Ben Muse

Treasury Deficit Study II On

Treasury Deficit Study II

On Thursday I posted on what I described as a ""Treasury Tax Study," but which is more of a deficit study. The study was initiated at the request of former Secretary Paul O'Neill and represented his interests in long-term federal budget issues. Max Zawicky" posts on the study here, providing some background and a critique of its methods. The first reference to the study I have seen is an a Boston Globe op ed piece by two economists from May 19, which may be found here "An economic 'menu of pain' ". I learned about the Globe editorial at

Where did the tax bill

Where did the tax bill come from?

The Wall Street Journal had a good article in last Friday's paper (5-23-03) on the origins of the tax bill. ("Bush's Tax Cut: Victory - at a Cost" by Bob Davis, Greg Hill, and Shailagh Murray).

The story is presented in part as a conflict between the Treasury Secretary, Paul O'Neill, and Glenn Hubbard, Chairman of the Council of Economic Advisors and Lawrence Lindsey, head of the National Economic Council - a conflict that O'Neill lost.

Here's an abstract of the story up to the point Bush unveils his tax package in January. Note that this stimulus bill has its origins early last summer, Bush proposed it in January, Congress passed it in late May, and (I understand) money from the first cuts begins to come in July. Here is an example of the enormous lags in fiscal policy.

Early evolution of tax reform

The bill had its origins almost a year ago when Bush asked for suggestions to stimulate the economy. The Journal story notes that a pessimistic forecast on the economy in early 2003 was delivered by Lawrence Lindsey at about that time. It's not clear from the story if the forecast stimulated Bush's request, or came afterwards. At any rate, his economic advisors begin compiling policy ideas following the forecast. Among their suggestions was a proposal for the elimination of the double taxation of dividends. Carter had proposed this reform in the 1976 election but hadn't followed through on it, and it had languished since then.

Glenn Hubbard, the CEA Chair, nurtured the dividend idea and kept it alive. Hubbard had worked on a similar idea in the first Bush administration. "A quiet Midwesterner who had taught at Columbia University, he had surprisingly good political skills. They won him points with senior White House officials who tired of the bickering among the economic team." Hubbard got a window of opportunity at the Waco Economic Summit last August. Charles Schwab gave a speech promoting dividend tax reform, and Hubbard "made sure" Bush heard it. Bush liked the idea.

That night, Mr. Hubbard and other Bush officials met at the Waco Hilton to hammer out a fuller proposal. The team noticed the enthusiasm of Karen Hughes, a communications specialist, who said the proposal seemed fresh and innovative. Afterward Mr. Hubbard told confidants, "A big part of salesmanship is finding the right customer."

Apparently shortly after Labor Day Lawrence Lindsey, the NEC director, gave Bush a economic package proposal including: (a) "an acceleration of individual-income-tax cuts" from the 2001 tax bill, (b) and dividend tax reduction, "either 50%, or elimination." "If it's the right thing to do, it's the right thing to [do]," the president remarked, according to an aide. But he decided against introducing any dividend plan in the early fall as lawmakers were running for reelection."

[Bush's interest appears to be stimulated by a respected financial figure from outside the administration (Schwab), familiarity with the issue based on his experiences as a businessman, and a sense of fairness or justice(?) - its the right thing to do. Note that later in the story he chooses the more radical of the options he's been presented. - Ben]

Paul O'Neill loses influence

Treasury Secretary O'Neill was skeptical about the need for short term stimulus, and more focused on long term fiscal reform (See the posting earlier this evening: "Treasury Tax Study" ). Moreover, his political skills were not good.

"After Republicans gained control of both houses, by narrow margins, the White House started putting together its agenda. Economists argued for a larger tax-cut package, while Mr. O'Neill, the Treasury secretary, shot back that the economy was likely to recover anyway, and new cuts were unnecessary. Mr. O'Neill won't discuss his role, but his former aides and opponents say he lacked the bureaucratic skills necessary to prevail in the Bush White House. He didn't use Treasury's formidable cadre of economists and tax experts to put together analyses of economic conditions. Rather, he had them work on long-term plans for reforming the tax system, which the White House dismissed as pie-in-the-sky.

"Sometimes, Mr. O'Neill skipped meetings of top officials, sending a lower official whose views didn't carry much weight. other times, white House officials didn't invite him. Meanwhile, his opposition to any shorter-term plan fed White House suspicions that Treasury officials would use leaks to undermine the tax plan, further isolating Treasury from decision making."

Run-up to January

In a November 26 meeting Bush "signaled his support for the broadest possible tax cuts...In the end, Mr. Bush decided on a plan that cost $726 billion, about twice what administration deficit hawks had been pushing" The final decision to go for a $726 billion tax cut bill was made at Christmas in Texas. "Mr. Bush introduced it in January before the Economic Club of Chicago..."

