It turns out that layoffs of government workers caused by federal, state and local government belt tightening is a major factor in disappointing employment growth. The private sector is creating new jobs, but government cutbacks are taking away a meaningful share of newly created jobs.
READ MORE - Austerity Plans Hurting Job Growth
Tampilkan postingan dengan label public finance. Tampilkan semua postingan
Tampilkan postingan dengan label public finance. Tampilkan semua postingan
Selasa, 09 Agustus 2011
Senin, 25 Juli 2011
End The Debt Ceiling
The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized.... For the U.S. to default now, when investors are happily lending it money at exceedingly reasonable rates, would be akin to shooting yourself in the head for failing to follow your diet.
From James Surowiecki at the New Yorker via Calculated Risk.
I totally agree with Surowiecki's analysis. Alas, Tea Party Republicans, rather than grown ups, are in charge in the House of Representatives and they could care less about responsible government, the nation's credit rating, or the well being of our country, and are blinded by a less taxes, less spending agenda, reality and reason be damned.
Rabu, 20 Juli 2011
Fiscal Choices of Evils
Dorf echoes my previous post on the subject, and that of other legal pundits, in analyzing a failure to increase the debt limit as a choice of evils for the President and then observing that while every option is unconstitutional that some options (like imposing taxes unilaterally) may be more unconstitutional than others (like ignoring the debt ceiling).
In my view, the question comes down to whether appropriations bills are mandatory or merely grant permission to spend, which may vary from bill to bill, and the time order in which the debt ceiling and appropriations bills were passed. The concern about raising taxes relative to the other options has something to do with the notion that this involves a less bounded form of discretion than the other options.
READ MORE - Fiscal Choices of Evils
the President's menu of options looks very interesting. There's no way he can comply with all three laws: 1) Taxing to raise revenue X; 2) Borrowing to raise Y; 3) Spending in the amount of Z > X+Y. (I'm assuming that other means of raising revenue, such as selling Alaska back to Russia, or invading Saudi Arabia and selling its oil to China, have been rejected as preposterous.) So:
1) Taxing beyond X would amount to an unconstitutional assumption of the power of Congress to tax;
2) Borrowing in excess of Y would amount to an unconstitutional assumption of the power of Congress to borrow;
and
3) Spending substantially less than Z would violate Section 4 of the Fourteenth Amendment.
Under these circumstances, I read both Professors Tribe and Buchanan to be saying that number 1) is somehow worse than 2) or 3), while I read Professor Tribe to also be saying that number 2) would be worse than number 3), while Professor Buchanan is saying that number 3) is worse than number 2). I'm less interested in the specifics of their agreement and disagreement than in the shared assumption that runs through all of this--namely, that where a President's only choices are all unconstitutional, some of these choices are more unconstitutional than others.
That strikes me as probably right, but it's worth noting that there's nothing in the text of the Constitution itself that states this principle. Moreover, I am not aware of any well-developed case law, historical practice, or scholarly literature addressing the question of which constitutional violations are worse than others. Maybe the generation of careful thinking about this question will be a beneficial side-effect of our government driving the economy over the cliff.
In my view, the question comes down to whether appropriations bills are mandatory or merely grant permission to spend, which may vary from bill to bill, and the time order in which the debt ceiling and appropriations bills were passed. The concern about raising taxes relative to the other options has something to do with the notion that this involves a less bounded form of discretion than the other options.
Kamis, 14 Juli 2011
Minnesota Running Out Of Liquor And Tobacco
The government shutdown in Minnesota means not just that state parks are closed, but also that licenses to purchase wholesale liquor and tobacco are expiring and impossible to renew. The result is that stores across the state are rapidly exhausting their inventories of booze and cigarettes. Licenses for hundreds of establishments have expired.
READ MORE - Minnesota Running Out Of Liquor And Tobacco
Senin, 11 Juli 2011
Government Spending Stimulates The Economy
Econometric analysis over a wide range of circumstances shows that government spending and investment generally produce somewhat more economic benefits to the economy than the amount of the spending itself (which is called a "multiplier effect"), although the benefits are fairly modest and rarely as much of a full dollar of economic gain in addition to the government spent dollar.
Critics of government spending restraint during bad economic times, of the kind prevailing at the moment, compare this policy to the policies of Herbert Hoover, whose lack of leadership contributed to the Great Depression and compare this approach unfavorably to the Keynesian economic policies of FDR. They note, for example, that weak job growth at the moment is substantially due to government layoffs.
READ MORE - Government Spending Stimulates The Economy
Critics of government spending restraint during bad economic times, of the kind prevailing at the moment, compare this policy to the policies of Herbert Hoover, whose lack of leadership contributed to the Great Depression and compare this approach unfavorably to the Keynesian economic policies of FDR. They note, for example, that weak job growth at the moment is substantially due to government layoffs.
Kamis, 07 Juli 2011
Congressional Partisanship At Record High
The partisan divide between the Democrats and Republicans in the United States Congress is currently at an all time high. Partisan divides were lowest in the mid-20th century, but are higher now than they were in the late 19th century and early 20th century.
Posed less negatively, the Democratic and Republican party are more distinct than every before rather than being blurred by politicians who don't fit either party's mold, in part, due to "realignment" with one time Northeastern moderate Republicans now identifying as Democrats, and one time conservative Southern Democrats now identifying as Republicans in federal elections.
Deadlock isn't always a bad thing when the country is divided. A deadlocked nation may be one that shouldn't be making major changes from the status quo in the law. But, deep partisan divisions and divided government may make action entirely unachievable even on issues that necessarily call for some action to keep the institution of the federal government functioning, like the debt ceiling, appointments to bureaucratic posts, or approval of a federal budget.
READ MORE - Congressional Partisanship At Record High
Posed less negatively, the Democratic and Republican party are more distinct than every before rather than being blurred by politicians who don't fit either party's mold, in part, due to "realignment" with one time Northeastern moderate Republicans now identifying as Democrats, and one time conservative Southern Democrats now identifying as Republicans in federal elections.
Deadlock isn't always a bad thing when the country is divided. A deadlocked nation may be one that shouldn't be making major changes from the status quo in the law. But, deep partisan divisions and divided government may make action entirely unachievable even on issues that necessarily call for some action to keep the institution of the federal government functioning, like the debt ceiling, appointments to bureaucratic posts, or approval of a federal budget.
Rabu, 22 Juni 2011
Middle Class Income Tax Rates At Roughly 40 Year Lows
Average and marginal income taxes for those making the median income and twice the median income are mostly at forty year lows. Taxpayers making half the median income have never paid less in income taxes (the average income tax rate is a negative percentage of income), but have the highest marginal income tax rates of all taxpayers, due to the effects of various refundable tax credits, the standard deduction and personal exemptions.
The bottom line, here, and across the board in the area of federal taxation, is that in a time period where we have federal budget deficits, it has never made less sense to close those deficits entirely or mostly through spending cuts. We have large budget deficits, at the federal level, and have almost overconstrained state budgets in Colorado that have forced painful cuts, mostly because we made deep tax cuts during an economic boom while fighting two regional wars, without paying for them.
From the perspective of overall economic growth and the employment situation, we should be spending more in the public sector, at a time when private sector demand is anemic and investment activity is tepid. Instead, we are cutting back on public services at a time when our economy has massive amounts of slack resources and above average demand for public services.
Also, our current extremely generous tax code is full of special interest tax breaks that constitutes autopilot meddling with private economic decisions that picks winners and losers in the business world, rather than letting the marketplace carry out that function, continues to be a force driving increasing systemic risk in our economy, and dramatically increases the dead weight transaction costs associated with tax code compliance and tax planning that its one of the regulatory costs of government that truly does hit small businesses the hardest.
Accumulated tax code crud is inevitable. A tax code will never be ideal once and for all. Revenue needs change, new kinds of transactions are invented, politicians are compelled to respond to urgent cries from the public for tax tweaks great and small to be responsive. But, like a garden, the tax code requires continuous weeding of provisions that damage the whole and planting of improved provisions if it is to satisfy the public need for revenue in a way that doesn't do unnecessary harm to the economy. Congress has put off that unpleasant task for too long, and the result has been ugly.
But, the solution is not to shut down the IRS, to hire private collectors, to pass further special interest tax break, to pass a consumption tax, or to mimic sometimes lower foreign corporate tax rates without expanding the tax base as countries with lower corporate tax rate do. Instead, it is to take on the unpleasant business of repealing a great many tax breaks, in a way that increases the amount of revenue produced by the income tax, makes the tax code more economically neutral, and reduces the complexity and tax planning opportunities that great dead weight drags on the economy.
READ MORE - Middle Class Income Tax Rates At Roughly 40 Year Lows
The bottom line, here, and across the board in the area of federal taxation, is that in a time period where we have federal budget deficits, it has never made less sense to close those deficits entirely or mostly through spending cuts. We have large budget deficits, at the federal level, and have almost overconstrained state budgets in Colorado that have forced painful cuts, mostly because we made deep tax cuts during an economic boom while fighting two regional wars, without paying for them.
From the perspective of overall economic growth and the employment situation, we should be spending more in the public sector, at a time when private sector demand is anemic and investment activity is tepid. Instead, we are cutting back on public services at a time when our economy has massive amounts of slack resources and above average demand for public services.
Also, our current extremely generous tax code is full of special interest tax breaks that constitutes autopilot meddling with private economic decisions that picks winners and losers in the business world, rather than letting the marketplace carry out that function, continues to be a force driving increasing systemic risk in our economy, and dramatically increases the dead weight transaction costs associated with tax code compliance and tax planning that its one of the regulatory costs of government that truly does hit small businesses the hardest.
Accumulated tax code crud is inevitable. A tax code will never be ideal once and for all. Revenue needs change, new kinds of transactions are invented, politicians are compelled to respond to urgent cries from the public for tax tweaks great and small to be responsive. But, like a garden, the tax code requires continuous weeding of provisions that damage the whole and planting of improved provisions if it is to satisfy the public need for revenue in a way that doesn't do unnecessary harm to the economy. Congress has put off that unpleasant task for too long, and the result has been ugly.
But, the solution is not to shut down the IRS, to hire private collectors, to pass further special interest tax break, to pass a consumption tax, or to mimic sometimes lower foreign corporate tax rates without expanding the tax base as countries with lower corporate tax rate do. Instead, it is to take on the unpleasant business of repealing a great many tax breaks, in a way that increases the amount of revenue produced by the income tax, makes the tax code more economically neutral, and reduces the complexity and tax planning opportunities that great dead weight drags on the economy.
Jumat, 03 Juni 2011
Is The Debt Ceiling Constitutional?
Congress enacts our tax laws. Congress appropriates funds by law. Congress passes a statute called the debt ceiling. The U.S. Constitution gives Congress the enumerated power to tax, to spend, and to incur debt. The U.S. Constitution also forbids Congress from passing laws that impair rights under government contracts. The Constitution calls upon the President to faithfully execute the laws and constitution of the United States and the President has long been understood to have the authority to resolve based upon legal advice from the executive branch situations in which one law seems to be contradicted by another law or the United States Constitution. The judicial branch is also understood to have that authority.
When the United States government bumps up against a debt ceiling passed by Congress, we are overconstrained and the way to faithfully executed the law and the United States Constitution becomes non-obvious. No one suggests that the President or the Courts may increase revenues by imposing new taxes without Congressional approval. But, faced with laws enacted by Congress appropriating discretionary funds, earlier passed legislation by Congress establishing a debt ceiling, legislation passed before the debt ceiling was enacted providing for non-discretionary spending, and the constitutional obligation of the United States government not to default on its contracts, either by failing to pay its national debt obligations or failing to honor contracts it has entered into with its employees and government contractors, what is a President who has a Congressional mandate to spend funds and a Congressional mandate not to borrow enough money to spend the funds appropriated to do?
According to current predictions from the United States Treasury Secretary, if legislative gridlock persists, we will have a constitutional crisis that will force the President to resolve this issue some time around August 2 of this year.
At least since President Nixon, there have been some who have argued that the mere fact that Congress has authorized the President to spend money in an appropriation doesn't mean that the President doesn't have to spend those funds, in a sort of back door line item veto that is not subject to legislative review (despite clear U.S. Supreme Court authority that Congress cannot create a line item veto by statute). But, the President's freedom of action is less obvious once government contracts (particularly multi-year appropriations for navy purchases expressly authorized by the constitution) have been inked, in cases of non-discretionary spending, and in cases where the language of a specific appropriate classified as "discretionary spending" does not on its face have language that is susceptible to being read as giving the President the option not to spend it.
