Whatever they’re doing, it doesn’t seem to be good for shareholders. That’s one conclusion of a new paper by John Coates, a Harvard law professor, which I discuss in today’s Atlantic column (which originally misdated the Citizens United decision, thanks to some faulty proof-reading by me). Coates compares firm valuations with levels of lobbying and contributions by corporate PACs and finds that, outside of heavily regulated industries where everyone lobbies heavily, political activity is associated with lower firm value—implying that it’s more like a CEO perk than like a good investment from the shareholder perspective.

The Times has a story out today: Surprise, all the Republican candidates’ tax plans increase the national deficit! The numbers (reduction in 2015 tax revenues, from the Tax Policy Center):

• Romney: $600 billion
• Gingrich: $1.3 trillion
• (Late lamented) Perry: $1.0 trillion
• Santorum: $1.3 trillion

I guess that makes Romney the “fiscally responsible” choice, at least among the Republicans. But President Obama’s tax proposals would only reduce 2015 tax revenues by $222 billion. (That’s $385 billion in Table S-4 less $163 billion in Table S-3.)

Second surprise: The big winners in all of these tax plans are the rich! (That’s not just in dollars, but in percentage increase in after-tax income.)

I don’t mean to be hard on the Times reporters. This is exactly the kind of story they should be writing. Someone has to point out that the same people who are complaining about deficits are proposing to vastly increase those deficits. Especially when their fantastic claims are essentially going unchallenged on the campaign trail.

As you may have noticed by now, Wikipedia’s English-language site is (mostly) down for the day to protest SOPA and PIPA, two draconian anti-copyright infringement laws moving through Congress, and Google’s home page looks like this:

Under existing law (the DMCA), if someone posts copyrighted material in a comment on this blog, the copyright holder is supposed to send me a takedown notice, after which point I am supposed to take the material down (if it is in fact copyrighted).

SOPA and PIPA are bills in the House and Senate, respectively, that make it much easier for “copyright holders” (like the big media companies that back the bill—or, come to think of it, authors like me) to take action not only against “bad” web sites that make copyrighted material available (against the wishes of the copyright holders), but also against web sites that simply link to such “bad” web sites. For example, the copyright holder can require payment network providers (PayPal, credit card networks) to block payments to such web sites (in either category above) and can require search engines to stop providing advertising for such web sites—simply by sending them a letter. That’s SOPA § 103(b).*

Another controversial provision is the one in § 102 that allows the Justice Department to order domain name servers to stop translating URLs (like “www.google.com”) into the IP addresses that actually point your browser to the web sites you want to go to—essentially without due process. This has been described by some as tantamount to “breaking the Internet” because it would break the integrity of the domain name system that keeps the Internet organized. (For overviews of the bills, see Brad Plumer and the EFF; for the case that it violates the First Amendment, see Mike Masnick, who quotes extensively from and links to Lawrence Tribe’s argument).

Naturally, I was wondering how the bill would affect me. Many people think it would impose a requirement that web sites police not only the content they produce themselves, but the content contributed by visitors (e.g., blog comments), and all the content on all the sites they link to (including links in blog comments). I think this is based on § 103(a)(1)(B)(ii)(I) (don’t you love bill numbering?), which puts your site in the wrong if it “is taking, or has taken, deliberate actions to avoid confirming a high probability of the use of the U.S.-directed site to carry out acts that constitute a violation of section 501 or 1201 of title 17, United States Code.” What does it mean to take actions to avoid confirming a high probability that someone is using your site to link to copyrighted material?

Now, § 103 only allows copyright holders to cut you off from payment networks and advertising, and since we don’t do either one here, I don’t think it would mean the end of The Baseline Scenario. But it could mean the end of every commercial blog, or at least the end of comments on any commercial blog that doesn’t have the staff to police comments and sites linked to in comments. And if it passes, I will at least turn off comments until I can get an opinion from a real IP lawyer whom I trust.

So if you like the Internet the way it is, tell your representatives that you oppose SOPA and PIPA, via the EFF, Google, or Wikipedia. Thanks.

(I know it’s been a slow start to the year on the blog. I had a wedding to go to out of the country and an intensive week of edits on an upcoming book. Things should return to normal slowly.)

