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Monthly Archives: August 2013

You already have heard that the next fiscal cliff that we will encounter on our journey to Responsibility will come with the conjunction of the expiration of the appropriations at the end of this fiscal year (a date certain, September 30 / October 1, 2013) and the collision of our nation’s debt with its statutory limit (a date highly uncertain, hitherto estimated by the leading nongovernmental authority, the Bipartisan Policy Center, at somewhere between mid-October and mid-November).  But in the last week or so, Washington’s two non-negotiating negotiating partners made their first moves onto the public stage.

On Thursday of last week, the House Republican caucus reportedly held a telephone conference call during which Speaker John Boehner (R-OH) laid out the first steps in his negotiating strategy (AKA Kabuki).  The Speaker said that he would put forward a short-term continuing resolution (CR) to continue agency appropriations at this year’s level – higher than next year’s statutory spending caps – so that the threat of a government shutdown (from the expiration of appropriations) would be postponed until the onset of the threat of a debt-limit crisis – presumably to increase his side’s negotiating leverage.

The conference call, of course, was private, and we have learned only what Members on the call have been willing to relate to the press.  Those accounts, therefore, could suffer from either faulty memory or intentional spin.  But by all accounts, the Speaker’s conservative wing was not happy.  Those Members reportedly have insisted that appropriations, however short-term, should be passed only on the condition that a provision be included to prohibit the expenditure of any funds to implement the Patient Protection and Affordable Care Act (AKA “Obamacare”).  (A few Members would demand approval of the Keystone XL pipeline as well; any other precondition conceivably could be added.)

Despite what the press portrayed as vocal opposition from the conservative wing, the Speaker really didn’t offer very much to the Democratic side.  Again, he reportedly was speaking about only a temporary bill of less than one-quarter of a fiscal year’s duration – just enough to extend the appropriations standoff until the expected collision with the debt limit.  He (and Majority Leader Eric Cantor (R-VA)) reportedly suggested that the same demands regarding health-reform implementation could be attached to exhaustion of the debt limit.  And the press reports gave no indication that the Speaker suggested any change in the statutory appropriations caps.  The Congress could pass higher appropriations in a temporary bill; but without a change in the caps, the temporary overage would merely be recaptured in a later sequester, pinching government operations even harder at the end of the year.  It might even lay the groundwork for further cuts later, given the eventually lower rate of spending.

Of course, the Republican House could not actually write this scenario into law.  The Senate would not pass such a bill, and the President surely would veto it.  This maneuver would be either a political statement before a contrary ultimate agreement, or a threat that the President either capitulate on his healthcare law or suffer a government shutdown and/or a Treasury default (use of that term is controversial).  Most Washington watchers would characterize either a shutdown or a default as an extreme outcome, but a default as much the worse of the two.  That the Speaker would maneuver to connect the two outcomes suggests that he is at least keeping his options open, while extending the process would allow the heat and the pressure to build.

Then this week, the Administration acted – or perhaps reacted.  Treasury Secretary Jack Lew added to his portfolio of letters sent to Congressional leaders, which in the current environment means the Speaker, since the last postponement of the debt limit tensions in May.  In this new letter, Secretary Lew for the first time provided a point estimate of the onset of serious default risk, placing it at mid-October.  The Secretary, as he and his predecessors always have, asked the Congress to act expeditiously to increase the debt limit.  His purpose seemed to be to send a message that the drama over the annual appropriations and the debt limit could not be long postponed.

The Treasury typically is reluctant to make public point estimates of the final moment of a collision with the debt limit.  And the language of Secretary Lew’s letter suggests that its mid-October estimate is conservative.  But based on the BPC’s estimate, Secretary Lew’s request for action prior to that time is only prudent.  Truth be told, with all of the good will in the world, the Treasury cannot project its cash position with precision over even a few days.  Numerous routine cash events are none the less quite unpredictable; and at this moment the chance of military operations in Syria, and the multiple contingencies that could follow from them, is far from routine.  And this is not an annual budget deficit projection, where, as in horseshoes or hand grenades, close is good enough.  A small error in a cash projection near the debt limit could have disastrous and irreversible consequences.

Opinions differ, and are strongly held, but in my opinion the United States of America should give the widest possible berth to any risk of a failure to pay any of its bills.  Members of Congress who wish to create an action-forcing event should do so over the annual appropriations, rather than court what could become a global financial crisis.  The downside of a federal government credit event is far too great to take any chances.