Looking at the issue politically, it also isn't obvious why the constitution, which is at its heart a political document, should be interpreted in a way that allows Congress to demand the impossible in an overconstrained budget by forcing the President to make politically painful choices on what to cut from Congressionally authorized appropriations by providing the President with neither the tax revenues nor the borrowing power to spend the funds appropriated.
In the absence of a debt ceiling statute, the President would almost surely have the inherent authority, implied from the appropriations and the lack of tax revenues sufficient to fund all of the appropriations made by Congress to borrow money on the full faith and credit of the United States in order to carry out the appropriations authorized by Congress. So, one of the easier options for a court faced with resolving a situation in which the President is presented with a choice of evils that leaves it mathematically impossible for him to faithfully execute all of the laws that Congress has deemed fit to adopt would be to declare that the debt ceiling is unconstitutional, or at least, that the President may lawfully resolve the overconstrained situation by ignoring it until the nation's budget ceases to be overconstrained. This has the virtue of keeping the courts out of the policy laden minefield of figuring out which spending programs should be cut and which should not be cut and how much each program should be cut.
The alternative would be for a court to determine that the President has the power to resolve the situation by not spending appropriated funds, or indeed, a court could even hold the that President is not allowed to spend even appropriated funds if tax revenues and the amount of spending available to the President as a result of the debt ceiling are insufficient to pay for the appropriated spending.
But, here, the devils are in the details. Since spending is authorized by myriad different pieces of legislation and government revenue is organized into many dedicated funds from which spending for particular programs flows, the analysis for each little bit of appropriated spending is not so simple. In each case it is necessary to determine what legislation authorizes the spending, whether the spending comes from the general fund or from a trust fund that is still solvent, whether the spending is discretionary given the language of the appropriation, and how the general law of resolving conflicts between statutes such as interpretive provisions based upon specificity, connection to larger statutory schemes and the preference to be given to the later enacted statute (a rule that leaves unclear what weight to be given to the non-binding budget passed by Congress in advance of binding appropriation and tax bills should be given in terms of prioritizing statutes that conflict with each other) should be given. The constitution is not a suicide pact, and the President cannot ignore in an overconstrained budget situation the fact that some appropriations are for essential government operations that have irrevocable life and death consequences if suspended even briefly while the President and Congress work out deals on spending cuts and the debt ceiling.
Congressionally appropriated funds as he deems fit, and does not have any constitutional obligation to make the cuts from appropriations that are determined to yield in a conflict of statutes to the debt ceiling equally across the board or according to any other predetermined formula.
Similarly, even if it is determined that there are some appropriations that can be cut by the President that yield in a conflict of statutes to the debt ceiling, if all of these potential cuts in appropriations combined still make it necessary to exceed the debt ceiling in the budget year, it isn't legally obvious whether those cuts must all be made, extending the collision with the debt ceiling until the latest possible date before which Congress might act to increase the debt ceiling legislatively, or if the President may take note of the inevitable and abrogate the debt ceiling immediately upon determining factually that the debt ceiling can't be reconciled with the funding that has been appropriated by Congress and prevails in a conflicts of statutes with the debt ceiling.
But, if the President does not exercise his discretion to refrain from spending appropriated funds in an amount sufficient to avoid exceeding the debt ceiling, and if a court has the authority to look at spending statutes on a case by case basis to determine which may and which may not yield to a debt ceiling law when the aggregate amount of spending appropriated by Congress conflicts with the debt ceiling that it has enacted (something that is arguable a non-justiciable political question), these matters generally come to the courts when the clock is ticking and complying with all of the budget related laws enacted by Congress has already become impossible or will become impossible imminently. So, a court may lack the time to conduct the analysis necessary to come to a legally principled resolution of the question of when appropriated spending is not required by law before an immediate resolution of the conflict is required. Faces with a choice of evils, a determination that the debt ceiling is unconstitutional may be the only practicable resolution available to a court if it is called upon the resolve the crisis as a matter of law, because elected officials have failed to do so.
After all, a court determination that the United States government has a legal obligation to pay for appropriated spending, even if that means that the United States government has to incur a debt liability as a result, isn't really all that different from the routine practice of courts that under judgments against the United States government in a legal case that are by their very nature debts of the United States government that are not authorized by Congress in advance.
UPDATE: Some have argued that the "no debt shall be questioned" language of the 14th Amendment makes the debt ceiling unconstitutional. I'd argue the opposite. The duty to pay the government's obligations comes from the contracts clause of the original constitution. It applies to everything from contracts to build roads to Treasury bonds. The 14th Amendment, by limiting its validation of the national debt (and with a current focus on the Civil War debt obligation of the Union which was validated in contrast to that of the Confederacy which was not) limits that validation to debts authorized by law. But, the debt ceiling arguably makes the point that debts in excess of that amount are not authorized by law, buttressing the argument that Congress, in general, is the branch that authorizes debt to be incurred under Article II, Section 8. Debts in excess of the ceiling, which are not authorized by law, are arguably subject to question under the 14th Amendment in a way that debts under the ceiling are not.
But, the 14th Amendment language still doesn't elucidate one way or the other the way we must proceed when we have multiple laws, one group authorizing spending, another authorizing the collection of federal reveneus from sources other than debt, and a third limiting the amount of the debt that may be incurred. When they can't be reconciled, something has to give. If it is not an imposition of executive order imposed taxes, it must be legislatively authorized spending or the legislatively imposed debt ceiling.
In practice, so much of the spending, like Social Security, Medicare, unemployment benefits, etc. is non-discretionary, and tax revenues are so low, that once the debt-ceiling is reached, truly draconian cuts on that portion of discretionary spending that the government is not already obligated to pay as a result of government contracts with private parties may be impossible, at least as a practical matter. For example, we can't simply put the entire U.S. military on furlough, and the Department of Defense is the singled largest discretionary spending line item.
So, faced with a choice of evils, it may simply be impossible to do anything but to ignore the debt ceiling, which in one piece of legislation, in favor of the appropriations legislation for the nation's spending, which is another piece of legislation.
READ MORE - Is The Debt Ceiling Constitutional?
When the United States government bumps up against a debt ceiling passed by Congress, we are overconstrained and the way to faithfully executed the law and the United States Constitution becomes non-obvious. No one suggests that the President or the Courts may increase revenues by imposing new taxes without Congressional approval. But, faced with laws enacted by Congress appropriating discretionary funds, earlier passed legislation by Congress establishing a debt ceiling, legislation passed before the debt ceiling was enacted providing for non-discretionary spending, and the constitutional obligation of the United States government not to default on its contracts, either by failing to pay its national debt obligations or failing to honor contracts it has entered into with its employees and government contractors, what is a President who has a Congressional mandate to spend funds and a Congressional mandate not to borrow enough money to spend the funds appropriated to do?
According to current predictions from the United States Treasury Secretary, if legislative gridlock persists, we will have a constitutional crisis that will force the President to resolve this issue some time around August 2 of this year.
At least since President Nixon, there have been some who have argued that the mere fact that Congress has authorized the President to spend money in an appropriation doesn't mean that the President doesn't have to spend those funds, in a sort of back door line item veto that is not subject to legislative review (despite clear U.S. Supreme Court authority that Congress cannot create a line item veto by statute). But, the President's freedom of action is less obvious once government contracts (particularly multi-year appropriations for navy purchases expressly authorized by the constitution) have been inked, in cases of non-discretionary spending, and in cases where the language of a specific appropriate classified as "discretionary spending" does not on its face have language that is susceptible to being read as giving the President the option not to spend it.
Looking at the issue politically, it also isn't obvious why the constitution, which is at its heart a political document, should be interpreted in a way that allows Congress to demand the impossible in an overconstrained budget by forcing the President to make politically painful choices on what to cut from Congressionally authorized appropriations by providing the President with neither the tax revenues nor the borrowing power to spend the funds appropriated.
In the absence of a debt ceiling statute, the President would almost surely have the inherent authority, implied from the appropriations and the lack of tax revenues sufficient to fund all of the appropriations made by Congress to borrow money on the full faith and credit of the United States in order to carry out the appropriations authorized by Congress. So, one of the easier options for a court faced with resolving a situation in which the President is presented with a choice of evils that leaves it mathematically impossible for him to faithfully execute all of the laws that Congress has deemed fit to adopt would be to declare that the debt ceiling is unconstitutional, or at least, that the President may lawfully resolve the overconstrained situation by ignoring it until the nation's budget ceases to be overconstrained. This has the virtue of keeping the courts out of the policy laden minefield of figuring out which spending programs should be cut and which should not be cut and how much each program should be cut.
The alternative would be for a court to determine that the President has the power to resolve the situation by not spending appropriated funds, or indeed, a court could even hold the that President is not allowed to spend even appropriated funds if tax revenues and the amount of spending available to the President as a result of the debt ceiling are insufficient to pay for the appropriated spending.
But, here, the devils are in the details. Since spending is authorized by myriad different pieces of legislation and government revenue is organized into many dedicated funds from which spending for particular programs flows, the analysis for each little bit of appropriated spending is not so simple. In each case it is necessary to determine what legislation authorizes the spending, whether the spending comes from the general fund or from a trust fund that is still solvent, whether the spending is discretionary given the language of the appropriation, and how the general law of resolving conflicts between statutes such as interpretive provisions based upon specificity, connection to larger statutory schemes and the preference to be given to the later enacted statute (a rule that leaves unclear what weight to be given to the non-binding budget passed by Congress in advance of binding appropriation and tax bills should be given in terms of prioritizing statutes that conflict with each other) should be given. The constitution is not a suicide pact, and the President cannot ignore in an overconstrained budget situation the fact that some appropriations are for essential government operations that have irrevocable life and death consequences if suspended even briefly while the President and Congress work out deals on spending cuts and the debt ceiling.
Congressionally appropriated funds as he deems fit, and does not have any constitutional obligation to make the cuts from appropriations that are determined to yield in a conflict of statutes to the debt ceiling equally across the board or according to any other predetermined formula.
Similarly, even if it is determined that there are some appropriations that can be cut by the President that yield in a conflict of statutes to the debt ceiling, if all of these potential cuts in appropriations combined still make it necessary to exceed the debt ceiling in the budget year, it isn't legally obvious whether those cuts must all be made, extending the collision with the debt ceiling until the latest possible date before which Congress might act to increase the debt ceiling legislatively, or if the President may take note of the inevitable and abrogate the debt ceiling immediately upon determining factually that the debt ceiling can't be reconciled with the funding that has been appropriated by Congress and prevails in a conflicts of statutes with the debt ceiling.
But, if the President does not exercise his discretion to refrain from spending appropriated funds in an amount sufficient to avoid exceeding the debt ceiling, and if a court has the authority to look at spending statutes on a case by case basis to determine which may and which may not yield to a debt ceiling law when the aggregate amount of spending appropriated by Congress conflicts with the debt ceiling that it has enacted (something that is arguable a non-justiciable political question), these matters generally come to the courts when the clock is ticking and complying with all of the budget related laws enacted by Congress has already become impossible or will become impossible imminently. So, a court may lack the time to conduct the analysis necessary to come to a legally principled resolution of the question of when appropriated spending is not required by law before an immediate resolution of the conflict is required. Faces with a choice of evils, a determination that the debt ceiling is unconstitutional may be the only practicable resolution available to a court if it is called upon the resolve the crisis as a matter of law, because elected officials have failed to do so.
After all, a court determination that the United States government has a legal obligation to pay for appropriated spending, even if that means that the United States government has to incur a debt liability as a result, isn't really all that different from the routine practice of courts that under judgments against the United States government in a legal case that are by their very nature debts of the United States government that are not authorized by Congress in advance.
UPDATE: Some have argued that the "no debt shall be questioned" language of the 14th Amendment makes the debt ceiling unconstitutional. I'd argue the opposite. The duty to pay the government's obligations comes from the contracts clause of the original constitution. It applies to everything from contracts to build roads to Treasury bonds. The 14th Amendment, by limiting its validation of the national debt (and with a current focus on the Civil War debt obligation of the Union which was validated in contrast to that of the Confederacy which was not) limits that validation to debts authorized by law. But, the debt ceiling arguably makes the point that debts in excess of that amount are not authorized by law, buttressing the argument that Congress, in general, is the branch that authorizes debt to be incurred under Article II, Section 8. Debts in excess of the ceiling, which are not authorized by law, are arguably subject to question under the 14th Amendment in a way that debts under the ceiling are not.