* Section 103, in bipartisan Orwellian fashion, is entitled “MARKET-BASED SYSTEM TO PROTECT U.S. CUSTOMERS AND PREVENT U.S. FUNDING OF SITES DEDICATED TO THEFT OF U.S. PROPERTY.” What’s market-based about a system that allows one party to cut off the revenues of another party simply by sending a letter to PayPal, MasterCard, Visa, and American Express?

Earlier this year I wrote about a paper by Suzanne Mettler that included a survey showing that a large proportion of beneficiaries of government programs insist that they have never been beneficiaries of any “government social programs”—60 percent for the mortgage interest deduction and 44 percent for Social Security retirement benefits, for example. This provides ample evidence that “keep your government hands off my Medicare” is not a fringe opinion.

Recently, I read Mettler’s book, and there’s more to the story. One of her arguments is that hiding government programs in the tax code undermines the democratic system because it obscures the role that government plays in society. There were two quantitative examples I thought were particularly revealing.

Mettler distinguishes between visible federal programs, such as Pell Grants and Social Security, which are administered by government agencies and therefore are more recognizable as government programs, and submerged programs such as the mortgage interest deduction or 529 accounts. She found that the more visible programs a person uses, “the more likely he or she was to agree that government had helped in times of need.” Benefiting from submerged programs, however, had no impact on people’s perception that the government had helped them—even in the case of things like HOPE or Lifetime Learning tax credits, which help people pay for eduction. In fact, “the greater the number of tax breaks an individual had benefited from, the more likely he or she was to disagree that government had provided opportunities for an improved standard of living” (pp. 41–43, emphasis added). (This is after controlling for socio-economic characteristics.)

In short, the way our government currently distributes goodies makes it possible for people to think that they are paragons of individual self-reliance while still being enormous beneficiaries of other people’s tax dollars. That explains a lot about politics today.

Mettler and Matt Guardino also did an experiment that is described in chapter 4 of the book. For various tax expenditures, they asked people whether they supported them or not before and after giving them some information about the policies. For the mortgage interest deduction, one group was told only what it is; the other group was told what it is and that: “The people who benefit most from this policy are those who have the highest incomes. In 2005, a large majority of the benefits went to people who lived in households that made $100,000 or more that year.” (That’s absolutely true: you can look at last page of the JCT report on tax expenditures.) The first group favored the deduction by 81 percent to 5 percent; the second group was evenly split, 40 percent for and 41 percent against. (Support for the Earned Income Tax Credit, however, rose when people had more information.)

So there may be some reason for hope. Give people a little more information, and they are more likely to recognize their own self-interest. That would be a big improvement over the present state of affairs.

Yesterday I wrote an Atlantic column about Republican presidential candidates’ fondness for tax plans that transfer massive amounts of money from the poor to the rich. The main question, to my mind, is why people like Herman Cain and Rick Perry talk about transferring massive amounts of money to the rich when polls show that even a majority of Republicans think the rich should pay more in taxes.

Many of the readers here could probably  have written that column themselves, but it does have a wonderful picture of Cain and Perry in all their well-dressed glory.

It has become a truism that modern American conservatism is revolutionary in the sense that it seeks to overturn the established order rather than to preserve it. “Reagan Revolution,” “Tea Party”—the very names for the movement announce that is about more than defending the status quo. In the conservative worldview, America (or “Washington,” or the “mainstream media,” or some other powerful stratum) is dominated by a liberal-intellectual-academic-bureaucratic-socialist-internationalist (pick two or more) elite that must be overthrown. So in at least a mythical sense, conservatism is about restoration, which is something very different from “conserving” what exists today.

When did this happen? According to one view of the world, to which I have been partial in the past, there was once an ideology called conservatism that really was conservative in the narrow sense: that is, it counseled maintaining existing institutions on the grounds that radical change was dangerous. The Rights of Man and the Citizen may be great, but soon enough you have the Committee of Public Safety and the guillotine. On this reading of history, conservatism became radical sometime after World War Two, when it gave up accommodation with the New Deal in favor of rolling the whole thing back, ideally all the way through the Sixteenth Amendment.