It is impossible to say how this Kabuki will play out.  Rational players on both sides fear being jammed at the last instant by the other, after a failure to negotiate straightforwardly.  Congressional Republicans will accuse the Administration of waiting until the last moment before demanding a total capitulation, at the risk of the Republicans’ being identified as to blame for a default.  The Administration will counter that the Congressional Republicans want to be handed the tools for an effective negotiation over their hostage, when they had no right to take the hostage in the first place.  This is a principled debate that will not be easily resolved.

And this entire confrontation is not a negotiation where one side wants 100 and the other side wants 80, with the possible result that after lengthy and painful negotiations both can somehow find their way to accept 90 as the answer.  This is, rather, the culmination – for this year – of a long-running ideological dispute in which the disputes effectively are over the difference between yes and no, and large shares of both sides believe that compromise is totally unacceptable.  The swords in this Kabuki are not made of wood.

Enjoy the play.

A couple of weeks ago, President Obama released his proposed “grand bargain” – which was a trade of a corporate tax reform, with a reduced tax rate, for a one-time increase in “public investment” spending that was alleged to increase economic growth.  A recent CED blog discussed the spending components of the President’s package, which were a mixed bag, and did raise some questions about the soundness and viability of the one-time approach.  Now, I would like to switch to the idea of corporate tax reform.

In fact, this discussion will be a little broader, because Chairman Dave Camp (R-MI) of the House Ways & Means Committee also has had something to say about corporate reform. To be even-handed, Chairman Camp’s work has been more-detailed and more-thoroughly developed than the President’s – not totally surprising, because it is the Congress that writes the laws.

To betray my bottom line at the top, though, it seems to me that we have a long, long way to go before we will be ready to enact a serious and significant corporate tax reform.  I’ll try to explain a couple of reasons why.

But first, a little historical background, which will help to uncover some principles.

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I recently had an opportunity to listen to recordings of radio broadcasts from the 1940s that featured CED’s first chairman, Paul G. Hoffman.  Wikipedia, the source of all modern knowledge, describes Hoffman as an American automobile company executive, statesman and global development aid administrator. He was all that.

From 1935 to 1948, he was president of the Studebaker Corporation (and later Chairman of the Board). In 1948 he became the director of the Economic Cooperation Administration, also known as the Marshall Plan aid program. Later he served as the president of the Ford Foundation. In 1966 he became the first administrator of the United Nations Development Programme.

My interest, of course, was in his role as Chairman of the Committee for Economic Development from 1942 to 1948. Paul Hoffman was what we now call a business statesman.  What is a business statesman?  Here is how Hoffman was described before an appearance on Meet the Press in 1948:  ‘Chairman of the Committee for Economic Development, a group of business leaders whose recommendations for the national welfare are made from a broad-minded viewpoint beyond their individual business interests.’  In those days business statesmanship was not so unusual among national business leaders.  Hoffman was far from the only one.

A recent CED paper describes business statesmanship as: ‘the kind of thinking and behavior that recognizes societal health as part of what it means to be a business leader.  A prime goal of business statesmanship is to strengthen the fabric into which society and business are interwoven.’  This type of societal engagement, for example, speaking out for the common good on key public policy issues of the day, is a distinct business-leadership trait, though often occurring in combination with other attributes such as showing a long-term commitment to the enterprise, ethical integrity, and other leadership characteristics.

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The title of the explanatory fact sheet on the President’s new economic program is “A Better Bargain for the Middle Class: Jobs.”  That conveys several things.  For one, the White House understands that government is divided, and if you want to get anything done (or at least appear that you are trying to), you need to strike a deal.  Fine so far.  Second, most Americans either identify themselves, or wish they could identify themselves, as middle class.  So favoring that group is good politics, and actually succeeding in helping that group might well be good economics.  OK again.  Finally, the sore spot of the economy is jobs.  Four years into an economic recovery, we remain well short of the employment level of the previous cycle peak, and millions of Americans are so disheartened as to have given up looking for work.  So the title of the exercise seems promising.

The suggested deal is an exchange of corporate income tax reform, with the statutory tax rate reduced to no more than 28 percent — which is assumed to entail a one-time increase of revenues but to be revenue-neutral in the long run — in exchange for the use of those additional one-time revenues for specified one-time programs that will “support middle-class jobs.”

We should look at the two parts of this deal separately.  And we will discuss the corporate tax reform idea, both in the abstract and in the context of the President’s new program, in a post two weeks from now.  It is appropriate to ask at this time, however, whether the President’s conception is that the revised corporate tax would be revenue neutral plus yield a one-time revenue bump.  Only the fine print, not yet supplied, would answer that question.