Why didn't poor people get

Why didn't poor people get the child credit?

The New York Times reports today (along with many other papers) that:

"WASHINGTON, May 28 — A last-minute revision by House and Senate leaders in the tax bill that President Bush signed today will prevent millions of minimum-wage families from receiving the increased child credit that is in the measure, say Congressional officials and outside groups.

"Most taxpayers will receive a $400-a-child check in the mail this summer as a result of the law, which raises the child tax credit, to $1,000 from $600. It had been clear from the beginning that the wealthiest families would not receive the credit, which is intended to phase out at high incomes.

"But after studying the bill approved on Friday, liberal and child advocacy groups discovered that a different group of families would also not benefit from the $400 increase — families who make just above the minimum wage.

"Because of the formula for calculating the credit, most families with incomes from $10,500 to $26,625 will not benefit. The Center on Budget and Policy Priorities, a liberal group, says those families include 11.9 million children, or one of every six children under 17."

Does the headline on the posting at A Taxing Blog (a fairly sober blog) have it right: "Republicans are Just Plain Mean ". The Times reports the credit extension to this group would have cost about $3.5 billion. There was no room for this in a $350 billion tax cut bill? The story says that it was in one version of the bill and implies it was deliberately taken out.

"House Republicans, who acknowledged the gap on the child credit, blamed the Senate for insisting on its $350 billion cap, saying the low-income families could have been covered had the Senate been more flexible.

"A spokeswoman for the Republicans on the House Ways and Means Committee, Christin Tinsworth, noted that the provision was included in an agreement reached last week by Representative Bill Thomas, Republican of California, the committee chairman, and Senator Charles E. Grassley, Republican of Iowa, chairman of the Senate Finance Committee.

"That agreement would have cost $380 billion, but it fell apart when an important swing senator, George V. Voinovich, Republican of Ohio, said he could not approve any bill that exceeded $350 billion. To satisfy him and the Senate, Ms. Tinsworth said, the child credit provision was dropped, along with other costs."

They couldn't have found room by reducing the cuts for the affluent by the given amount? The Center for Budget and Policy Priorities has a short item on the credit issue, here: "Was There Enough Room In The Tax Bill For The Low-Income Child Tax Credit Provision?" They note that the tax bill contained $90 billion in tax cut provisions for the households with incomes over $1 million. The Center has a paper on the mechanics of the credit provision, and why it fails to provide the $3.5 billion, here: "How The New Tax Law Alters The Child Tax Credit And How Low-Income Families Are Affected".

Revised 5-30-03

Treasury Tax Study This story

Treasury Tax Study

This story has been getting a lot of play today. The Financial Times is reporting here ("US 'faces future of chronic deficits' ") on a U.S. Treasury study begun under former Treasury Secretary O'Neill that projects very large future deficits.

"The study asserts that sharp tax increases, massive spending cuts or a painful mix of both are unavoidable if the US is to meet benefit promises to future generations. It estimates that closing the gap would require the equivalent of an immediate and permanent 66 per cent across-the-board income tax increase...

"...The study's analysis of future deficits dwarfs previous estimates of the financial challenge facing Washington. It is roughly equivalent to 10 times the publicly held national debt, four years of US economic output or more than 94 per cent of all US household assets. Alan Greenspan, Federal Reserve chairman, last week bemoaned what he called Washington's "deafening" silence about the future crunch."

The study itself may be found here: "http://specials.ft.com/spdocs/WP-Fiscal-Smetters.pdf" The Financial Times story above contains links tothe transcripts of two substantive interviews with the two authors of the study. I hope that link remains "live."

Kent Smetters, former Assistant Deputy Treasury Secretary for Economic Policy was not the principal author, but was more highly placed, and maybe in a better position to understand the role of the study and the reactions to it by administration officials. His interview quotes him on the origins and progress of the study. Much of the press coverage has suggested the admnistration deliberately deep-sixed this study because its estimates of large budget deficits might have undercut the tax proposals this year. Not so says Smetters:

"FT: When was this study initiated and at who's request?

"KS: The work was never meant to be a Treasury study. It was meant to be some internal thinking, something for O'Neill. It was meant to be an internal part of thought process on how to reform the budget - in particular, budget accounting...

"...O'Neill is a very engaging and smart guy. He hired me in June 2001 as his deputy assistant secretary - six months before he even hired an assistant secretary - in order to get a jump-start on working on Social Security reform. Especially before September 11, 2001, I was meeting with him two or three times a week, primary to talk about social security reform. It became very clear very early that a big part of the problem is the whole language we're using in this debate, which is being driven by the current budget accounting framework. The current budget accounting has all these biases against trying to reform Social Security in a way that increases the amount of funding in the system. It doesn't track the Social Security liabilities at all. So that a lot of potential reforms appear to be bad since they would increase the debt held by the public ?