But, the 14th Amendment language still doesn't elucidate one way or the other the way we must proceed when we have multiple laws, one group authorizing spending, another authorizing the collection of federal reveneus from sources other than debt, and a third limiting the amount of the debt that may be incurred. When they can't be reconciled, something has to give. If it is not an imposition of executive order imposed taxes, it must be legislatively authorized spending or the legislatively imposed debt ceiling.
In practice, so much of the spending, like Social Security, Medicare, unemployment benefits, etc. is non-discretionary, and tax revenues are so low, that once the debt-ceiling is reached, truly draconian cuts on that portion of discretionary spending that the government is not already obligated to pay as a result of government contracts with private parties may be impossible, at least as a practical matter. For example, we can't simply put the entire U.S. military on furlough, and the Department of Defense is the singled largest discretionary spending line item.
So, faced with a choice of evils, it may simply be impossible to do anything but to ignore the debt ceiling, which in one piece of legislation, in favor of the appropriations legislation for the nation's spending, which is another piece of legislation.
Senin, 09 Mei 2011
Combined U.S. Tax Burden Lowest Since 1958
Americans are paying the smallest share of their income for taxes since 1958, a reflection of tax cuts and a weak economy. . . . The total tax burden — for all federal, state and local taxes — dropped to 23.6% of income in the first quarter, according to Bureau of Economic Analysis data. By contrast, individuals spent roughly 27% of income on taxes in the 1970s, 1980s and the 1990s — a rate that would mean $500 billion of extra taxes annually today, one-third of the estimated $1.5 trillion federal deficit this year. . . . Individuals paid taxes at an annual rate of $10,549 per person in the first quarter — about the same as individuals have paid since 1990 when adjusted for inflation. Incomes have grown; tax payments haven't.
From USA Today via the Tax Profs Blog.
The top income tax rate in 1958 was 91% (where it remained from shortly after World War II until 1964). At the time, the nation was running under the recently overhauled Internal Revenue Code of 1954, which was revised, in part, because of budget surpluses run by the federal government in 1948, 1949 and 1950 (the Korean War soaked up surpluses in the following years). There was also a gift and estate tax regime in place in 1958 which was less generous (and more complicated) than the one in place as of 2011.
In contrast, the top federal income tax rate in 2011 is 35%, and for most long term capital gains and qualified dividends the top federal income tax rate is 15%. Thus, in addition to a low aggregate tax burden by historical standards, top marginal tax rates are also low by historical standards. It is also easier given the state of transportation and telecommunications technologies to relocate to a low tax state now to minimize state and local tax burdens than it was to do so in 1958.
Jumat, 06 Mei 2011
Feynman On Big Numbers
There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.
- Richard Feynman (from here).
Senin, 25 April 2011
Undocumented Workers Still Not A Public Finance Burden
The latest reports the Colorado Law and Policy Foundation and the Bell Foundation confirms that in Colorado undocumented immigrants still pay more in taxes than they use in public services. If there is an argument against immigration, it is not an empirically valid public finance argument.
READ MORE - Undocumented Workers Still Not A Public Finance Burden
Denver Businesses and Real Estate Holes Come Back To Life
For any urban area, real estate development and utilization is central to a community's health. Denver's metropolitan area, which took a relatively light blow during the financial crisis and housing bubble collapse, seems to be bouncing back with new businesses and developments filling gaps left by businesses that the downtown purged.
* A major infill development from Alameda to the I-25 and Broadway light rail station which would include 3,000 new homes, a new school, and new office space is in the advanced planning stage. Currently it includes the Denver Design Center which is a suite of interior design oriented retail spaces, a Sam's Club, an Albertsons, two light rail station, a K-Mart, and some strip mall development.
* The Gates Rubber Plant to the south of the planned new development has been the major projects focus for the area at the fringe of Denver's West Washington Park neighborhood, some office space was restored on the east side of Broadway, and a new apartment complex went in at the southern tip of the project, but environmental concerns and a financial crisis spawned collapse of investment in major new real estate projects has put it on hold. But, if both the Gates Rubber Plant and the new transit oriented development planned between it and the Baker Neighborhood eventually take off, it will be a major transit oriented population expansion in Central Denver.
* Another small transit oriented development, with senior housing and retail is going in at the I-25 and Yale light rail stop.
* National Jewish Hospital has finally decided to buy the long vacant Gove Middle School at Colorado Boulevard and 14th Street, that is adjacent to its campus, allowing it to consolidate its expanding operations, and providing capital projects cash for a cash strapped Denver Public Schools.
* The former University Hospital on University Boulevard was to have been redeveloped by a developer who managed to rezone the property but gave up on the project. The new infill developer on the project has more modest ambitions, but looks likely to be able to put this major hole in the neighborhood back into productive use. A new apartment complex and new restaurants have kept that neighborhood surprisingly healthy considering the massive loss of employment that it has experienced.
* A shakeup is looming in the area of Saint Joseph's and Presbyterian/Saint Luke's Hospital in North Denver. P/SL has recently upgraded its ER and added a children's focused facility to fill the gap created by the departure of Children's Hospital to Fitzsimmons. Saint Joseph's signature tower has serious building code issues, so a somewhat complicated plan involving major new construction is underway to deal with it.
* A string of vacant store fronts along Alameda Avenue in West Washington Park created by the pull out of Twist and Shout Records, a closing Blockbuster store, a failed used book store, a closed laundromat, a long dead gas station, a floundering dinner assembly business, and several other faltering small businesses is almost entirely back to life. Two bars at Alameda and Downing have come under new management replacing the old ones. A hair salon has expanded to fill the space left vacant by the loss of a small neighborhood gym. A tailor and a new dry cleaner moved in, while a space once held by a travel agent struggling with declining commissions has been filled by a home nursing service. Pho Pasta took over the used book store space, Bittersweet have turned the old gas station into a beautiful new fine restaurant, Italian restaurant La Scalia filled the space previously occupied by a Dinner assembly business and the adjacent Chinese restaurant has taken the opportunity to give itself an upscale face life. A high end appliance store filled one gap. A Jimmy Johns, a hair salon, a new small gym, and a Larkburger have filled the gap created by the move of Twist and Shout records to Colfax near East High School. A new bar will fill the gap created by a closing Blockbuster. Further down the road, medical marijuana dispensaries have filled several street front locations zoned for retail.
* Also nearby the Wask Perk coffee shop at Emerson and Ohio in West Washington Park has expanded, both taking over the space of its retail neighbor which was most recent a struggling gift shop and starting to offer a mobile bicycle like station in Washington Park itself. The establishment seems to be thriving, after struggling through at least three successive rounds of owners, clashing with the local neighborhood association, and facing traffic declines due to road work. Nearby a new bare bones retro style barber shop has moved in, next to a pet grooming business.
* The new Central Denver Recreation Center that had been planned for a parcel near East High School that had once been a grocery store and then was a church, on land purchased for a pretty penny (arguably suspiciously high), has been put on hold in favor of what I call the million dollar dog park. The dog park meets the urban planning goal of turning what had once been a popular gathering place for vagrants and youths with nothing to do into a space securely held by middle class dog owners, but has not filled the hole in community services that exists in the neighborhood.
* One major question mark that may be resolved in the next few days or weeks is the fate of the old Byers School. It was the home of the Denver School of the Arts until that relocated to the former DU Music School near Stapleton, and has sat vacant since then. Its school yard was redeveloped into a complex of what I call cereal box houses. They are small, narrow houses that look like half duplexes but have space between them because the neighborhood association (WWPNA) insisted that they be single family dwellings rather than town houses or duplexes (a preference that still baffles me). Neighbors, myself included, are pushing to have the location serve as the home for a new campus of the Denver School of Science and Technology, the most successful of Denver's charter schools. Success would mean another major hole in the neighborhood filled, an attractive new educational option nearby, and relief for the Denver Public Schools from the fiscal strain of carrying valuable empty real estate without getting any benefit from it. Failure would probably lead to increased efforts to dispose of the property, but this wouldn't be easy as it has few alternative uses that wouldn't take lots of ambition and capital investments.
* Downtown, a space filled by the failed Niketown store on the 16th Street Mall is slated to become the new home of discount fashion department store H&M. Considerable rumor had gathered suggesting that it would replace the departing Saks Department store in the Cherry Creek mall, but that apparently, will not be happening. A new tenant there has not been announced.
* The Commons Park, South Platte, Highland area to the west of LoDo is thriving.
* West Colfax will soon lose Saint Anthony's Hospital to the suburbs, a major hole in a neighborhood that has not seen the redevelopment and infill activity of many other Denver neighborhoods.
* Construction seems to be picking up again in Stapleton. It also has a new beautiful church opening in a signature concrete arch building, a new modern architecture inspired new recreation center, and new schools. Much of this is development funded.
* The new, reasonably affordable, suburban style Gateway neighborhood on the road to DIA in Denver proper, just opened a new library and is also getting new schools.
* Aurora, in a urban planning department lead initiative, is looking for a way to open the doors to a major infill redevelopment of the area between Fitzsimmons and Stapleton, which is currently a working class residential neighborhood that has seen major upheaval as many black and moderate income Asian residents have moved to more suburban neighborhood's like Denver's Green Valley Ranch and the E-470 corridor, and many new Hispanic residents have moved in, given the "Old Town Aurora" neighborhood a new ethnic character. They would like to expand the middle to high income neighborhoods created by the redevelopments of Lowry and Stapleton and Fitzsimmons to link them all into a coherent larger scale zone of prosperity. But, it is unclear is the private sector interest to make it happen in present.
* A major new development that will bring thousands of new residents is planned for Douglas County near Chatfield Reservoir at densities within the levels allowed by current zoning, but the supposedly pro-growth, anti-government regulation Republicans of the area are balking at the new project.
* Meanwhile, facing renewed budget cuts, the Denver Public Library system is pushing to form its own property tax funded district, apart from the municipal government's general fund from which it is funded now, to stave off those cuts and provide it with greater budget security. Hickenlooper's administration managed to stave off deep cuts to the system, compared to many library systems such as the decimated Aurora Public Library system, but the fear that another recession could inflict deep permanent damage to the system lingers.
* Despite funding shortfalls that leave the prospects of a timely completion of Northern expansions of Denver's light rail and transit system in doubt, as it isn't clear what sort of sales tax increase voters would support to fund it, the FasTracks line from central Denver to the Jefferson County court house is coming ever closer to entering service and the Union Station redevelopment is moving along. Most of the new light rail bridges for the line are in place.
* Next in line for rail transit expansion will be the efforts already underway to connect downtown Denver and the Denver International Airport, a line that might also connect Stapleton to DIA via rail.
* The Greyhound bus station downtown is closing, and the very obvious optimal place for it to relocate would be Union Station, which is supposed to be a multi-modal transit hub for downtown. But, it isn't clear that this will happen.
READ MORE - Denver Businesses and Real Estate Holes Come Back To Life
* A major infill development from Alameda to the I-25 and Broadway light rail station which would include 3,000 new homes, a new school, and new office space is in the advanced planning stage. Currently it includes the Denver Design Center which is a suite of interior design oriented retail spaces, a Sam's Club, an Albertsons, two light rail station, a K-Mart, and some strip mall development.
* The Gates Rubber Plant to the south of the planned new development has been the major projects focus for the area at the fringe of Denver's West Washington Park neighborhood, some office space was restored on the east side of Broadway, and a new apartment complex went in at the southern tip of the project, but environmental concerns and a financial crisis spawned collapse of investment in major new real estate projects has put it on hold. But, if both the Gates Rubber Plant and the new transit oriented development planned between it and the Baker Neighborhood eventually take off, it will be a major transit oriented population expansion in Central Denver.
* Another small transit oriented development, with senior housing and retail is going in at the I-25 and Yale light rail stop.
* National Jewish Hospital has finally decided to buy the long vacant Gove Middle School at Colorado Boulevard and 14th Street, that is adjacent to its campus, allowing it to consolidate its expanding operations, and providing capital projects cash for a cash strapped Denver Public Schools.
* The former University Hospital on University Boulevard was to have been redeveloped by a developer who managed to rezone the property but gave up on the project. The new infill developer on the project has more modest ambitions, but looks likely to be able to put this major hole in the neighborhood back into productive use. A new apartment complex and new restaurants have kept that neighborhood surprisingly healthy considering the massive loss of employment that it has experienced.
* A shakeup is looming in the area of Saint Joseph's and Presbyterian/Saint Luke's Hospital in North Denver. P/SL has recently upgraded its ER and added a children's focused facility to fill the gap created by the departure of Children's Hospital to Fitzsimmons. Saint Joseph's signature tower has serious building code issues, so a somewhat complicated plan involving major new construction is underway to deal with it.