In The Reactionary Mind,* however, Corey Robin has a different take: conservatism, all the way back to Edmund Burke, has always been about counterrevolution, motivated by the success of left-wing radicals and consciously copying their tactics in an attempt to seize power back from them. Conservative thinkers were always conscious of the nature of modern politics, which required mobilization of the masses long before Nixon’s silent majority or contemporary Tea Party populism. The challenge is “to make privilege popular, to transform a tottering old regime into a dynamic, ideologically coherent movement of the masses” (p. 43). And the way to do that is to strengthen and defend privilege and hierarchy within all the sub-units of society (master over slave, husband over wife, employer over worker).

Now, the conservative movement in America is what it is; whether Edmund Burke would have blessed it or not is not going to change the number of signatories to the Taxpayer Protection Pledge. But Robin’s book should make people skeptical of the occasional claim that there is some “good conservatism” represented by, say, George Will, and some “bad conservatism” represented by, say, Sarah Palin. (I would have said Rick Perry, but these days it seems poor Palin can use all the media mentions she can get, since even Chris Christie is out-trending her.)

Robin also highlights the importance of victimhood in conservatism, going back to Edmund Burke’s tears for Marie Antoinette. To restore something, you have to have lost something in the first place. In the 1970s, it was the idea that business was being beaten up by labor that finally got the business community to organize behind the Republican Party (see Hacker and Pierson, Winner-Take-All Politics; Phillips-Fein, Invisible Hands); without that money, conservatism would still be about as powerful as it was in 1964. The idea that ordinary Americans are being trampled on by the liberal-bureaucratic elite, which is so central to the fundraising strategies of the NRA and other lobbying groups, is part and parcel of the whole ideology, not a clever idea thought up by Wayne LaPierre.

Of course, you can always get into an argument about which specific positions can lay claim to the word “conservative” and which can’t. To the extent that you feel bound by intellectual history, then I think Robin has a strong argument. To the extent that words are what you make them, I guess everyone has equal claim to the word.

For more, see Robin’s guest post at Rortybomb.

* I got a pre-publication copy free from the publisher. I also went to high school with Corey, but haven’t seen him in a couple of decades.

(Actually, it was on Saturday.) I just read Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (W.W. Norton, 2009), by Kim Phillips-Fein. It’s a history of the resistance from the business community to the New Deal and how it gave birth to at least one major strand of the modern conservative movement. One of Phillips-Fein’s major points is that the conservative movement is not just a reaction to the civil rights movement, the 1960s, and the women’s liberation movement (and Roe v. Wade). Those trends gave the conservative movement more energy and support, but business leaders had for decades been trying to build an intellectual and political movement that could reverse the New Deal. And while some of them talked about Christian values, what they really cared about were breaking unions and lower taxes.

I think this is relevant because it gets at the question of what the modern conservative movement and the Tea Party are all about. There has been a lot of work on this issue, from a variety of different angles. David Campbell and Robert Putnam looked at longitudinal surveys and found that the best predictors of being a Tea Party supporter are being an activist, conservative Republican and wanting religion to play a larger role in politics—which implies that the Tea Party is just the same foot soldiers who have backed the conservative movement for the past thirty years. Vanessa Williamson, Theda Skocpol, and John Coggin (Chrystia Freeland summary here) studied one local Tea Party movement in depth and found that there is something new about the movement:

“We find that the Tea Party is a new incarnation of longstanding strands in U.S. conservatism. The anger of grassroots Tea Partiers about new federal social programs such as the Affordable Care Act coexists with considerable acceptance, even warmth, toward long-standing federal social programs like Social Security and Medicare, to which Tea Partiers feel legitimately entitled. Opposition is concentrated on resentment of perceived federal government ‘handouts’ to “undeserving” groups, the definition of which seems heavily influenced by racial and ethnic stereotypes.”

Jane Mayer famously described the Tea Party as the creation or the tool of the Koch Brothers and former Gingrich lieutenant Dick Armey. And a number of scholars, including Thomas Ferguson, have argued that political conservatism derives its strength not from a shift in popular attitudes, but from the money provided by businessmen with an anti-regulation, low-tax agenda.

Obviously, as with any complex phenomenon, there are nuances and differences—between elite organizers and grass-roots supporters, and between people who came to the movement for different reasons. I don’t have anything particularly original to add here. But I think Phillips-Fein’s book strengthens the relative position of the pro-business, anti-union, anti-regulation strand in the genealogy of the conservative movement (as opposed to the family values strand, or the true libertarian strand).