"FT: They don't account for the reduced drain from future unfunded liabilities.

"KS: Exactly.

"FT: The cost, but not the benefits in the form of future unfunded liabilities avoided

"KS: That's exactly right. So what happens is that you have a bias against pre-funding because you see only the increase in debt held by the public but not any of the reductions in the present value of future Social Security obligations since they are not being tracked. O'Neill understood this instantly. It took him 30 seconds to understand this. He was very engaged. He pretty much let me do my own thing, but he was very engaged on this.

"FT: He was engaged in having this process develop and produce some very significant results?

"KS: Absolutely, but the outlet for this was never to be a Treasury study, but to create internal discussion and hopefully reform the president's budget framework - to slowly start to change how people think about the budget framework to track these hidden obligations.

"It was something that was very engaging, but obviously when the Secretary went, when the NEC director Larry Lindsey went...

"FT: Lindsey was also interested in this?

"KS: Yes. Everyone pretty much was interested in this. Lindsey and O'Neill were very engaged on this. The same with Mitch Daniels. Everybody was pretty enthusiastic about this. But the thing is Lindsey went, O'Neill went. It's perfectly reasonable that the new guys came in, they're hit with this, and they need some time to think about it. The Boston Globe article was written by two brilliant economists. But, in my opinion, that piece maybe made it sound too much like some kind of a conspiracy to kill honest accounting in order to save the tax cut, or something like that. It really wasn't. The new guys said, hey, this is something that could go to a press within a week, and this is just a completely radical new way of looking at the budget.

"FT: So there wasn't any high-level conspiracy?

"KS: No, there wasn't. This point has to be really emphasised. In fact, if you look at this framework, the tax plan looks great. You see 99 per cent of all the liabilities are Social Security and Medicare. That's even after including the president's original $750 tax-cut plan proposal. The estimates correspond directly with the OMB budget so it includes all the policy proposals he originally wanted. It included the full elimination of the dividend tax. Only a very small part of the imbalance actually comes from the rest of the government - only $600bn of the $44,000bn. Almost all of it is Social Security and Medicare. This is hardly stuff the Administration would kill because they're afraid of the tax plan looking bad.

"FT: Indeed, they did include the 75-year projections for Social Security and Medicare?

"KS: Yes, but those estimates are problematic for a number of reasons. They underestimate the problem by two-thirds when you do it correctly into perpetuity, which is really the way economists think about this. The 75-year projections represent only one-third of the problem. Also, there was sort of a rush job on those numbers, so they actually didn't calculate them under OMB assumptions. They just got the Social Security and Medicare actuaries to give them the numbers under Trustees assumptions which are much more conservative.

"FT: Mr Gokhale has a somewhat harsher interpretation of all this than you do Sure, they see a set of numbers and they want to digest them first, but the question is: There were all these other numbers in there...why did a lot of other numbers that were presented to them at the last minute make it in, and why did this number not? The whole point of this number is to provide a simple, easily understood, transparent, comprehensive measure of the government's full long-term imbalance

"KS: My reading of what happened is simply this: If, in fact, these perpetuity numbers where calculated by the actuaries themselves then they would have found their way into the budget. The old guys did not need to have the numbers calculated by the actuaries because they had followed the project and understood them. But the new guys did not have the time to study them in much detail before the budget was going to press. And so if the actuaries had calculated them and, therefore, provided some distance, they might have gone to press."

Dynamics of Economic Policy Making

Dynamics of Economic Policy Making Power in the Bush Administration

The organization chart only tells you so much. Here are three articles on the fight for economic policy influence in the Bush Administration.

This August 2002 Washington Post column, available through Brad DeLong's web site, describes the loss of Treasury Department influence in the current administration, and the impact of this loss on the Department - "Treasury Departures Hurt Staff Morale "

This Spring 2003 The International Economy article by Fred Barnes describes the loss of influence by Treasury under Secretary Paul O'Neill, and the efforts by the new Secretary, John Snow, to make up the lost ground: "The Incredible Shrinking U.S. Treasury"

This Fred Barnes article, from the Winter 2003 International Economy plots the interacting trajectories of the Administration's economic policy heavyweights: "The Four Horsemen of Bush Economic Policy" This covers more than the four horsemen of the title, but it is a little dated, important characters have left the administration or changed their positions since the article was published.