* A string of vacant store fronts along Alameda Avenue in West Washington Park created by the pull out of Twist and Shout Records, a closing Blockbuster store, a failed used book store, a closed laundromat, a long dead gas station, a floundering dinner assembly business, and several other faltering small businesses is almost entirely back to life. Two bars at Alameda and Downing have come under new management replacing the old ones. A hair salon has expanded to fill the space left vacant by the loss of a small neighborhood gym. A tailor and a new dry cleaner moved in, while a space once held by a travel agent struggling with declining commissions has been filled by a home nursing service. Pho Pasta took over the used book store space, Bittersweet have turned the old gas station into a beautiful new fine restaurant, Italian restaurant La Scalia filled the space previously occupied by a Dinner assembly business and the adjacent Chinese restaurant has taken the opportunity to give itself an upscale face life. A high end appliance store filled one gap. A Jimmy Johns, a hair salon, a new small gym, and a Larkburger have filled the gap created by the move of Twist and Shout records to Colfax near East High School. A new bar will fill the gap created by a closing Blockbuster. Further down the road, medical marijuana dispensaries have filled several street front locations zoned for retail.
* Also nearby the Wask Perk coffee shop at Emerson and Ohio in West Washington Park has expanded, both taking over the space of its retail neighbor which was most recent a struggling gift shop and starting to offer a mobile bicycle like station in Washington Park itself. The establishment seems to be thriving, after struggling through at least three successive rounds of owners, clashing with the local neighborhood association, and facing traffic declines due to road work. Nearby a new bare bones retro style barber shop has moved in, next to a pet grooming business.
* The new Central Denver Recreation Center that had been planned for a parcel near East High School that had once been a grocery store and then was a church, on land purchased for a pretty penny (arguably suspiciously high), has been put on hold in favor of what I call the million dollar dog park. The dog park meets the urban planning goal of turning what had once been a popular gathering place for vagrants and youths with nothing to do into a space securely held by middle class dog owners, but has not filled the hole in community services that exists in the neighborhood.
* One major question mark that may be resolved in the next few days or weeks is the fate of the old Byers School. It was the home of the Denver School of the Arts until that relocated to the former DU Music School near Stapleton, and has sat vacant since then. Its school yard was redeveloped into a complex of what I call cereal box houses. They are small, narrow houses that look like half duplexes but have space between them because the neighborhood association (WWPNA) insisted that they be single family dwellings rather than town houses or duplexes (a preference that still baffles me). Neighbors, myself included, are pushing to have the location serve as the home for a new campus of the Denver School of Science and Technology, the most successful of Denver's charter schools. Success would mean another major hole in the neighborhood filled, an attractive new educational option nearby, and relief for the Denver Public Schools from the fiscal strain of carrying valuable empty real estate without getting any benefit from it. Failure would probably lead to increased efforts to dispose of the property, but this wouldn't be easy as it has few alternative uses that wouldn't take lots of ambition and capital investments.
* Downtown, a space filled by the failed Niketown store on the 16th Street Mall is slated to become the new home of discount fashion department store H&M. Considerable rumor had gathered suggesting that it would replace the departing Saks Department store in the Cherry Creek mall, but that apparently, will not be happening. A new tenant there has not been announced.
* The Commons Park, South Platte, Highland area to the west of LoDo is thriving.
* West Colfax will soon lose Saint Anthony's Hospital to the suburbs, a major hole in a neighborhood that has not seen the redevelopment and infill activity of many other Denver neighborhoods.
* Construction seems to be picking up again in Stapleton. It also has a new beautiful church opening in a signature concrete arch building, a new modern architecture inspired new recreation center, and new schools. Much of this is development funded.
* The new, reasonably affordable, suburban style Gateway neighborhood on the road to DIA in Denver proper, just opened a new library and is also getting new schools.
* Aurora, in a urban planning department lead initiative, is looking for a way to open the doors to a major infill redevelopment of the area between Fitzsimmons and Stapleton, which is currently a working class residential neighborhood that has seen major upheaval as many black and moderate income Asian residents have moved to more suburban neighborhood's like Denver's Green Valley Ranch and the E-470 corridor, and many new Hispanic residents have moved in, given the "Old Town Aurora" neighborhood a new ethnic character. They would like to expand the middle to high income neighborhoods created by the redevelopments of Lowry and Stapleton and Fitzsimmons to link them all into a coherent larger scale zone of prosperity. But, it is unclear is the private sector interest to make it happen in present.
* A major new development that will bring thousands of new residents is planned for Douglas County near Chatfield Reservoir at densities within the levels allowed by current zoning, but the supposedly pro-growth, anti-government regulation Republicans of the area are balking at the new project.
* Meanwhile, facing renewed budget cuts, the Denver Public Library system is pushing to form its own property tax funded district, apart from the municipal government's general fund from which it is funded now, to stave off those cuts and provide it with greater budget security. Hickenlooper's administration managed to stave off deep cuts to the system, compared to many library systems such as the decimated Aurora Public Library system, but the fear that another recession could inflict deep permanent damage to the system lingers.
* Despite funding shortfalls that leave the prospects of a timely completion of Northern expansions of Denver's light rail and transit system in doubt, as it isn't clear what sort of sales tax increase voters would support to fund it, the FasTracks line from central Denver to the Jefferson County court house is coming ever closer to entering service and the Union Station redevelopment is moving along. Most of the new light rail bridges for the line are in place.
* Next in line for rail transit expansion will be the efforts already underway to connect downtown Denver and the Denver International Airport, a line that might also connect Stapleton to DIA via rail.
* The Greyhound bus station downtown is closing, and the very obvious optimal place for it to relocate would be Union Station, which is supposed to be a multi-modal transit hub for downtown. But, it isn't clear that this will happen.
Rabu, 13 April 2011
Obama's Deficit Reduction Proposal
President Obama called for cutting the nation’s combined budget deficit by $4 trillion over the next 12 years. . . . The president vowed not to extend tax cuts for the wealthy or to dismantle the government-run health care systems for the elderly and poor. . . . Among his proposals is a “debt fail-safe” mechanism that would force lawmakers into much more severe action if the deficit has not contracted significantly by 2014. The provision would impose across-the-board cuts on most government programs, officials said. . . . there would be $3 in spending cuts and interest savings in the president’s proposals for every $1 that comes from increased tax revenue. . . . "we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.” He said people like him “don’t need a tax cut,” and added, “Not if we have to pay for it by making seniors pay more for Medicare, or by cutting kids from Head Start, or by taking away college scholarships that I wouldn’t be here without.” . . . Along with allowing the lowered tax rates to expire, Mr. Obama suggested limiting itemized deductions for the top 2 percent of taxpayers. . . . Rather than change Medicare to a voucher program, Mr. Obama proposes broad reforms that he says would save hundreds of billions of dollars over the next 12 years and more than $1 trillion in the following decade. In the speech, the president embraced some of the proposals of his own debt commission, including $770 billion worth of cuts in nonsecurity related spending by 2023. Cuts to defense programs would be increased to nearly $400 billion over the next 12 years, officials said. The president stayed away from proposing changes to Social Security, saying that it was not a significant piece of the country’s deficit problem.
From here
A look at the details shows a proposal that allocates deficit reductions by category, is big on cutting "fraud, waste and abuse," and with some notable exceptions, particularly in the area of health care cost reductions, is short on specifics, but big on having a process to get the job done.
The White House offers more details here:
the President is calling for:
•A debt failsafe that will ensure that our nation’s debt is on a declining path as a share of our economy. If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the failsafe will trigger an across the board spending reduction, including on spending through the tax code.
•The trigger will ensure that deficits as a share of the economy average no more than 2.8% of GDP in the second half of the decade.
•Consistent with prior fiscal enforcement mechanisms put in place by Presidents Reagan, George H.W. Bush and Clinton, the trigger should not apply to Social Security, low-income programs, or benefits for Medicare enrollees.
•The trigger should also include a mechanism to ensure that it does not exacerbate an economic downturn or interfere with our nation’s ability to respond to a national security emergency.
Discretionary non-defense spending would be cut $200 billion over 10 years ($20 billion per year) in addition to $400 billion ($40 billion per year) in the President's budget, and would cut $770 billion over 12 years.
Defense spending would be cut by $400 billion by 2023 ($33.3 billion per year) by "pushing harder to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America’s missions, capabilities, and our role in a changing world. . . .(The President will make decisions on specific cuts after working with Secretary Gates and the Joint Chiefs on the comprehensive review.) . . . in addition to the savings generated from ramping-down overseas contingency operations."
Health care cost reductions in projected Medicare and Medicaid spending over the next twelve years is to be reduced by $40 billion per year on average ($34 billion per year on average in the first ten years), by a variety of means. A blue ribbon commission would be given the power to implement cost savings proposals when health care cost inflation is above a target unless an alternative is developed by Congress.
•Building on the Affordable Care Act, the President is proposing additional reforms to Medicare and Medicaid designed to strengthen these critical programs by reducing waste, increasing accountability, promoting efficiency, and improving the quality of care, without shifting the cost of care to our seniors or people with disabilities.
• . . . This framework includes . . . an amount sufficient to fully pay to reform the Medicare Sustainable Growth Rate (SGR) physician payment formula while still reducing the deficit.
The President’s framework proposes specific reforms to strengthen Medicare and Medicaid over the long term, including: . . .
The President’s framework would strengthen the Independent Payment Advisory Board (IPAB) created by the Affordable Care Act. . . . Under the Affordable Care Act, IPAB analyzes the drivers of excessive and unnecessary Medicare cost growth. When Medicare growth per beneficiary exceeds growth in nominal GDP per capita plus 1 percent, IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services. Congress must consider IPAB’s recommendations or, if it disagrees, enact policies that achieve equivalent savings. If neither acts, then the Secretary of Health and Human Services would have to develop and implement a proposal to achieve the savings target.
•Set a new target of Medicare growth per beneficiary growing with GDP per capita plus 0.5 percent. This is consistent both with the reductions in projected Medicare spending since the Affordable Care Act was passed and the additional reforms the President is proposing.
•Give IPAB additional tools to improve the quality of care while reducing costs, including allowing it to promote value-based benefit designs that promote proven services like prevention without shifting costs to seniors.
•Give IPAB additional enforcement mechanisms such as an automatic sequester as a backstop for IPAB, Congress, and the Secretary of Health and Human Services.
. . . Under current law, States face a patchwork of different Federal payment contributions for Medicaid and the Children’s Health Insurance Program (CHIP). The President’s framework would replace the current complicated Federal matching formulas with a single matching rate for all program spending that rewards States for efficiency and automatically increases if a recession forces enrollment and State costs to rise.
. . . The President also supports reform of Medicaid to incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare. These nine million beneficiaries comprise 15 percent of Medicaid enrollment but consume nearly 40 percent of total Medicaid spending.
. . . . Together with employers, States, hospitals, physicians and nurses, the Administration has launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans. The two goals of this new Partnership are: preventing patients from getting injured or sicker while they are in the hospital and helping patients heal without complication. Achieving the initiative’s goal would mean more than 1.6 million patients will recover from illness without a preventable complication, reducing costs by up to $50 billion in Medicare and billions more in Medicaid over the next 10 years.
. . .. limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power – similar to what was called for by the bipartisan Fiscal Commission. It would speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs.
. . . clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage; establish upper limits on Medicaid payments for durable medical equipment; and take other actions to improve program integrity.
Non-health care mandatory spending would be cut by $360 billion over 12 years ($30 billion per year) through "measures to reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures. . . . The Fiscal Commission and other bipartisan efforts have put forward additional proposals that should be considered as part of a comprehensive deficit reduction effort to meet this target. Reforms to mandatory programs should protect and strengthen the safety net for low-income families and other vulnerable Americans."
A key piece of the plan is tax increases:
He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth. . . . the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit.
He does not include Social Security in the package:
The President does not believe that Social Security is a driver of our near-term deficit problems or is currently in crisis. . . . The President in the State of the Union laid out his principles for Social Security reform which he believes should form the basis for bipartisan negotiations that could proceed in parallel to deficit negotiations:
•Strengthen retirement security for the low-income and vulnerable; maintain robust disability and survivors’ benefits.
•No privatization or weakening of the Social Security system; reform must strengthen Social Security and restore long-term solvency.
•No current beneficiary should see the basic benefit reduced; nor will we accept an approach that slashes benefits for future generations.
