Author Archives: Nolan McCarty

Obama’s Math

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In the vain hope of making sense of the president’s budget proposal, I have begun reading it with some care. I’ve become stumped, however, by some of the math used to justify his tax plans. His budget promises, as did his campaign, to only raise taxes on the top 5% of American households or those couples making over $250k ($200k for individuals). My first problem is that those two cutoffs are not the same.

According to the Census Bureau’s current population survey, the top 5% of households in 2007 were those with incomes over $177,000. Thomas Piketty and Emmanuel Saez’s data on tax returns (the Gold Standard for measuring the income distribution) show that the cutoff for the top 5% was $148,000 in 2006 (I believe their number is lower because they exclude government transfer payments.) So my puzzlement is whether ultimately Obama’s commitment is to not raise taxes on those families below $250k or is to not raise taxes on those below $177k or ($148k).

The question has both important political as well as economic ramifications. The Republicans will obviously fare much better in their quest to defeat Obama’s tax plan if they can portray Obama as ultimately willing to extend his tax increases to much lower income levels.

The economic ramification is one that exacerbates the political one. To pay for the spending increases that the budget calls for and to keep deficits within reason, taxes will almost certainly have to go up on families making more than $150k (if not less).

A little of my math helps explain why I believe this. Assume that tax increases are limited to those families making above $250k. From eyeballing Picketty and Saez’s data, 33% is a reasonable estimate of the share of national income received by this group of families. This implies that to increase revenue by 1% of national income the average tax rate on those above $250k will have to rise by 3 percentage points (because they control a third of national income their taxes must go up three time the total increase). Obama’s budget projects deficits at 4% of GDP from 2013-2019 (even after an initial round of high-income tax increases). So if these future tax liabilities are to be borne only by the $250k-and-up club, their taxes would have to go up 12 percentage points. How large a tax increase would this be? Currently, the average federal tax rate on families over $250k is about 30% (this includes all federal taxes). Obama’s proposed increases are likely to push that number to around 34%. To cover all future liabilities only through taxes on this group, their average tax rates will have to rise to 46%, a 50% increase in federal taxes. By contrast, the rate on the top 1% was 38% in the last year of the Carter administration before Reagan’s tax cuts. Even if Obama were willing to raise taxes on the top 5 percent (i.e. those with incomes greater than $150K), the average tax increase for that group would still be around 10 percentage points. While I often believe that supply-siders overstate their case against taxes, this clearly represents a level at which perverse incentive effects including non-compliance and reduced labor supply (especially among second earners) could materialize. So even tax hikes of the magnitude I’ve described may not produce the desired level of revenue.

So it seems very clear that enactment of Obama’s ambitious spending plans (many of which I support) will require taxes to go up (now or later) much more broadly than either his $250k or top 5% pledge would seem to allow. An administration that prides itself on its openness and transparency would do well to acknowledge that inconvenient fact sooner rather than later.

My Take on the Speech

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Despite my chosen profession, I have never been a fan of the State of the Union address. Although President Obama’s speech before Congress was technically not an SOTU address, it had all the trappings: a cabinet member abandoned in a secure location, a visitors’ gallery full of human interest stories, and an absurdly large number of standing ovations. Because I find most of these rituals silly and annoying, I generally must force myself to watch in the hopes of obtaining new insights about the president’s agenda and approach to governance.

My gamble paid off only partially tonight. It was clearly a well-written and delivered speech. The president did a very good job of highlighting his priorities. Some may argue that in the current economic crisis progress on health, education, and the environment is improbable in the short run. But he made a good case for linking these priorities to economic recovery. I am at least reassured that Obama did not deliver a Clintonesque laundry list chock full of v-chips and school uniforms.

But in many other regards the speech was disappointing. It was never more specific on policy matters than a campaign stump speech. If the markets crave more details on the bank recovery and housing plans, they will go to bed hungry. His proposals on health, education, and the environment did not break any new ground. About the only thing I learned is that he plans to repeat Clinton’s mistake of using a big multi-stakeholder commission to write the healthcare bill.

The speech was also politically incoherent at times. In discussing the bank recovery plan, he employed all of the populist tropes blaming the crisis on greedy, over-paid bankers. But then he turned to a full-throated defense of “trickle-down” bank recovery economics. It is hard to see how the populist rhetoric is going to help sell a policy of massive subsidies to the financial sector.

I was especially concerned with some of the president’s statements and rhetoric on trade. He has long struggled to reconcile his internationalist pro-trade sympathies with the more protectionist elements of his base. Given that congressional Democrats are pushing “Buy American” provisions and restrictions on Mexican truck drivers, I had hoped for a stronger assertion of the president’s commitment to trade. Instead I heard a lot of economic nationalism. What’s wrong with Korean batteries for plug-in hybrids? Why does there have to be an “American” automobile industry (as opposed to autos built in the U.S. by international firms)? He did commit to working with the G20 to fight the rising tide of protectionism, but I fear that he’s part of that wave.