It also contains this gem for anyone who thinks the American people suddenly developed warm and fuzzy feelings about the Constitution in the past two years. Describing the 1934 founding of the American Liberty League—a rabidly anti-Roosevelt, anti-New Deal organization—she writes (p. 10):

“The main topic of discussion was creating a ‘propertyholders’ association,’ as Irénée [DuPont] put it, to disseminate ‘information as to the dangers to investors’ posed by the New Deal. The group decided that the name of their association should not refer directly to property—it would be better to frame their activities as a broad defense of the Constitution.”

Today’s Atlantic column is about corporate political spending in the wake of Citizens United and what, if anything, can be done about it. A group of corporate and securities law professors has petitioned the SEC to write rules requiring companies to disclose their political spending, just like they have to disclose their executive compensation today. As usual, I’m not too optimistic about what disclosure can achieve, especially disclosure in SEC filings or proxy statements: who reads those things, anyway? But it’s better than nothing, and with the current makeup of the Supreme Court, nothing is just about what we’ve got now.

Yesterday I wrote an Atlantic column about the bizarre situation that the Federal Reserve is in. Ordinarily, we think central bank independence is important because it permits the bank to take unpopular, anti-growth steps when the political branches of government want popular, pro-growth steps. But today we’re in Bizarro world: the political branches are intent on strangling the economy, so the Fed should be ignoring the political winds and stimulating the economy—especially since it’s clear that fiscal policy is off the table. Rick Perry just provided a last-minute dose of color.

Obviously Perry and the Republicans don’t want the Fed to stimulate the economy because they don’t want the economy to recover before the 2012 elections. But I think there’s something deeper here, which Mike Konczal gets at in this great post. Konczal summarizes the nineteenth-century gold-standard ideology this way: “Paper money decreases the power of the husband over his wife and the father over his family, loosens the natural leadership that serves as the best protection against ‘effeminate’ manners, and gives us a democracy without nobility.”

For policy wonks like me, inflation (short of hyperinflation) is just a transfer of wealth from creditors to debtors and hence a way to help bring overleveraged balance sheets under control and get people spending again.* But don’t take it from me; take it from Ken Rogoff, who is nobody’s idea of a socialist. I think Olivier Blanchard, chief economist of the IMF, has also said that in today’s world inflation should be 4 percent instead of 2 percent.

But for Rick Perry and people like him, there’s something immoral and unmanly about inflation and about paper money. He can stand there telling people that monetary expansion is devaluing the dollars in their pockets, and those people will nod their heads, even though (a) it isn’t—check the inflation figures—and (b) many of them are net debtors and thus stand to gain from a little more inflation. The basic problem is that Rick Perry and his audience (and probably many other people) see economic questions in primarily moral terms, and in their moral universe gold is better than paper and deflation is better than inflation. (That’s the obvious inference if you say that inflation is bad.)

I’m obviously not the first person to think of this. It’s the core of George Lakoff’s book Moral Politics, which is a great description of the conservative worldview combined with an unconvincing description of a liberal worldview that he wishes existed but I think doesn’t exist.

But I think it’s particularly relevant in light of today’s op-ed by David Campbell and Robert Putnam in the Times. Campbell and Putnam use interviews going back to 2006 to see what people ended up joining the Tea Party. And it isn’t new entrants to politics, or libertarians, or people with a thing for the Constitution. Using pre-Tea Party data, the predictors of becoming a Tea Party supporter include being Republican, political activism (contacting government officials), being white, “a low regard for immigrants and blacks long before Barack Obama was president” (even compared to other white Republicans), and wanting more religion in politics. (The best predictor is being a Republican; the second best is wanting more religion in politics.)

So if the Tea Party is basically the Christian Coalition all over again, why does it fly the banners of libertarianism, strict constructionism, hard money, and low taxes? One explanation is the billionaire puppet-master story, best exemplified by Jane Mayer’s story about the role of the Koch brothers and other traditional Republican elites in the rise of the Tea Party. I’m sure there’s something there. But another explanation is that the Tea Party, like the old religious right, is a movement based on a sense of moral outrage, and the style of the Tea Party appealed to a certain segment of the population. If you think the world went all wrong in the 1960s and abortion should be illegal and there what we need is prayer in public schools, you probably also think the Constitution must be eternally pure and gold is better than paper money—even if it’s not in your own economic interests. (Just like you probably don’t like distributing condoms to teenagers, even if it is an effective way to reduce the number of abortions.)

