteous interviewer can be a more probing and more dangerous interlocutor than a straightforward enemy.

Axelrod of course is unflappable. He sustained his note of immovable calm and reason throughout: we take the long view, the pragmatic view; in extremely difficult circumstances, made more difficult by an intemperate and unreasoning opposition, we make progress where we can; being loud is not the same thing as being effective; look at our record of achievement (fiscal stimulus, financial reform, health-care-reform, education reform); we will let history be the judge. But Klein kept coming back. Obama is failing to explain himself, failing to make his case. Where is the president on this? Where is the president on that? His rhetorical skills are clear. Why isn’t he using them? Good questions. I felt that Axelrod had no answer.

Continue reading: “Obama’s Passion Deficit”

Posted in Current Affairs, Obama, US Elections, US Politics | Permalink

More on the IMF reshuffle

June 29, 2011 8:23 pm by Clive Crook

Yesterday I said I’d be surprised if the US agreed to let the number 2 job at the IMF go to a non-US candidate, as recommended by Mohamed El-Erian. Today I ran into Stephan Richter at the Aspen Ideas Festival, and he drew my attention to an interesting possibility, which he wrote up earlier for The Globalist: a co-directorate, with Agustin Carstens as deputy director.

I don’t know whether Carstens would want the job, but the idea does have big advantages both for the US (which would have to agree to it) and for the world order. The US gets a top-class Chicago-trained economist in a key role–a de facto American economist, is how Richter puts it–while retaining a veto over Fund policies through its executive director on the Fund’s board. The rest of the world gets an end to the traditional US-Europe stitch-up, and an excellent official at the top of the IMF.

In backing this notion the US could look selfless while shrewdly advancing its interests.

Posted in Current Affairs, Economics, Financial markets, Foreign policy | Permalink

Lagarde and the IMF

June 29, 2011 2:02 am by Clive Crook

Disappointing but unsurprising that Christine Lagarde has got the top job at the IMF. I don’t say this because I thought she was a weak candidate or won’t do a good job, By all accounts she is very capable. The sad thing is that even under these extraordinary circumstances, it is business as usual when it comes to running such a critical institution.

If this was not the moment to make a break with the old arrangements, and to declare that these positions are no longer filled according to a system of entitlement, one wonders what it will take — especially when such outstanding alternative candidates (Agustín Carstens, Stan Fischer) were in the running.

Continue reading: “Lagarde and the IMF”

Posted in Current Affairs, Economics, Financial markets | Permalink

From FT.com June 26, 2011

FT column: A fiscal policy fit for the next crisis

The debt-ceiling talks in Washington have stumbled again. The sticking point, as before, is taxes. Republicans refuse to raise them and Democrats are insisting on it. The drama and the walkouts are part of the show: in all likelihood a deal of some sort will still be struck before the August 2 deadline. Whether it is a good deal for the country is another question.

Posted in Current Affairs, US Economy | Permalink

Comparing budget plans

June 24, 2011 11:47 am by Clive Crook

The Committee for a Responsible Federal Budget has created a useful tool for comparing the various budget-reform plans.

A recent CRFB blog post on the long-term budget outlook also has helpful explanations of the differences between the CBO’s “extended” and “alternative” baselines. I agree with CRFB that the most plausible starting-point probably lies between the two. (The extended baseline isn’t going to happen. The more pessimistic alternative fiscal scenario is probably too pessimistic.) The CRFB’s own “realistic” baseline essentially splits the difference. They intend to update it shortly.

Posted in Current Affairs, Debt, Economics, US Economy | Permalink