Short Takes

  • Did anyone find Speaker Pelosi’s behavior and body language as bizarre as I did? The energetic bounding from her seat and exaggerated clapping upon each semi-colon made her look goofy. At times, Joe Biden seemed embarrassed. I wonder if she is on retainer from the Daily Show.
  • I know that politicians specialize in obtaining free media and getting face time with the big fish, but I was quite amused by the report that Elliot Engel (D-NY) obtained an aisle seat 12.5 hours before the speech started.
  • At the risk of “messing with Joe,” let me say that I am not comforted by the fact that compliance with the stimulus bill will fall to an inter-agency task force headed by the vice-president.
  • Didn’t Roland Burris seem like the loneliest guy in the room?
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The Transition Race

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One of the truly distinctive features of American politics is the massive turnover of top officials following the inauguration of a new president. In no other advanced democracy is the personnel turnover associated with a transition of executive power as extensive.

Given the domestic, international, and economic challenges the country faces, the need for a quick and orderly transition is more imperative than in any time since perhaps 1932. But back then the federal government was smaller and the appointments process was far less contentious and politicized compared to now.

Given how crucial and challenging President Obama’s transition will be, I thought it might be interesting to track how quickly he fills key positions compared with his predecessor. To construct a rough gauge, I have collected information on the confirmation dates of department secretaries, deputy secretaries, and under secretaries (and the Justice Department equivalents) for the Obama and George W. Bush administrations. I’ve narrowed the list to positions that both presidents had to fill (thus ignoring positions that were created or eliminated between 2001 and 2009). This leaves me with a list of 64 positions. Obviously, this list has some limitations. First, it omits the White House staff. This is necessitated by the fact that each president organizes the White House in different ways so that I could not make position by position comparisons. Second, there are important positions in the departments that have titles other than deputy or undersecretary. Nevertheless, comparison across presidents for positions on the list is useful.

In aggregate, the record for Obama is slightly better. By February 20, 2001, Bush had filled 15 of the 64 positions by obtain Senate confirmation or keeping the incumbent from the Clinton administration (one undersecretary of Agriculture). Over the same period, President Obama had filled 17 of the positions. But the aggregate number is a little misleading, Obama filled three of the positions in the Department of Defense with Bush holdovers (Secretary Gates and two undersecretaries). And of course, Obama still has three cabinet openings. Health and Human Services and Commerce lack nominees, and Hilda Solis will not be confirmed at Labor until next week at the earliest. Conversely, Bush had his cabinet secretaries in place by January 29, 2001.

It probably is too early for any definitive assessment. During Bush’s first term, the bulk of the positions on my list were filled in May (24 of 64). So I’ll continue to track this and report back as interesting patterns emerge.

TARP II and the Transition

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Given that my post-doc and I are busily collecting data to compare the speed of Obama’s personnel transition with that of recent presidents, I was very interested in this disclosure about how the slow transition affected the Treasury’s TARP II plan:

Meanwhile, the sources said, Obama’s senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys.

There has to be a better way…

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The Politics/Policy Firewall

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One of the many things that the Bush White House was criticized for was the lack of a meaningful distinction between the policy apparatus and the political operation. Of course, this conflation was personified by the role that political advisor Karl Rove played in formulating Bush’s policy initiatives and priorities.

Despite assertions that the Obama White House would do a better job keeping politics and policy separate, David Axelrod seems to be reprising the Karl Rove role. First, it has been reported that Axelrod was intimately involved in the TARP II planning, strenuously arguing for tougher executive pay limits. Second, Axelrod has become a fixture on the Sunday morning talk shows. Granted such appearances would be absolutely appropriate to communicate the president’s policy decisions. But his appearances seem to indicate just how deeply involved he’s been in formulating those policies.

Of course, as a political scientist, I’m not naive enough to think that it possible (or even always desirable) to keep political and policy deliberations separate. But because there is always the temptation for the political considerations to overwhelm the policy ones, maintaining some wall of separation is important. Otherwise, every decision becomes politicized. I certainly hope that the Obama White House doesn’t repeat the mistakes of the Bush White House.

On the Virtues of Strategic Bipartisanship

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President Obama has been roundly criticized for making such demonstrative efforts to woo Republican support and having his efforts rewarded with only three votes and a weaker stimulus plan. Although it would be hard to argue that his post-partisan strategy paid short term dividends, I believe that it was the right approach over the long run.