Analysis
The President is a bit light on taxes to close the deficit gap (a 50-50 split between taxes and spending cuts, rather than a 25-75 split would have been better). The defense cuts are overly modest, because they are arbitrary and don't spell out cost saving changes in the scope of our missions and procurement approaches. The non-discertionary savings cuts seem fairly high given the many rounds of cuts that they have been subjected to already. The "other mandatory spending" cuts seem appropriate.
The cuts to health care are about right in magnitude but assume cuts are possible in spending without really demonstrating that it is possible to sensibly bend the curve on health care cost inflation, leaving that problem to experts who may have little more of an idea about how to do it than the politicians do.
Thumbs up:
* Repeal of Bush Tax Cuts for those making more than $250,000 a year.
* Reducing tax expenditures.
* "reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures."
* "clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage"
* "limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power. . . speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs."
* Defense spending cuts.
Neither Here Nor There:
* "incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare." But how?
* "launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans." How will this happen?
* "IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services." What can they recommend that would meet that standard?
* Discretionary non-defense spending cuts. Where?
Thumbs down:
* Lowering corporate income tax rates.
* Limiting itemized deductions based on AGI.
Senin, 11 April 2011
Compromise Happened
Somehow, despite divided control of both the Colorado General Assembly and Congress, both Colorado and the Congress managed to approve budgets this month. This is what usually happens, even in times of divided government. It doesn't happen without fail. There have been a number of government shutdowns, although the longest one at the federal government level was twenty days, and most haven't been longer than a day or two.
The process does nothing to guarantee that a compromise is reached. No majority can single handedly impose its will. But, time and time again, deals are struck. Much of the time, government is not divided and the deals aren't so difficult to secure. But, even in the time periods when government is divided, there is usually a deal.
Most business deals work on the same basis as budget deals. Everything is decided on a quite short scale, or nothing is decided. Juries likewise resolve disagreements by consensus. Miraculously, when the choice is no deal, no budget, no verdict . . . most of the time deals are secured. There are frequently compromises, but deals are secured.
Courts determine the status quo in the absence of a deal. Most of the time, there is a sensible or at least workable alternative if a deal on legislation falls apart. If there is a deadlock in a redistricting matter, usually courts will intervene and draw a map themselves. But, this rarely happens with the budget. If no deal is reached, the money will not be spent. The budget is "must pass" legislation. Sometimes there are compromises for "essential services" if the rest of the government is shut down. But, those are usually handled outside the courts.
A functioning government that spends money on government services, when push comes to shove, is a better outcome than one that does not function.
Federalism lowers the stakes. One of the key benefits of federalism is that even in a system that sometimes produces government shutdowns from political impasses, the entire government isn't affected at once. Only a few states in any given year will reach an impass on their budgets, and they won't do so all at once. Local governments are not directly shut down by impasses at the state level. Federal government shutdowns still leave the state and local governments that employ the vast majority of government employees, any agencies whose appropriations bills managed to pass before there was an impass, and self-funding agencies like the postal service in business.
I'm a pessimist on this score. I worry about system failure. I worry about a prolonged failure to the political system to meet its basic responsibilities. We haven't had serious steps across that line in the United States. But, in other countries there have been long periods, many months or even years, of deadlock. The labor-management equivalent - a long strike or lockout due to failure to reach a deal - used to be much more common. Usually, those dire worst case scenarios don't happen. But, it takes more than Civics 101 and Constitutional law to explain what goes on when these miraculous agreements happen. A shallow analysis of the rules of our political system can't easily explain why negotiations break down so much less often than one might expect that they would, what is different about the times when they do break down, why the breakdowns are more or less intractable in different situations, and as a result, also can't explain how fundamentally stable our system of government that depends upon partisans who disagree compromisings in unspecified ways is within a coherent theoretical context. We have a good track record of compromise so far, but why?
READ MORE - Compromise Happened
The process does nothing to guarantee that a compromise is reached. No majority can single handedly impose its will. But, time and time again, deals are struck. Much of the time, government is not divided and the deals aren't so difficult to secure. But, even in the time periods when government is divided, there is usually a deal.
Most business deals work on the same basis as budget deals. Everything is decided on a quite short scale, or nothing is decided. Juries likewise resolve disagreements by consensus. Miraculously, when the choice is no deal, no budget, no verdict . . . most of the time deals are secured. There are frequently compromises, but deals are secured.
Courts determine the status quo in the absence of a deal. Most of the time, there is a sensible or at least workable alternative if a deal on legislation falls apart. If there is a deadlock in a redistricting matter, usually courts will intervene and draw a map themselves. But, this rarely happens with the budget. If no deal is reached, the money will not be spent. The budget is "must pass" legislation. Sometimes there are compromises for "essential services" if the rest of the government is shut down. But, those are usually handled outside the courts.
A functioning government that spends money on government services, when push comes to shove, is a better outcome than one that does not function.
Federalism lowers the stakes. One of the key benefits of federalism is that even in a system that sometimes produces government shutdowns from political impasses, the entire government isn't affected at once. Only a few states in any given year will reach an impass on their budgets, and they won't do so all at once. Local governments are not directly shut down by impasses at the state level. Federal government shutdowns still leave the state and local governments that employ the vast majority of government employees, any agencies whose appropriations bills managed to pass before there was an impass, and self-funding agencies like the postal service in business.
I'm a pessimist on this score. I worry about system failure. I worry about a prolonged failure to the political system to meet its basic responsibilities. We haven't had serious steps across that line in the United States. But, in other countries there have been long periods, many months or even years, of deadlock. The labor-management equivalent - a long strike or lockout due to failure to reach a deal - used to be much more common. Usually, those dire worst case scenarios don't happen. But, it takes more than Civics 101 and Constitutional law to explain what goes on when these miraculous agreements happen. A shallow analysis of the rules of our political system can't easily explain why negotiations break down so much less often than one might expect that they would, what is different about the times when they do break down, why the breakdowns are more or less intractable in different situations, and as a result, also can't explain how fundamentally stable our system of government that depends upon partisans who disagree compromisings in unspecified ways is within a coherent theoretical context. We have a good track record of compromise so far, but why?
Jumat, 08 April 2011
Suthers Indicts Doug Bruce For Failing To File Taxes
Colorado's best known anti-tax activist, Doug Bruce, has been indicted for failing to file taxes by the state attorney general's office. Colorado's attorney general, John Suthers, is a Republican.
It couldn't happen to a more deserving defendant. Some of the evidence regarding his tax fraud was developed in connection with his failure to comply with subpeonas regarding a ballot initiative (taht were ultimately defeated) which he supported in contributions that were not reported on campaign finance form in 2010. He filed a false tax return alleging that he had zero income in 2005 and filed no return despite earning considerable income that was funnelled into a non-profit organization that he used for his personal benefit in 2006 and 2007. The amount of income not reported was in the hundreds of thousands of dollars.
Doug Bruce is famous for getting TABOR (the taxpayer' bill of rights) into the state constitution, leading to serious problems with the fiscal viability of the State of Colorado during recesions.
READ MORE - Suthers Indicts Doug Bruce For Failing To File Taxes
If convicted of the charges, Bruce could face up to six years in prison and a $500,000 fine.
Colorado Springs police officers arrested Bruce Friday at a post office in Colorado Springs. He was booked on a $10,000 bond into the El Paso County Jail, where he remains.
It couldn't happen to a more deserving defendant. Some of the evidence regarding his tax fraud was developed in connection with his failure to comply with subpeonas regarding a ballot initiative (taht were ultimately defeated) which he supported in contributions that were not reported on campaign finance form in 2010. He filed a false tax return alleging that he had zero income in 2005 and filed no return despite earning considerable income that was funnelled into a non-profit organization that he used for his personal benefit in 2006 and 2007. The amount of income not reported was in the hundreds of thousands of dollars.
Doug Bruce is famous for getting TABOR (the taxpayer' bill of rights) into the state constitution, leading to serious problems with the fiscal viability of the State of Colorado during recesions.
Rabu, 30 Maret 2011
Fines As An Alternative To Incarceration
Colorado, like almost all American jurisdictions, makes heavy use of small fines for petty criminal offenses, but includes fines almost as an afterthought, if at all, as the sanction for more serious offenses and has the option to impose many months or years of incarceration as a sentence even in the case of offenses that are usually disposed of only with a fine such as municipal ordinance violations and more serious traffic offenses.
As the Denver Daily News explains:
While sentences of incarceration produce big costs for taxpayers, fines raise revenues. Moreover, the maximum sentence of incarceration for an offense is generally much more severe in terms of economic impact than the related fine.
For example, a judge can impose a sentence of eighteen months of imprisonment for a class one misdemeanor, or a fine of $5,000. But, an eighteen month sentence of imprisonment would deprive the person sentenced of eighteen months of income in a state where the median income in a single person household is $52,430 in Colorado in 2010, depriving that median individual of more than $75,000 of income, in addition to considerable lost future income because the incarcerated individual is very likely to be unemployed for a substantial period of time upon release, and economic harm associated with involuntarily breaking their residential or automotive lease or default on their mortgage and car payments, etc. Even for someone earning only a far below median wage and netting out costs of room and board that are provided in jail, eighteen months of incarceration has far more economic impact than a $5,000 fine for a large share of all convicted criminal defendants.
Similarly, a judge can impose a sentence of a year in jail for a class two misdemeanor, but can impose of fine of no more than $1,000, and can impose a sentence of six months in jail for a class three misdemeanor, but can impose a fine of only $750.
The amounts of the fine somewhat understate the situation, because a variety of courts costs and fees apply when an individual is convicted of a crime, and there are also costs for a privately retained criminal defense attorney (if any), and the possibility of a restitution award. But, the general observation holds true and restitution awards are generally far narrower than the compensatory element of a civil tort judgment.
Of course, one of the reasons that we ended up with this kind of statutory framework is that a large share of criminal defendants in the United States are indigent or near indigent (something that can be estimated by the large percentage of criminal defendants who avail themselves of the services of the public defender), and that when imposed together with incarceration, the defendant has little or no means of generating income to pay it. Imposing fines that can never be paid is pointless and makes it harder to reintegrate the defendant into the community after the defendant is released. Indeed, one of the rules of thumb in the law is that legislators and judges and regulators tend to punish offenses committed by defendants without the financial wherewithal to make those they harm whole with incarceration and tend to punish offenses committed by defendants with an ability to pay with civil judgments and fines.
But, not all criminal defendants are indigent. One of the reasons that a large fine for people who purchase the services of prostitutes is attractive to legislators is that this is a class of criminal defendants who often do have the financial means to pay these fines. Many traffic, vice and white collar criminal defendants, generally, have a substantial ability to pay criminal fines. And, some minority of everyday crimes, especially misdemeanors and less serious felonies, are likewise committed by individuals with an ability to pay substantial fines for whom a sentence of incarceration would be an intense economic burden. Large fines also make the option of prosecuting criminal cases against corporate defendants more attractive.
The predominant punishment in Germany and many Scandinavian countries for what would be serious misdemeanors or minor felonies in the United States is a "day fine" equal to one day's average income in some recent time period for the defendant times the number of days of fines imposed, in lieu of a maximum term of incarceration of the same length. Defaults result in imprisonment for the number of day-fine days of fines not paid. This keeps the defendant in the community, employed, with an incentive to work more to pay off the fine and shed the burden sooner, and without imposing significant administration costs on the public and without disproportionately punishing low income defendants. Part of what makes that system work is the fact t hat these countries don't have the kind of "underclass" of persistently poor people who regularly get caught up in their criminal justice system that we do in the United States. But, there is still surely a class of offenses in the United States for which a day-fine would be a useful criminal justice option.
This isn't to say that I support this Johns bill just passed by the State Senate. The policy case for criminalizing prostitution between consenting adults at all is weak, and many our world peers tolerate some form of legalized prostitution. In my view, taxing and regulating vice is generally preferrable to using the criminal law to prohibit it and trying to enforce that law.
But, while I don't support increasing penalties for adult prostitution, period, the approach of imposing a high fine for an offense in a situation where there is a realistic possibility that criminal defendants will be able to pay it, rather than incarceration, is an option that has much wider applicability.