And this is why Rick Perry can go around spouting nonsense and still be a serious contender for the presidency.

* For the record, I’m a net creditor—I have money in bond funds and TIPS and no debt to speak of—so I stand to lose from higher inflation.

Helene Cooper of the New York Times wrote a “news analysis” story saying that the challenge for President Obama is this:

“Is he willing to try to administer the disagreeable medicine that could help the economy mend over the long term, even if that means damaging his chances for re-election?”

The problem, she goes on to say in the next paragraph, is that the economy is in bad shape:

“The Federal Reserve’s finding on Tuesday that there is little prospect for rapid economic growth over the next two years was the latest in a summer of bad economic news.”

 Now ordinarily I wouldn’t pick on the Times for something like this: it is just a newspaper, after all. But this case is a good example of  right-wing talking points leaking into the mainstream media and then becoming part of the conventional wisdom, which is something that should be cut off as soon as possible.

This framing has a certain kind of narrative resonance: Is the young, “untested” leader of the free world willing to sacrifice himself for the good of the country? Is he, like Harry Potter, willing to face death to save the world from Lord Voldemort?

The problem is, it’s completely backwards. The “disagreeable medicine” Cooper suggests is budget cuts, including cuts in entitlement programs like Social Security. But that has nothing to do with the problem she presents at the beginning: slow economic growth. Anyone who is reading this blog already knows that budget cuts are contractionary in the short term. The “medicine” the economy needs now is more government spending, not less, and there’s nothing disagreeable with putting more people to work and building more stuff that people want.*

There is a somewhat valid debate about whether deficit-cutting is good in the medium and long term. There have been papers purporting to show that deficit-cutting can lead to higher economic growth, but those have confused deficit-cutting in a boom and deficit-cutting in a slump. (See Mike Konczal for a summary of that debate.) In other words, it could be a good idea to cut the deficit when the economy is strong (because then it could lower interest rates for the private sector), but not when it is weak (and certainly not when interest rates are already extremely low). A recent paper by economists at the IMF reaffirms that when you restrict your sample to episodes of deficit-cutting that are not confounded by concurrent economic conditions that the deficit-cutting is responding to, you find that deficit-cutting lowers economic growth.

So why is Helene Cooper ready to dispatch Frodo Baggins off to Mordor to toss the One Ring into Mt. Doom, when really all he needs to do is head back to the Shire and throw a huge party, putting unemployed caterers, bakers, and entertainers back to work? I think it’s because if right-wing politicians and commentators keep repeating that the deficit is hurting the economy (“job-killing deficits,” of course), then otherwise reasonable people start to believe it. See for example this priceless passage from the House Budget Resolution:

“Government at all levels is mired in debt. Mismanagement and overspending have left the nation on the brink of bankruptcy. Only recently, millions of American families saw their dreams destroyed in a financial disaster caused by misguided policies, perverse incentives, and irresponsible leadership. This crisis squandered the nation’s savings and crippled its economy.”

If you didn’t know better, reading that would make you think that the financial crisis and recession were caused by government debt.

So now we’re at the point where ordinary people are starting to believe this nonsense. And that means we need to stamp it out whenever possible.

* Arguably, tax cuts would work, too. I think that government spending is highly preferable for two reasons. First, spending is easy to undo after it is no longer necessary (or even before—see ARRA for Exhibit A), while tax cuts seem to be forever. Second, spending has a higher multiplier.

1. Obama still has his hostage—if he wants it. As far as I can tell, the Bush tax cuts are nowhere in the debt ceiling agreement, which means that at current course and speed they expire at the end of 2012. Extending the tax cuts would reduce revenue by about $3.5 trillion over the next decade. According to news reports, Obama was willing to extend the Bush tax cuts in exchange for $800-1,200 billion of additional tax revenue—in other words, he was willing to cut taxes by about $2.5 trillion relative to current law. Boehner and Cantor walked out because of some combination of (a) they couldn’t get their members to vote for that tax “increase” or (b) they think they will be able to extend all the tax cuts if they negotiate that deal separately. I wouldn’t be so sure about (b). Remember, gridlock means the tax cuts expire.