In evaluating the strategy, we have to compare it to some other approach. It seems that the only other option to compromising would have been to “play chicken” with the Republicans. He could have presented exactly the plan he wanted and dared them to filibuster it. The Republicans almost certainly would have done so and defended themselves with the argument that a left-wing president was trying to ram his agenda through Congress. So the net result may well have been a delayed stimulus package and possibly new doubts among centrist voters about the president’s ideological proclivities. Moreover, the president may well have had to compromise anyway to secure cloture.

So instead, I think the president took a very politically shrewd approach. He courted and wooed Republicans and conservative opinion makers. He pledged to work with them. He transformed much of the stimulus into the only policy instrument that Republicans believe in: tax cuts. Yet, 98% of the Republican in Congress voted against. So who looks like extremists now? It will be much harder for Republicans to run against Obama as a leftwing extremist and easier for him to run against them as unreconstructed Hooverites. Of course, the Republicans will still cry out that socialism is on the march, but I think it will work even less well than it did in November.

So is there any evidence that I’m right and Obama’s critics are wrong? I think the Clinton healthcare debacle shows exactly how the counterfactual would have played out. The Clintons decided to pursue what they viewed was the right policy and hoped to use the Democrat’s numerical majority to enact it without compromise. This approach made it easier for Republicans to attack the plan as complex, bureaucratic, socialized medicine. The failure of Clintoncare and the perception that Clinton’s policy views were outside the mainstream contributed to the Republican sweeps in the 1994 election.

Ironically, the Republicans are still playing by the old script. Only time will tell whether Obama’s bipartisan ad lib will change the storyline.

P.S. Tim Groseclose and I formalize a similar argument here (JSTOR access required).

Catching Up

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Because I gave several talks in the UK last week, it has been some time since I updated the blog. Events have unfolded so quickly that it seems like an eternity. So let me play the lightning round to catch up.

Taxing Appointments

I have to say I’m fairly shocked at how quickly the promised smooth transition unraveled over tax and ethics problems. Stuff happens so Richardson’s withdrawal didn’t seem like a big deal in the big picture. But Obama’s vaunted vetting process was supposed to weed out annoying distractions like tax evasion. Is evasion too strong a word? For Geitner, no. He failed to give the U.S. government money that the IMF explicitly gave him to pay U.S. taxes. What did he think the extra money was for? Daschle’s case is more complicated, but only slightly. Unlike Geitner, it may be that no one ever explicitly told him he had top pay money on his perks. But a senator who wrote tax law ought to have known better. Assuming that Killefer’s only indiscretion was $900 in D.C. unemployment tax, I have much more sympathy for her. D.C., like many states, treat families with nannies as a small business and require not just social security taxes but payments into disability and unemployment funds. From experience, I know it is almost impossible to comply without a professional accountant. But Obama couldn’t push all three nominees and hers was the least important (I’m really not sure what a Chief Compliance Officer is supposed to do.)

Hitting the Ground Running

Several years ago Rose Razaghian and I published a chapter in an edited volume analyzing how quickly presidents make their first appointments to high executive office positions and how quickly the Senate confirmed them. Our argument was that increasing partisan polarization had slowed both processes. Early on I thought the Team Obama was going to reverse the tide and move more quickly than recent presidents. Just eyeballing things, I’m pretty sure that I was wrong. In a week or so, I hope to produce a report card detailing exactly how Obama is doing.

The Stimulus Package

I have very mixed feelings about the stimulus package. I’m generally sympathetic to the idea that now is the ideal time for the U.S. to make very significant investments in infrastructure, education, and energy conservation. But that is not what this package looks like. First, it has two many small tax cuts that seem likely to be saved rather than spent by consumers. Some tax cuts are very desirable, however. I would especially like to see a cut in payroll taxes. Those taxes are very regressive so lowering them would quickly get money in the hands of people most ready to spend it. It also makes sense on tax equity grounds. But a hodge-podge of new credits and deductions just lowers revenues and make the tax system more complicated. Nobody will be able to spend in anticipation of a tax cut that they can’t anticipate. The projects that the bill includes also don’t seem to be the sort that I want to put on my son and daughter’s credit card. I’d be happy to tell them that they will have to pay up big for a bunch of stuff that is going to make their lives better. But I don’t see a lot of those things in the package.

Post-Partisanship

President Obama is taking heat in some quarters for reaching out to Republicans and getting so few votes to show for it. Nevertheless, I still think it was the right thing to do. First, he obviously has to get some votes in the Senate. Second, I think there may still be political rewards for having offered the hand and putting the Republicans in the position to spurn it. After all, the ultimate goal of “post-partisanship” is not to make nice, but to reclaim the center and build a permanent majority. In fact, I think he might have done more to give at least a few Republicans a stake in the House version of the bill. By securing only that the two most non-germane programs (family planning and sodding the Mall) were dropped, he gave Republicans the opportunity to continue to say they were ignored.