Similarly, in cases where the existing fines are the predominant form of punishment for a crime and are adequate to the task, for example, for many traffic offenses that carry criminal penalties, ordinance violations, petty offenses and minor misdemeanors, removing the possibility of a sentence of incarceration would be desirable, because it would lower the stakes of proceeding, reduce the possibility of abuses of judicial discretion in sentencing, elminate the constitutional requirement that counsel be provided at public expense in the proceeding, and have little impact on the day to day outcomes of the criminal justice system in these areas. Where an offense is such that arrest power and brief periods of incarceration are helpful in enforcing the law (e.g. public drunkeness or disturbing the peace), a maximum period of incarceration of a few days, as opposed to many months, might be attached to a significant fine.
READ MORE - Fines As An Alternative To Incarceration
As the Denver Daily News explains:
The fine for using a prostitute would be raised up to $10,000 under a bill that passed out of the Senate yesterday. The minimum fine for prostitution-related offenses would be raised to $5,000. The current fine for prostitution-related offenses can currently be under $100. Additionally, the bill would create “john schools” that first-time offenders could attend to get a deferred judgment. The scared straight-type program would educate first-time offenders on the harrowing effects of prostitution. The bill passed on a 32-2 vote and now goes to the House.
While sentences of incarceration produce big costs for taxpayers, fines raise revenues. Moreover, the maximum sentence of incarceration for an offense is generally much more severe in terms of economic impact than the related fine.
For example, a judge can impose a sentence of eighteen months of imprisonment for a class one misdemeanor, or a fine of $5,000. But, an eighteen month sentence of imprisonment would deprive the person sentenced of eighteen months of income in a state where the median income in a single person household is $52,430 in Colorado in 2010, depriving that median individual of more than $75,000 of income, in addition to considerable lost future income because the incarcerated individual is very likely to be unemployed for a substantial period of time upon release, and economic harm associated with involuntarily breaking their residential or automotive lease or default on their mortgage and car payments, etc. Even for someone earning only a far below median wage and netting out costs of room and board that are provided in jail, eighteen months of incarceration has far more economic impact than a $5,000 fine for a large share of all convicted criminal defendants.
Similarly, a judge can impose a sentence of a year in jail for a class two misdemeanor, but can impose of fine of no more than $1,000, and can impose a sentence of six months in jail for a class three misdemeanor, but can impose a fine of only $750.
The amounts of the fine somewhat understate the situation, because a variety of courts costs and fees apply when an individual is convicted of a crime, and there are also costs for a privately retained criminal defense attorney (if any), and the possibility of a restitution award. But, the general observation holds true and restitution awards are generally far narrower than the compensatory element of a civil tort judgment.
Of course, one of the reasons that we ended up with this kind of statutory framework is that a large share of criminal defendants in the United States are indigent or near indigent (something that can be estimated by the large percentage of criminal defendants who avail themselves of the services of the public defender), and that when imposed together with incarceration, the defendant has little or no means of generating income to pay it. Imposing fines that can never be paid is pointless and makes it harder to reintegrate the defendant into the community after the defendant is released. Indeed, one of the rules of thumb in the law is that legislators and judges and regulators tend to punish offenses committed by defendants without the financial wherewithal to make those they harm whole with incarceration and tend to punish offenses committed by defendants with an ability to pay with civil judgments and fines.
But, not all criminal defendants are indigent. One of the reasons that a large fine for people who purchase the services of prostitutes is attractive to legislators is that this is a class of criminal defendants who often do have the financial means to pay these fines. Many traffic, vice and white collar criminal defendants, generally, have a substantial ability to pay criminal fines. And, some minority of everyday crimes, especially misdemeanors and less serious felonies, are likewise committed by individuals with an ability to pay substantial fines for whom a sentence of incarceration would be an intense economic burden. Large fines also make the option of prosecuting criminal cases against corporate defendants more attractive.
The predominant punishment in Germany and many Scandinavian countries for what would be serious misdemeanors or minor felonies in the United States is a "day fine" equal to one day's average income in some recent time period for the defendant times the number of days of fines imposed, in lieu of a maximum term of incarceration of the same length. Defaults result in imprisonment for the number of day-fine days of fines not paid. This keeps the defendant in the community, employed, with an incentive to work more to pay off the fine and shed the burden sooner, and without imposing significant administration costs on the public and without disproportionately punishing low income defendants. Part of what makes that system work is the fact t hat these countries don't have the kind of "underclass" of persistently poor people who regularly get caught up in their criminal justice system that we do in the United States. But, there is still surely a class of offenses in the United States for which a day-fine would be a useful criminal justice option.
This isn't to say that I support this Johns bill just passed by the State Senate. The policy case for criminalizing prostitution between consenting adults at all is weak, and many our world peers tolerate some form of legalized prostitution. In my view, taxing and regulating vice is generally preferrable to using the criminal law to prohibit it and trying to enforce that law.
But, while I don't support increasing penalties for adult prostitution, period, the approach of imposing a high fine for an offense in a situation where there is a realistic possibility that criminal defendants will be able to pay it, rather than incarceration, is an option that has much wider applicability.
Similarly, in cases where the existing fines are the predominant form of punishment for a crime and are adequate to the task, for example, for many traffic offenses that carry criminal penalties, ordinance violations, petty offenses and minor misdemeanors, removing the possibility of a sentence of incarceration would be desirable, because it would lower the stakes of proceeding, reduce the possibility of abuses of judicial discretion in sentencing, elminate the constitutional requirement that counsel be provided at public expense in the proceeding, and have little impact on the day to day outcomes of the criminal justice system in these areas. Where an offense is such that arrest power and brief periods of incarceration are helpful in enforcing the law (e.g. public drunkeness or disturbing the peace), a maximum period of incarceration of a few days, as opposed to many months, might be attached to a significant fine.
Rabu, 23 Maret 2011
Fannie Mae and Freddie Mac Bailout Most Costly
As I noted yesterday, most of the bailouts in the wake of the financial crisis were cheap. In all, they cost less than $50 billion of taxpayer money, and a third of that went to job saving and federal government revenue preserving/federal government expense reducing bailouts of General Motors and Chrysler.
There were a pair of bailouts, however, that were much more expensive: Fannie Mae and Freddie Mac, the government chartered, but privately owned firms that repurchased mortgages and mortgage securities meeting their guidelines from mortgage originators. According to a Los Angeles Times story from September 2010:
The federal government guaranteed the obligations of Fannie Mae and Freddie Mac in exchange for a 79.9% ownership interest in each of them, and there are in receivership. There was not a legally binding guarantee of either corporation's debts by the federal government prior to the financial crisis, but many investors had invested on the assumption that these institutions would be considered to big to fail and to tied to the federal government (despite its lack of ownership) to permit their obligations to default.
Some of the loans Fannie and Freddie own include "buy back" obligations from the sellers if they were improperly unwritten (e.g. if they knowingly accepted false appraisals or false borrower information). As a result, "Lenders repurchased $8.7 billion worth of single-family mortgage loans last year, DeMarco said. And as of June 30, an additional $11.1 billion in repurchase requests from Fannie and Freddie were pending." But, that even if all of the requested repurchases were made, only a drop in the bucket of the total losses sustained. Several dozen subpeonas are outstanding to determine if there are more cases where repurchases can be requested.
Record low new home sales and falling median home sale prices in February suggest that the market to which Fannie Mae and Fredie Mac are exposed won't be recovering any time soon.
Lets recap:
Financial industry bailout (x Fannie and Freddie): Under $33 billion
Auto Industry bailout: About $17 billion (but saved Feds $25 billion)
Fannie and Freddie bailout: $148 billion+ (probably under $400 billion). Another estimate suggests a $154 billion taxpayer cost for the bailout.
Stimulus spending: $690 billion including:
*$158 billion for Bush stimulus package
*$150 billion in public works projects for transportation, energy and technology in Obama Stimulus package
*$87 billion to help states meet rising Medicaid costs.
*$3 billion for Cars for Clunkers
*$267 billion for other Obama stimulus package spending
Stimulus tax cuts: $563 billion including:
* $268 billion for Bush stimulus tax cuts
* $16 billion for Homebuyer's Tax Cut
* $116 billion for Obama's tax cut to 95% of Americans
* $166 billion for Obama's other tax cuts
* $13 billion for Obama's payroll tax cut holiday
Still unknown: Recoveries in lawsuits against bad loan originators and investment banks that lied to sell mortgage backed securities.
Selected private sector losses from the financial crisis:
The public cost of the financial crisis was accompanied by massive private sector losses. Stockholders of failed financial institutions lost almost everything, whether or not their shares were ultimately cancelled or merely diluted. Bondholders in General Motors, Chrysler, and many bailed out financial institutions also experienced great losses -- although some bondholders in failed financial institutions (most notably Fannie Mae and Freddie Mac) appear to have been held largely harmless if they had the intestinal fortitude not to sell out to speculators.
Thus, ownership of failed institutions largely got their just deserts, while senior management was often sacked but rewarded handsomely upon their departure, and bondholders (particularly speculators) sometimes benefitted a great deal from bailouts.
Trade creditors, on average, did very well compared to long term financial creditors.
AIG
* "fraud-related losses to AIG shareholders totaled $1.2 billion to $1.4 billion. Another methodology from the expert put the losses at around $543 million to $598 million" Shareholders in AIG (collectively) weren't completely wiped out, but lost almost everything: "AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent."
Lehman
* Lehman Brothers shareholders, who were wiped out when it went bankrupt, lost about $41 billion in the year before it collapsed.
* As of March 16, 2001, "Lehman's revised plan would repay [Lehman] creditors roughly $60.1 billion, equal to about 18.6 cents on the dollar based on an estimated $322 billion of valid claims." It hopes to obtain approval for the plan by November.
GM
* General Motors creditor losses: "Before entering bankruptcy on June 1, 2009, GM had $54.4 billion in debt and owed an additional $20 billion to a retiree health-care trust managed by the United Auto Workers. . . . GM now owes $15.6 billion in debt and preferred stock and $9.4 billion in underfunded retiree obligations." The retirees also received common stock, so may not be as underfunded as it appears looking only at liabilities. GM creditors lost about $40 billion.
* General Motors stockholder losses since 2007: $15 billion. GM shareholders were wiped out.
Chrysler
* Chrysler secured bondholders received 29% of the face value of their investment. Their losses were approximately $16 billion.
* Chrysler equity holders via Cerberus Capital Management purchased an 80.1% stake in the company from DaimlerChrysler AG on May 14, 2007 for $7.4 billion. Chrysler equity holders were wiped out. On October 23, 2008, Daimler announced that its stake in Chrysler had a book value of zero dollars after write offs and charges. Daimler paid $36 billion for all of Chrysler in 1997.
Fannie Mae and Freddie Mac
* Fannie Mae shares were trading at $69.49 on June 18, 2007 and were trading at 27 cents a share on September 30, 2010. Fannie Mae shareholders lost about $64 billion.
* Freddie Mac shares were trading at $34 a share at the end of 2007. By February 2010, its shares were selling at $1.21, a decline of about 96%. The loss to shareholders was about $17 billion.
Overview
A summary of market capitalization changes for some major players from October 9, 2007 and September 12, 2008 is found here:
Washington Mutual would ultimately be wiped out in bankruptcy.
In that time period: "4 trillion has been wiped off the total market capitalization of the U.S. stock market . . . Of that, nearly $1 trillion is from the decline in the financial sector alone."
READ MORE - Fannie Mae and Freddie Mac Bailout Most Costly
There were a pair of bailouts, however, that were much more expensive: Fannie Mae and Freddie Mac, the government chartered, but privately owned firms that repurchased mortgages and mortgage securities meeting their guidelines from mortgage originators. According to a Los Angeles Times story from September 2010:
The bailouts of the two former government-sponsored enterprises, which continue to keep the mortgage financing market afloat almost single-handedly, already have reached $148.2 billion as bad loans they purchased during the real estate boom continue to fail.
Concerns were raised about the ultimate price tag when the Obama administration in December lifted a $400-billion cap on the federal commitment to Fannie and Freddie through 2012. Officials at the time said they did so to provide certainty to the real estate market as the White House and Congress wrestle with the future of the entities.
[Federal Housing Finance Agency acting director Edward J.] DeMarco told a House Financial Services subcommittee Thursday that the total cost of the bailout "appeared to be less than $400 billion." That figure would hold even under most scenarios analyzed by Fannie and Freddie in which the economy suffers another "severe stress." . . . Altogether, Fannie and Freddie hold $1.6 trillion worth of mortgage loans.
The federal government guaranteed the obligations of Fannie Mae and Freddie Mac in exchange for a 79.9% ownership interest in each of them, and there are in receivership. There was not a legally binding guarantee of either corporation's debts by the federal government prior to the financial crisis, but many investors had invested on the assumption that these institutions would be considered to big to fail and to tied to the federal government (despite its lack of ownership) to permit their obligations to default.
