Deficit Reduction. Tax Reform, and Budget Baselines -How can it be that one commentator can blast the tax reform plan proposed a few weeks by the co-chairs of President Obama’s fiscal commission as a tax cut for the rich while another, looking at exactly the same proposal, sees it as a tax increase? It’s all about budget baselines. There is nothing more boring, even to budget wonks, but the reference point against which you measure tax changes is critical to how you see those proposals. It doesn’t help that in today’s fiscal debate there are at least three different baselines floating around. Unfortunately that makes it easy for politicians and their partisans to pick the one that helps advance whatever argument they want to make. And make no mistake: This is all about politics, not merit. Do you want to compare tax changes to the law that applied in 2009? Or would you prefer to compare those revisions to the Tax Code of a decade ago? Or how about measuring it against your best guess of what the law will be five years from now?
Show time – THINK there’s a pretty good case to be made that, in America at least, deficit cutting should be a clear second priority after support for economic recovery, especially in labour markets. To the extent that deficit cutting is currently on the table, it should be of a medium-term nature, and explicitly paired with measures to support recovery in the short term. But I recognise that others disagree and think it’s important to begin tackling America’s long-run fiscal issues right now.Against either goal, the government’s consolidation efforts to date have been a little pathetic, lacking in focus and effect. First, the Obama administration proposed a three-year freeze in non-defence discretionary spending. Then Congressional Republicans aimed to ban earmarks—not a terrible idea, but not deficit reduction. And now President Obama has announced his intention to freeze federal employee salaries for two years. The salary freeze will save a pittance, will mean a real wage cut for a lot of employees in high cost cities like Washington, and Mr Obama failed to negotiate any new stimulative measures in return for it. Ezra Klein has a good comment on this
Fed Discount-Rate Minutes Show 2 Banks Want Higher Rate – Federal Reserve officials characterized the pace of the U.S. economic recovery as slow according to minutes of meetings before the rollout of a big plan intended to spur growth, according to minutes released Tuesday of central bank discount rate meetings. The minutes showed the directors of 10 of the 12 banks voted to hold the discount rate steady. The directors of the Kansas City and Dallas banks dissented, as they had at a previous meeting on the interest rate charged on emergency loans to U.S. lenders. The dissenting bank directors called for an increase in the discount rate, to 1.0%. The discount rate meetings were held prior to the Fed’s latest policy-setting meeting Nov. 2-3. At that key meeting, policymakers again agreed to hold the Fed’s more important rate at which banks lend to each other–the federal-funds rate–at a record low near zero. However, the Federal Reserve unveiled a plan to buy $600 billion in U.S. Treasurys through June, hoping to spur growth in the sluggish economy. Fed officials said the bond purchases would be roughly equivalent to cutting short-term interest rates by three quarters of a percentage point.