Protectionism

I’m certainly not alone in thinking that one of the biggest long term fears is that the financial crisis will rekindle economic nationalism and protectionism. Certainly those pressures were evident when the House version of the stimulus bill included a “Buy American” provision. If we go down that path, other countries are sure to follow. Protectionist sentiment has also flared up significantly in the UK. There have been several unauthorized “wildcat” strikes protesting that subcontractors at a UK power plant plan to use foreign workers (in this case Spanish). The union claims that the foreign workers are intended to undercut wages. The foreign companies have intimated that there are concerns about the productivity of British workers (not the least of which is their penchant for illegal strikes). In response, there have been rolling sympathy strikes leading to labor unrest similar to that 1970s. So Gordon Brown’s government has not given into striker demands, but protectionist sentiment seems certain to grow there, here, and everywhere else.

Amending the Constitution

Given my ranting about gubernatorial appointments to fill Senate vacancies, I have to profess support for Russell Feingold’s proposed amendment to require special elections. My only concern is that amending the Constitution is (rightly) hard and would take several years even if successful. The way I see it, its in the interests of the voters of each state individually to make this change. So states should just do it themselves and not wait for the amendment. (P.S. The negotiations over Judd Gregg’s replacement were just as objectionable as what went on elsewhere.)

On Repealing the Law of Gravity

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This analysis by the Associated Press points out the difficulties associated with living up to President Obama’s pledge that the stimulus bill will be earmark free. The lede:

President Barack Obama’s ban on earmarks in the $825 billion economic stimulus bill doesn’t mean interest groups, lobbyists and lawmakers won’t be able to funnel money to pet projects.

They’re just working around it — and perhaps inadvertently making the process more secretive.

This should come as a surprise to few political scientists. The idea that legislators or presidents could completely eschew political criteria in making spending choices is almost as plausible as the thought that Congress could pass a law directing a river to flow uphill.

Although earmarking, the practice of placing explicit spending instructions in bills (often without much notice or debate), has received enormous attention, political scientists have long understood that such provisions represent but a minor part of congressional influence over spending decisions. As Doug Arnold demonstrated in Congress and Bureaucracy, congressional influence is just as likely to come from two different sources. The first is the spending formulas that are written into legislation. While such formulas may appear neutral on their face, they are carefully crafted to direct spending in ways to maximize political benefits. The second is the inherent desire of bureaucrats to please those legislators who control the purse strings. Therefore, even if spending decisions are formally delegated to agencies, political considerations may still be very important in how the money is spent.

So banning or limiting earmarks can only result in a minor redirection in the river’s course. It cannot stop the water. Moreover as the AP piece points out, shifting spending decisions from earmarks to formulas or bureaucrats (or mayors or governors) may lessen transparency and accountability.

I have little doubt that earmarking has led both to corruption and the undue influence of some groups. But it has struck me that banning the practice is a cure worse than the disease.

I Heart NY Politics

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I thought that the l’affaire Blagojevich was the best argument for my belief that Senate vacancies should be filled only by special election. But witnessing what has transpired with Hillary Clinton’s Senate seat, I have changed my mind — New York, not Illinois, should be Exhibit A.

As illustrated by Governor Rod, any institution designed by humans can be corrupted by corrupt individuals. But the process that let to Kirsten Gillibrand’s appointment shows that gubernatorial Senate appointments are a bad idea even when otherwise decent and well-meaning people are involved.

I have no particular beef with Senator-appoint Gillibrand. By all accounts, she is a talented up-and-comer. Her centrism will probably be a boost both to New York and to the Democratic ticket in 2010. But the average New Yorker certainly knows far less about her than they do about Caroline Kennedy, Carolyn Maloney, Andrew Cuomo, or any of the other leading contenders.

Although I never thought it was a good idea to appoint Kennedy to the seat, there is something terribly unseemly about the insinuations and innuendo that are now flying back and forth between her people and Patterson’s people. Whether she had a nanny or tax problem, wouldn’t it have been better to have it in the open before a voting public rather than have David Patterson be the judge and jury about whether it disqualified her from office?

It will be interesting to see whether Carolyn McCarthy carries through with her threat to challenge Gillibrand in the Democratic primary over her support for gun rights. Based on DW-NOMINATE scores, Gillibrand is the most conservative Democrat in the NY delgation while McCarthy is 4th most (of 23). So I suspect guns is one of only a handful of issues that divide them. It is not in the Democratic Party’s best interest to have a contested primary focused exclusively on gun control.