Some of the loans Fannie and Freddie own include "buy back" obligations from the sellers if they were improperly unwritten (e.g. if they knowingly accepted false appraisals or false borrower information). As a result, "Lenders repurchased $8.7 billion worth of single-family mortgage loans last year, DeMarco said. And as of June 30, an additional $11.1 billion in repurchase requests from Fannie and Freddie were pending." But, that even if all of the requested repurchases were made, only a drop in the bucket of the total losses sustained. Several dozen subpeonas are outstanding to determine if there are more cases where repurchases can be requested.
Record low new home sales and falling median home sale prices in February suggest that the market to which Fannie Mae and Fredie Mac are exposed won't be recovering any time soon.
Lets recap:
Financial industry bailout (x Fannie and Freddie): Under $33 billion
Auto Industry bailout: About $17 billion (but saved Feds $25 billion)
Fannie and Freddie bailout: $148 billion+ (probably under $400 billion). Another estimate suggests a $154 billion taxpayer cost for the bailout.
Stimulus spending: $690 billion including:
*$158 billion for Bush stimulus package
*$150 billion in public works projects for transportation, energy and technology in Obama Stimulus package
*$87 billion to help states meet rising Medicaid costs.
*$3 billion for Cars for Clunkers
*$267 billion for other Obama stimulus package spending
Stimulus tax cuts: $563 billion including:
* $268 billion for Bush stimulus tax cuts
* $16 billion for Homebuyer's Tax Cut
* $116 billion for Obama's tax cut to 95% of Americans
* $166 billion for Obama's other tax cuts
* $13 billion for Obama's payroll tax cut holiday
Still unknown: Recoveries in lawsuits against bad loan originators and investment banks that lied to sell mortgage backed securities.
Selected private sector losses from the financial crisis:
The public cost of the financial crisis was accompanied by massive private sector losses. Stockholders of failed financial institutions lost almost everything, whether or not their shares were ultimately cancelled or merely diluted. Bondholders in General Motors, Chrysler, and many bailed out financial institutions also experienced great losses -- although some bondholders in failed financial institutions (most notably Fannie Mae and Freddie Mac) appear to have been held largely harmless if they had the intestinal fortitude not to sell out to speculators.
Thus, ownership of failed institutions largely got their just deserts, while senior management was often sacked but rewarded handsomely upon their departure, and bondholders (particularly speculators) sometimes benefitted a great deal from bailouts.
Trade creditors, on average, did very well compared to long term financial creditors.
AIG
* "fraud-related losses to AIG shareholders totaled $1.2 billion to $1.4 billion. Another methodology from the expert put the losses at around $543 million to $598 million" Shareholders in AIG (collectively) weren't completely wiped out, but lost almost everything: "AIG's share prices had fallen over 95% to just $1.25 by September 16, 2008, from a 52-week high of $70.13. At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent."
Lehman
* Lehman Brothers shareholders, who were wiped out when it went bankrupt, lost about $41 billion in the year before it collapsed.
* As of March 16, 2001, "Lehman's revised plan would repay [Lehman] creditors roughly $60.1 billion, equal to about 18.6 cents on the dollar based on an estimated $322 billion of valid claims." It hopes to obtain approval for the plan by November.
GM
* General Motors creditor losses: "Before entering bankruptcy on June 1, 2009, GM had $54.4 billion in debt and owed an additional $20 billion to a retiree health-care trust managed by the United Auto Workers. . . . GM now owes $15.6 billion in debt and preferred stock and $9.4 billion in underfunded retiree obligations." The retirees also received common stock, so may not be as underfunded as it appears looking only at liabilities. GM creditors lost about $40 billion.
* General Motors stockholder losses since 2007: $15 billion. GM shareholders were wiped out.
Chrysler
* Chrysler secured bondholders received 29% of the face value of their investment. Their losses were approximately $16 billion.
* Chrysler equity holders via Cerberus Capital Management purchased an 80.1% stake in the company from DaimlerChrysler AG on May 14, 2007 for $7.4 billion. Chrysler equity holders were wiped out. On October 23, 2008, Daimler announced that its stake in Chrysler had a book value of zero dollars after write offs and charges. Daimler paid $36 billion for all of Chrysler in 1997.
Fannie Mae and Freddie Mac
* Fannie Mae shares were trading at $69.49 on June 18, 2007 and were trading at 27 cents a share on September 30, 2010. Fannie Mae shareholders lost about $64 billion.
* Freddie Mac shares were trading at $34 a share at the end of 2007. By February 2010, its shares were selling at $1.21, a decline of about 96%. The loss to shareholders was about $17 billion.
Overview
A summary of market capitalization changes for some major players from October 9, 2007 and September 12, 2008 is found here:
Citigroup: $236.7 billion to $97.8 billion.
Bank of America: $236.5 billion to $150.2 billion.
AIG: $179.8 billion to $32.3 billion
Goldman Sachs: $97.7 billion to $61.3 billion
American Express: $74.8 billion to $45 billion.
Morgan Stanley: $73.1 billion to $41.1 billion.
Fannie Mae: $64.8 billion to $700 million.
Merrill Lynch: $63.9 billion to $24.2 billion
Freddie Mac: $41.5 billion to $300 million.
Lehman Brothers: $34.4 billion to $2.5 billion.
Washington Mutual: $31.1 billion to $2.9 billion
Washington Mutual would ultimately be wiped out in bankruptcy.
In that time period: "4 trillion has been wiped off the total market capitalization of the U.S. stock market . . . Of that, nearly $1 trillion is from the decline in the financial sector alone."
Selasa, 22 Maret 2011
Bailouts Were Cheap; Stimulus Was Expensive
The bailout programs of the financial crisis are turning out to be much cheaper than expected in the long run. Stimulus packages for the financial crisis so far have cost about $1,253 billion. All of the bailouts combined have cost taxpayers under $50 billion.
How costly were these programs?
* The total cost of all of the bailouts combined is under $50 billion.
* The U.S. Treasury Department is on track to make a $10+ billion profit on its controversial TARP (Troubled Asset Relief Program) bailout.
* The AIG bailout is on track to produce at $20 billion profit.
* "the Treasury said it had earned a profit of $2.25 billion on the sale of Citigroup Inc securities it received in exchange for a $5 billion guarantee on a portfolio of potentially toxic assets. The guarantee was canceled with no losses."
* The General Motors bailout is on track to cost the taxpayers $9 billion at the first GM IPO price, but could recoup its entire investment if GM shares reach $50 a share. The combined auto industry bailout cost was most recently estimated to be about $17 billion.
* The FDIC has a reserve balance deficit of $8 billion, and expects to incur more losses in 2011, but this will be replenished from future insured bank premiums.
* The Treasury didn't lose money in its brief participation in the commercial paper market which is now largely terminated.
* The U.S. government did not lose money when it guaranteed privately insured money market funds that were breaking the buck because of their exposure to AIG, in the face of doubts about the capacity of private insurers to cover the loses.
* There are $30 billion of the $245 billion of financial crisis loans to banks still outstanding, but the program overall is on track to make a $20 billion profit, and most of the funds outstanding are owed by profitable banks.
One missing piece: The Fannie Mae and Freddie Mac losses to the taxpayers.
Incidentally, in most of the cases of bailed out companies, shareholders lost nearly everything and so did most non-priority bondholders.
How Much Did The Stimulus Package Cost?
The economic stimulus package was much more expensive.
The Bush Stimulus Packages
In early 2008, "President George W. Bush and Congress agreed on a $268 billion plan consisting mostly of tax cuts" and "the $158 billion stimulus bill signed by President George W. Bush in the spring of 2008."
The First Obama Stimulus Package
In February 2009, during the Obama administration, Congress enacted a stimulus package estimated to cost $787 billion (revised to $814 billion as of August 2010).
In retrospect, the tax incentives for buyers of homes and cars was highly ineffective. The Cash for Clunkers program cost about $3 billion and cost about $24,000 per addition car sale induced. The Homebuyer Tax Credit program cost about $16 billion (and the final total isn't in yet), which works out to more than $100,000 per additional home sold: “'We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,' [think tank economist Andrew] Jakabovics says."
The Most Recent Stimulus Bills
Another stimulus bill was passed last week that included:
Also:
READ MORE - Bailouts Were Cheap; Stimulus Was Expensive
How costly were these programs?
* The total cost of all of the bailouts combined is under $50 billion.
* The U.S. Treasury Department is on track to make a $10+ billion profit on its controversial TARP (Troubled Asset Relief Program) bailout.
* The AIG bailout is on track to produce at $20 billion profit.
* "the Treasury said it had earned a profit of $2.25 billion on the sale of Citigroup Inc securities it received in exchange for a $5 billion guarantee on a portfolio of potentially toxic assets. The guarantee was canceled with no losses."
* The General Motors bailout is on track to cost the taxpayers $9 billion at the first GM IPO price, but could recoup its entire investment if GM shares reach $50 a share. The combined auto industry bailout cost was most recently estimated to be about $17 billion.
The U.S. would have lost $28.6 billion in spending on social services and missing tax revenue if not for the bailout of GM, its former lending arm and Chrysler Group LLC, according to a study released Nov. 17 by the Center for Automotive Research in Ann Arbor, Michigan.
* The FDIC has a reserve balance deficit of $8 billion, and expects to incur more losses in 2011, but this will be replenished from future insured bank premiums.
* The Treasury didn't lose money in its brief participation in the commercial paper market which is now largely terminated.
* The U.S. government did not lose money when it guaranteed privately insured money market funds that were breaking the buck because of their exposure to AIG, in the face of doubts about the capacity of private insurers to cover the loses.
* There are $30 billion of the $245 billion of financial crisis loans to banks still outstanding, but the program overall is on track to make a $20 billion profit, and most of the funds outstanding are owed by profitable banks.
One missing piece: The Fannie Mae and Freddie Mac losses to the taxpayers.
Incidentally, in most of the cases of bailed out companies, shareholders lost nearly everything and so did most non-priority bondholders.
How Much Did The Stimulus Package Cost?
The economic stimulus package was much more expensive.
The Bush Stimulus Packages
In early 2008, "President George W. Bush and Congress agreed on a $268 billion plan consisting mostly of tax cuts" and "the $158 billion stimulus bill signed by President George W. Bush in the spring of 2008."
The First Obama Stimulus Package
In February 2009, during the Obama administration, Congress enacted a stimulus package estimated to cost $787 billion (revised to $814 billion as of August 2010).
The final bill includes $507 billion in spending programs and $282 billion in tax relief, including a scaled-back version of Mr. Obama's middle-class tax cut proposal, which would give credits of up to $400 for individuals and $800 for families within certain income limits. It will also provide a one-time payment of $250 to recipients of Social Security and government disability support.
The bill contains more than $150 billion in public works projects for transportation, energy and technology, and $87 billion to help states meet rising Medicaid costs. Despite intense lobbying by governors around the country, the final deal slashed $25 billion from a proposed state fiscal stabilization fund, eliminated a $16 billion line item for school construction and sharply curtailed spending to provide health insurance for the unemployed.
In driving down the total cost — from $838 billion for the Senate stimulus bill and $820 billion for the House-passed measure — lawmakers also reduced the Senate's proposed tax incentives for buyers of homes and cars. The final agreement retained a $70 billion tax break to spare millions of middle-income Americans from paying the alternative minimum tax in 2009.
It also created a new tax credit for 95 percent of working families at a cost of $116 billion. To the administration's chagrin, this became the tax cut that no one noticed.
In retrospect, the tax incentives for buyers of homes and cars was highly ineffective. The Cash for Clunkers program cost about $3 billion and cost about $24,000 per addition car sale induced. The Homebuyer Tax Credit program cost about $16 billion (and the final total isn't in yet), which works out to more than $100,000 per additional home sold: “'We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,' [think tank economist Andrew] Jakabovics says."
The Most Recent Stimulus Bills
Another stimulus bill was passed last week that included:
[A] $13 billion plan to give companies who hire unemployed Americans an exemption from paying payroll taxes on those workers through the end of 2010. It also provides a $1,000 tax credit to employers who keep new workers on the payroll for at least for 52 weeks. . . . The law provides an exemption from the 6.2 percent Social Security payroll tax for every worker who has been unemployed at least 60 days and is hired after Feb. 3 through the end of this year. Employers will get an additional $1,000 income tax credit for new employees retained for at least a year. The Senate estimated the measure will cost $13 billion over 10 years, though most of the cost will be in the first two years.