Josh Bolten replaces Mitch Daniels

Josh Bolten replaces Mitch Daniels

President Bush is appointing his Domestic Policy Advisor Joshua Bolten to replace retiring Office of Management and Budget director Mitch Daniels. Here is his offical biography:

"Josh Bolten -- White House Assistant to the President and Deputy Chief of Staff
From 1999 to 2000, Josh Bolten was Policy Director of the Bush-Cheney 2000 Presidential campaign and the Bush-Cheney Presidential Transition. From 1994-1999, he was Executive Director, Legal & Government Affairs for Goldman Sachs International in London. In the previous Bush administration, Josh was General Counsel to the U.S. Trade Representative and Deputy Assistant to the President for Legislative Affairs. Previously, he was International Trade Counsel to the U.S. Senate Finance Committee. Josh is a graduate of Princeton University and received his J.D. from Stanford Law"

Here is a link to a January 2003 New York Times profile of Bolten: "An Invisible Aide Leaves Fingerprints" Here is a short Slate profile from November 2001: "No Relation No. 14: The Bush White House Edition"

"Josh Bolten is the White House's deputy chief of staff for policy. That makes him the president's chief domestic policy adviser, and since Sept. 11 he has headed the White House's new "domestic consequences group" that has developed post-attack legislation such as the airline bailout and the stimulus package. The New Republic's Ryan Lizza calls him "increasingly powerful" and "the anonymous fourth man in the inner circle of Bush's staff" (after Andy Card, Karl Rove, and Karen Hughes). U.S. News says he has emerged after the terrorist attacks as Bush's "chief economic architect," and the Washington Post says Bolten "has a quiet hand in all domestic policy and international economic policy."

"During the 2000 campaign, Bolten was Bush's policy director, and during the Florida recount he was a top lieutenant to James Baker. He worked as a lawyer in the Reagan administration's State Department, and he served as a staff attorney for the Senate Finance Committee from 1985 to 1989. In the first Bush administration, he worked as general counsel for the U.S. trade representative and as the White House's deputy assistant for legislative affairs.

"Bolten is publicity-shy—the rare profile of him always mentions that he didn't want the story written—but he has received some attention for his relationship with Bo Derek. The Austin American-Statesman says the two are just friends but that the relationship has included "several briefings" and a motorcycle ride. (Bolten owns a Harley.)"

A clip from Business Week with more on this Bolten-Bo Derek connection:

"While Ken Lay may disagree, it often pays to have friends in high places. Just ask actress Bo Derek. The onetime starlet, now a pet-care-product entrepreneur, has been picked for a coveted six-year term on the Kennedy Center's governing board. Derek, a rare Republican in Hollywood, has developed a close friendship with Deputy White House Chief of Staff Josh Bolten. Derek accompanied Bolten to the Kennedy Center Honors gala on Dec. 2."

Dr. Kristin Forbes named to

Dr. Kristin Forbes named to Council of Economic Advisors

Dr. Forbes, from the Sloan School of Management, was named to the Council last week. Daniel Gross points to work by Dr. Forbes suggesting a correlation between inequality and growth in this Slate column: "Dr. Inequality. Bush's new economist has a curious prescription.". The column has links to Forbes' resume and her American Economic Review paper on inequality and growth. Here's an Associated Press story about the nomination - "MIT professor tapped for Bush's economic council" Forbes needs Senate confirmation. Bush has also nominated Gregory Mankiw of Harvard and Harvey Rosen of Princeton to the other two slots on the Council.

Forbes was Deputy Assistant Secretary for Quantitative Policy Analysis, Latin American and Caribbean Nations, in the International Affairs Division of the Treasury earlier in this administration, and left some months ago. Last summer Brad DeLong posted a Washington Post article on policy making and staff turnover at Treasury along with some of his own commentary, here: "Treasury Department Staff Losses.". DeLong described eight Treasury economists who had recently left (including Forbes) as:

"All eight of these guys are first-class analysts and economists: smart, non-partisan, willing to tell their political bosses when they are off-base, willing to stay as late as they have to to get the work done, and deeply committed to public service. Their departure is a real loss for the country--for the current and for future administrations."

The Council of Economic Advisors (CEA) is meant to provide the President expert technical advice on economic matters. It has a somewhat different role than the National Economic Council (NEC), set up to coordinate the policy advice reaching the President from the different departments and agencies. I posted a few days ago about the evidence that the CEA was losing influence within the administration, here: ""Location, location, location": Influence in Washington and Economic Policy" See also this Washington Post column on the CEA, "'CEA You Later,' Bush Says") which outlines the dynamics of the relationship between the CEA and the NEC in the Bush Administration.

Jane Austen's investment tips From

Jane Austen's investment tips

From the Economist:

"IT IS a truth universally acknowledged that investors can no longer expect rapid capital accumulation from stocks. Since interest rates are low and likely to stay that way, the conundrum is how to ensure a steady income from investments. Mrs Bennet was well acquainted with the problem..."

here: "Cents and sensibility"

Why do we spend so

Why do we spend so much on health care?

Robert Shapiro (a former Clinton administration undersecretary of commerce and currently a Brookings Institution fellow and private consultant) summarizes the economics behind the current health care cost crisis in this Slate column: "Premium Blend. Why is it so difficult to provide universal health care?". I learned about this from the blog Asymmetrical Information.