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This is just a brief post-mortem on this morning’s monthly employment situation report, for those who did not have the opportunity to spend time with it.

As you probably know, the employment report is based on two separate surveys, one of employers and one of households.  The employer survey is generally thought to be the more reliable, with the footnote that it has a significant inevitable weak spot in the impossibility of adding newly created firms to, and dropping dying firms from, the sample in real time.  The household survey shows greater variability from month to month because of the difficulty some workaday citizens have with picking up the nuances of the concepts, not to mention the refusal of some to participate.

This month’s employer survey showed mediocre growth – 162,000 new jobs.  That is not enough to rebuild employment very much from the enormous job losses of the financial crisis, after taking into account the growth of the potential labor force (about 100,000 to 120,000 per month) because of the simple expansion of the adult population.  If you were hoping for a breakout number, this isn’t it.

The industry categorization of job growth was not terribly encouraging, either.  More than half of the new jobs came in food services and drinking places, and in retail trade.  I don’t want to overstate this complaint.  Job growth is better than the alternative, and jobs should not be downgraded reflexively on the basis of their industrial classification.  But having half of new job creation in these categories would be more satisfying if the overall new-job number had been robust.

One perspective on the labor market, and on the economy generally, is that the weakness in so many economies around the world (including ours) leads to reduced demand for goods and for highly technical services, which are the industry categories that tend to provide the best-paying jobs.  If we had robust overall economic and job growth, the retail and dining-and-drinking sectors would face more competition in the market for labor, and would have to pay more, benefitting everyone.  We don’t need a campaign against “services” and those firms that provide them, and we don’t need a campaign for gravity-defying higher wages without demand for labor.  We need economic growth.

In the household survey, the unemployment rate fell by 0.2 percentage points, from 7.6 percent to 7.4 percent.  Increasingly sophisticated public opinion puts much less stock (pardon the pun) in the unemployment rate than it did, say, two or three decades ago.  More people now understand that the unemployment ratio has a numerator and a denominator, that both matter, and that shifts in one or the other can yield a misleading overall change.  In this case, the household survey had employment rising, unemployment falling by a little more, but the size of the labor force declining a bit.  If the economy had been improving significantly, we would have expected some of the large number of discouraged job losers to re-enter the labor market.  Instead, following the pattern of recent months, we have at best tepid interest in the labor market.  Again, the need – easy to say, but more difficult to legislate than some would admit – is greater overall economic growth.

Wall Street often needs to decide whether good economic news is bad news (because it portends government macroeconomic restraint), or bad economic news is good news (because it will motivate government macroeconomic stimulus).  This time, Wall Street will have to interpret mediocre economic news.  May it choose wisely.

So the trend is that the trend continues.  Move along, folks, there’s nothing going on here.  (Sigh.)

The federal government’s fiscal year 2013 ends and its fiscal year 2014 begins on September 30 and October 1, two months from now.  According to the official calendar of the House of Representatives, that body leaves for its August break today, and will have only nine legislative days in September before the fiscal year ends.

That is one of the most tangible reasons why long-time Washington observers worry about a possible government shutdown – the failure to enact appropriations for the various federal agencies.

A second evident reason is that the Congress has made virtually no progress in passing the necessary appropriations, even as it packs its bags to take the August break.  Highlighting that failure is the withdrawal from the House floor of the appropriations bill for the Departments of Transportation, and Housing and Urban Development – known in the trade by its mellifluous acronym, THUD.

By jealously guarded prerogative, the House passes all appropriations bills first.  Of its 12 bills, the House thus far has passed four.  All four of those bills were “gimmees” (using the golf terminology – as in “I can’t possibly miss, so gimmee that putt”).  Three were the bills for defense, veterans, and homeland security.  Their can’t-miss status arises not only from their vivid red, white and blue color schemes, but also because the House gave those bills the largest allocations of funding relative to past years.  The fourth bill was the Energy and Water appropriations.  It is semi-red, white, and blue, in that it includes funding for the nuclear weapons programs and for the Army Corps of Engineers (which is “Army” in a limited sense), but it is a gimmee also in that with relatively small amounts of money it funds waterway projects that are of intense concern to many geographic areas around the country (including prominently parts of the South that are otherwise “anti-government”).  So it is always easy to pass.  In other words, degree-of-difficulty-adjusted, the House has completed virtually none of its appropriations work.

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