Also:
With the help of two Republican votes, Congress passed legislation that would create a $30 billion loan fund for small businesses and provide other tax incentives to encourage hiring and stimulate growth[.]
Rabu, 16 Maret 2011
Federal Criminal Prosecutions Waste Money
How are we using federal criminal justice resources?
Prosecuting and incarcerating someone whose only crime is being a repeat illegal immigrant at $30,000 per person per year, rather than simply deporting them at a cost of a few hundred bucks, or less, makes no sense. Neither does devoting federal criminal justice resources to marijuana possession cases. Drug possession generally is an issue that state courts are well equipped to handle. Nor does devoting substantial federal resources to very long prison terms for dirty old men with no prior criminal records who download child porn for free off the Internet (as the U.S. government does, despite its lack of mention in the statistics above), but have never actually harmed a child.
Notably, when gun toting, drug using judges are convicted of federal crimes, leniency is the rule.
READ MORE - Federal Criminal Prosecutions Waste Money
Filings in the regional courts of appeals dropped 3 percent to 55,992 in FY 2010, due to a 7 percent drop in criminal appeals to 12,797 and a 9 percent drop in administrative agency appeals to 7,813.... Prisoner petitions fell 3 percent to 15,789. Appeals involving pro se litigants declined 2 percent to 27,209....
Filings of criminal cases (including transfers) increased 2 percent to 78,428. The number of criminal defendants (including transfers) also rose 2 percent to 100,366, surpassing the previous record of 97,982 set in 2009. Proceedings were concluded against 98,311 defendants, 91 percent of whom were convicted, with 89 percent pleading guilty.
Immigration cases, which climbed 9 percent to 28,046, constituted 36 percent of all criminal cases filed, compared to 34 percent in 2009. The majority of immigration filings involved improper reentry of aliens, and 73 percent of all immigration cases were filed in the District of Arizona, the Southern District of California, the District of New Mexico, and the Southern and Western Districts of Texas.
Filings addressing fraud grew 12 percent to 9,371 for cases, and rose 13 percent to 12,639 for defendants in these cases.
Twenty percent of all criminal cases were drug offenses, compared to 22 percent in 2009. Cases involving drug offenses decreased 5 percent to 15,785, and defendants in those cases declined 2 percent to 29,410. Marijuana cases dropped 10 percent overall, but filings related to possession of marijuana increased, with cases climbing 26 percent to 1,248 and defendants rising 28 percent to 1,305. Drug cases involving non-marijuana offenses declined 3 percent to 10,817, and defendants in those cases fell 2 percent to 21,918.
Firearms and explosives cases, which account for 9 percent of total criminal case filings, declined 7 percent to 7,248. Defendants in those cases dropped 6 percent to 8,376.
Prosecuting and incarcerating someone whose only crime is being a repeat illegal immigrant at $30,000 per person per year, rather than simply deporting them at a cost of a few hundred bucks, or less, makes no sense. Neither does devoting federal criminal justice resources to marijuana possession cases. Drug possession generally is an issue that state courts are well equipped to handle. Nor does devoting substantial federal resources to very long prison terms for dirty old men with no prior criminal records who download child porn for free off the Internet (as the U.S. government does, despite its lack of mention in the statistics above), but have never actually harmed a child.
Notably, when gun toting, drug using judges are convicted of federal crimes, leniency is the rule.
The Japanese Business Model For Teacher Pay
There are lots of differences between the prevailing American model and the Japanese model for K-12 education. One of those differences is that Japanese schools often have class sizes that many U.S. schools would consider unacceptably large, but use these larger class sizes to make it feasible to pay teachers higher salaries and generally, to build up the prestige of teaching as a profession. Also, many tasks that would be done by paid staff in American schools, like a significant share of the janitorial work and photocopying, is done by students in Japan, again, freeing up resources for higher teacher salaries. American law professors routinely teach classes of ninety students. Almost no high school teachers in the United States do that, although such large class sizes are unheard of in Japan.
Nicholas Kristoff argues, reasonably, that teachers are underpaid:
He also cites some studies that argue that good teachers produce good student results, although the general trend is that instructional inputs are related only dimly as second or third order effects to student academic performance and life success.
But, part of the reason that demonstrated results from instructional inputs are so equivocal, is because almost everybody is using the same basic model: 180 days a year of school for days of less than eight hours, modest amounts of homework, teachers mostly drawn from conventional teacher certification programs in public schools with reasonably similar class sizes, and low career long pay prospects for someone with a college degree. Private religious schools don't pay teachers very well either. There are differences, but those differences are mostly modest.
A few elite secular private schools pay teachers very well, but given the elite character of the incoming student body which is overwhelmingly either upper middle class, rich, or extremely academically talented, it is hard to tell if good teachers or good students are driving the results. Also, these schools typically have not only highly paid teachers but very modest class sizes, which make their model unattainable without immensely larger K-12 budgets.
The public will simply does not exist to pay for a system of public schools where the average student-teacher ratio is 8:1 and the average teacher makes $90,000 a year. The more typical story is like this one from today:
Even if we did, we wouldn't get the results you see at Groton in classes full of kids who are two grade levels behind by the third grade, may not get a square meal on the weekends, have an older sibling in a gang, live in a single parent home with a parent who dropped out of high school, and are intermittently homeless. Government stinginess towards children in the United States is not limited to education spending.
On the other hand, the Detroit model: dramatically increasing class sizes while paying their teachers 30% below the going rate for teachers in the state, despite the fact that they are teaching students with the greatest educational needs, and simultaneously increasing commuting time for students on their way to and from school, is pretty surely not a good way to improve educational quality either. To some extent, you get what you pay for.
Nobody has ever tried in recent history for a sustained period to set up a K-12 education system in which entry level teachers teaching ordinary average neighborhood kids are paid as much as entry large law firm lawyers in the same area, and can expect to receive that kind of compensation for their entire careers, but teach very large classes by American standards with very little staff assistance.
Of course, it isn't at all easy to break out the impacts of particular parts of the Japanese or American models. The Japanese spend more days in school. A larger share of American kids are college bound than in Japan. Cram school for college entrance exams to supplement ordinary high school education are the norm. Japanese educators are less reluctant to use drill and kill instruction methods, and more liberal in putting social pressure on kids to perform though public disclosure of academic performance. Extra-curricular activity participation is more of an expectation in Japan. Many American kids have more educational choices that comparable Japanese kids. American higher education, particularly at the graduate level, has a better reputation for rigor than Japanese higher education. American teachers have a much larger proportion of very low income students and far more students who are non-native speakers of the language of instruction. Japan starts foreign language instruction sooner and has very little sex education.
Also, somewhat surprisingly, given the tendency of K-12 education systems to pay teachers of older students more than teachers of younger students, the evidence on educational performance and education seems to indicate that the importance of educational quality is greatest when kids are youngest and lower when kids are older. Kids who need remedial work upon entering college were mostly behind already by the time they were in the 6th grade.
If we are to set compensation based on potential lifetime educational performance impact (and no school system in the world does this, to the best of my knowledge, although many do mandate smaller class sizes for younger students), we should be paying the highest salaries to pre-school and kindergarten teachers, the next highest salaries to elementary school teachers, the next highest salaries to middle school teachers, and the lowest salaries to high school teachers. Instead, the pay of teachers seems more closely related to the proportion of the teachers who are men, which is greatest for the older ages. As usual in the American labor market, the supply of similarly skilled labor is more important in setting compensation levels than the value of what workers produce.
But, moving in the direction of the Japanese business model for teacher pay, and paying early education teachers much more than we do, is certainly something worth considering.
READ MORE - The Japanese Business Model For Teacher Pay
Nicholas Kristoff argues, reasonably, that teachers are underpaid:
Until a few decades ago, employment discrimination perversely strengthened our teaching force. Brilliant women became elementary school teachers, because better jobs weren’t open to them. It was profoundly unfair, but the discrimination did benefit America’s children.
These days, brilliant women become surgeons and investment bankers — and 47 percent of America’s kindergarten through 12th-grade teachers come from the bottom one-third of their college classes (as measured by SAT scores). The figure is from a study by McKinsey & Company, “Closing the Talent Gap.”
Changes in relative pay have reinforced the problem. In 1970, in New York City, a newly minted teacher at a public school earned about $2,000 less in salary than a starting lawyer at a prominent law firm. These days the lawyer takes home, including bonus, $115,000 more than the teacher, the McKinsey study found.
He also cites some studies that argue that good teachers produce good student results, although the general trend is that instructional inputs are related only dimly as second or third order effects to student academic performance and life success.
But, part of the reason that demonstrated results from instructional inputs are so equivocal, is because almost everybody is using the same basic model: 180 days a year of school for days of less than eight hours, modest amounts of homework, teachers mostly drawn from conventional teacher certification programs in public schools with reasonably similar class sizes, and low career long pay prospects for someone with a college degree. Private religious schools don't pay teachers very well either. There are differences, but those differences are mostly modest.
A few elite secular private schools pay teachers very well, but given the elite character of the incoming student body which is overwhelmingly either upper middle class, rich, or extremely academically talented, it is hard to tell if good teachers or good students are driving the results. Also, these schools typically have not only highly paid teachers but very modest class sizes, which make their model unattainable without immensely larger K-12 budgets.
The public will simply does not exist to pay for a system of public schools where the average student-teacher ratio is 8:1 and the average teacher makes $90,000 a year. The more typical story is like this one from today:
The fifth-largest school district in Colorado this afternoon expects to announce $30 million in cuts — including jobs and student activities, as well as increased class sizes — to meet its 2011-12 budget.
Today at 3:30 p.m., Adams 12 Five Star Superintendent Chris Gdowski will announce the proposed cuts, including an anticipated 185 job cuts. Last year, the district cut 188 full-time positions. Over the past five years, the district has cut $38 million from its budget.
For the 2010-11 school year, the operating budget was $268.8 million, about 88 percent of which was devoted to employee salaries and benefits.
Even if we did, we wouldn't get the results you see at Groton in classes full of kids who are two grade levels behind by the third grade, may not get a square meal on the weekends, have an older sibling in a gang, live in a single parent home with a parent who dropped out of high school, and are intermittently homeless. Government stinginess towards children in the United States is not limited to education spending.
On the other hand, the Detroit model: dramatically increasing class sizes while paying their teachers 30% below the going rate for teachers in the state, despite the fact that they are teaching students with the greatest educational needs, and simultaneously increasing commuting time for students on their way to and from school, is pretty surely not a good way to improve educational quality either. To some extent, you get what you pay for.
Nobody has ever tried in recent history for a sustained period to set up a K-12 education system in which entry level teachers teaching ordinary average neighborhood kids are paid as much as entry large law firm lawyers in the same area, and can expect to receive that kind of compensation for their entire careers, but teach very large classes by American standards with very little staff assistance.
Of course, it isn't at all easy to break out the impacts of particular parts of the Japanese or American models. The Japanese spend more days in school. A larger share of American kids are college bound than in Japan. Cram school for college entrance exams to supplement ordinary high school education are the norm. Japanese educators are less reluctant to use drill and kill instruction methods, and more liberal in putting social pressure on kids to perform though public disclosure of academic performance. Extra-curricular activity participation is more of an expectation in Japan. Many American kids have more educational choices that comparable Japanese kids. American higher education, particularly at the graduate level, has a better reputation for rigor than Japanese higher education. American teachers have a much larger proportion of very low income students and far more students who are non-native speakers of the language of instruction. Japan starts foreign language instruction sooner and has very little sex education.
Also, somewhat surprisingly, given the tendency of K-12 education systems to pay teachers of older students more than teachers of younger students, the evidence on educational performance and education seems to indicate that the importance of educational quality is greatest when kids are youngest and lower when kids are older. Kids who need remedial work upon entering college were mostly behind already by the time they were in the 6th grade.
If we are to set compensation based on potential lifetime educational performance impact (and no school system in the world does this, to the best of my knowledge, although many do mandate smaller class sizes for younger students), we should be paying the highest salaries to pre-school and kindergarten teachers, the next highest salaries to elementary school teachers, the next highest salaries to middle school teachers, and the lowest salaries to high school teachers. Instead, the pay of teachers seems more closely related to the proportion of the teachers who are men, which is greatest for the older ages. As usual in the American labor market, the supply of similarly skilled labor is more important in setting compensation levels than the value of what workers produce.
But, moving in the direction of the Japanese business model for teacher pay, and paying early education teachers much more than we do, is certainly something worth considering.
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