2. The next step of the deal is that a joint Congressional committee is supposed to come up with a plan to reduce deficits by $1.2-1.5 trillion over ten years. If they fail to come up with a plan, or their plan is rejected by Congress, then there will be major automatic cuts in discretionary spending, including defense. (There will also be cuts in Medicare reimbursement rates, but not in Social Security or Medicaid.) The idea on Obama’s side is that the prospect of major defense cuts will force Republicans to negotiate. But if they were willing to let the government default rather than increase taxes—even by closing tax loopholes—why do we think they will be afraid of some defense budget cuts? Traditional Republicans may have liked high defense spending, but not the new breed. Ron Paul is basically an isolationist; Grover Norquist thinks the defense budget should be reduced.

3. Obama needs the joint committee to succeed more than the Republicans do. Without it, he only gets a total of $2.1 trillion in debt ceiling increases, which may not get us through the next election—especially with the economy seeming to only get weaker. Since he is starting out with the weaker hand, I don’t see how he gets anything unless he is willing to hold the Bush tax cuts hostage. The tax cuts can’t be part of the joint committee plan because the committee has to find deficit reduction relative to the CBO baseline, and the baseline assumes that all the tax cuts expire. But presumably it could be negotiated in parallel as a separate issue. More likely, though, I expect we’ll get a joint committee deal that is all or virtually all spending cuts, and Obama will pressure enough Democrats to go along in order to remove the risk of another crisis just before the election. Then, frustrated at giving in to Republicans on every issue, the Democrats prevent the Bush tax cuts from being extended, and we have mutual assured destruction (both sides lose what they want most).

4. In any negotiation, you want to convince the other side that you are unable to compromise. Then the other side has to compromise. The Republicans have done this brilliantly with the anti-tax pledge: Boehner and Cantor can say, with complete honesty, that no bill that increases taxes in any way can get through the House, since a majority of the House has pledged to vote against it. And they will stick to that pledge, or else they will get attacked from the right in the primaries next year. The Democrats have no response. I don’t see how this is going to change.

Quick, what was the greatest conservative accomplishment of the George W. Bush presidency? It wasn’t Medicare Part D: that was a clever way to steal a Democratic issue and pass it in a form that was friendly to the pharmaceutical industry. It wasn’t Roberts and Alito: yes, they are young and conservative, but the majority is still only 5-4. It wasn’t Social Security privatization: that didn’t happen. Iraq? Getting political support to invade Iraq was a major coup, but everything went downhill from there.

The answer is obvious: the tax cuts of 2001 and 2003. Together, they were a wish list of conservative tax policy: a reduction in the top marginal income tax rate from 39.1 percent to 35 percent; a reduction in the top rates for capital gains and dividends to 15 percent; much higher contribution limits for tax-preferred retirement accounts (meaning that if you have enough money to save, you can shield more of it from taxes); and eventual elimination of the estate tax. In total, when fully phased in, the Bush-era tax cuts sliced almost 3 percent of GDP out of federal government revenues.*

And most of that money stayed in the pockets of the wealthy. According to the Tax Policy Center, 65 percent of the dollar value of the tax cuts (in 2010, once the 2001 and 2003 tax cuts were phased in) went to the top income quintile, and a staggering 20 percent — that’s tens of billions of dollars — went to the top 0.1 percent. Even if you look at the impact in percentage terms, the rich still took home more than their share: after-tax income went up by 0.7 percent for the bottom quintile, 2.5-2.6 percent for the middle three quintiles, 4.0 percent for the top quintile, and 8.2 percent for the top 0.1 percent.

Everyone knows all that already. Who cares? The point today is that President Obama can make this epic conservative victory vanish by snapping his fingers. He can say, “I promise to veto any bill that extends any of the tax cuts.” (Or, if he prefers, he can say, “I promise to veto any bill that extends any of the tax cuts, except the income tax rate reductions for the ‘middle class.’”)

Why would he do such a thing? Think about where the debt ceiling negotiations are today. The House Republicans are effectively holding the financial system and the economy hostage, demanding a massive, spending-cuts-only deficit reduction package. What makes this a smart move (where “smart” is defined solely in terms of likelihood of winning, not the risk being taken) is that if they can force Obama to choose between (a) raising the debt ceiling on their terms and (b) not raising it at all, he is going to choose (a). Even if he would be better off politically letting the government default and blaming it on the Republicans, no one thinks he would actually let it happen.**

Well, Obama has a hostage, too, if he wants to use it: the Bush tax cuts. From the Republicans’ position, just thinking about themselves and what they want (not about the country as a whole), are a few trillion in spending cuts over ten years — averaging something like 1.5 percent of GDP — worth giving up the greatest accomplishment of the entire conservative revolution?

Now, I’m not enough of a political strategist to know exactly how this would play out. For Obama to use the threat, he has to be willing to go through with it. That means mutual assured destruction: the Republicans insist on $3 trillion in spending cuts as the price to pay for raising the debt ceiling; Obama agrees in order to prevent default; and then Obama lets $3-4 trillion in tax cuts expire. Politically, it means being willing to argue in 2012 that letting the tax cuts expire was the right thing for the country. But that’s not an impossible case. Back in 2001, every aspect of the tax cuts was unpopular, other than the fact that they were tax cuts. (See Hacker and Pierson, Off Center, pp. 50-51.) Alternatively, Obama could propose a bill that extends just the “middle class” tax cuts on a take-it-or-leave-it basis.

As I said, I can’t tell you what the political percentages are. But it seems to me there has to be some leverage here that Obama can use — if he wants to.

* In the January 2007 Budget and Economic Outlook, the total 2017 cost of extending all the tax cuts, in addition to but not including patching the AMT, was projected to be $616 billion (Table 1-5), or 2.9 percent of GDP. I chose the 2007 projection because (a) it goes out to 2017, which is when some tax cuts were scheduled to expire and (b) it is before 2008, when the tax cuts to stimulate the economy began.

** What makes it a somewhat less smart move is that, with the Senate in the hands of the Democrats, the Republicans have no clear way of forcing Obama to sign or veto their deficit reduction bill. If the two houses can’t agree on a plan, Obama can avoid having to make the choice (and the end of the world will be Congress’s fault).

What was the budget debate about eleven years ago?

As you can see, that is the cover of the CBO’s March 2000 Budget Options report. (You can get it online, but without the cover.*) For most of the 1980s and 1990s, this report was called Reducing the Deficit: Spending and Revenue Options; this year’s version has reverted to that title.

The context for the picture above was the budget surpluses of the late 1990s. At the time, the CBO was projecting surpluses for at least the next twenty years, amounting to over $3 trillion in the first decade of the twenty-first century. (See the 2000 Budget and Economic Outlook, Summary Table 1.) And although most of the surpluses were off-budget (surpluses of Social Security payroll tax revenues over benefit payouts), there were supposed to be ten years of on-budget surpluses as well.

We all know what happened next: a (mild) recession, the Bush tax cuts of 2001 and 2003, the Afghanistan and Iraq Wars, and the Medicare prescription drug benefit, among other things. But the question for now is: did those surpluses really exist?

On an annual cash-flow basis, yes they did. The 2000 surplus was $236 billion, and only about $180 billion of that was due to the various Social Security and Medicare trust funds. (See Historical Tables 1.1 and 13.1 to the 2012 budget.) But on a long-term basis, the government very clearly had a budget gap. The CBO’s 1999 Long-Term Budget Outlook already had this now-familiar picture (p. 4):

As you can see, even if the government saved all of its surpluses — no tax cuts, no additional spending, just save the money for the future — the national debt would shoot up in the 2060s. At the other extreme, if the government gave back the surpluses, either through tax cuts or additional spending (but still balanced the budget for the next decade), the debt would spike in the 2030s. And the reasons were already clear: demographics and health care costs.

In other words, today’s long-term debt problems should not have been a surprise. And back in 2001 when the Bush tax cuts came up for a vote, every Congressperson should have known about these two pictures. That includes Senators Baucus, Feinstein, Kohl, Landrieu, and Nelson (Democrats), and Senators Blunt, Burr, Chambliss, Cochran, Collins, Crapo, DeMint, Ensign, Graham, Grassley, Hatch, Hutchison, Inhofe, Kirk, Kyl, Lugar, McConnell, Moran, Murkowski, Portman, Roberts, Sessions, Shelby, Snowe, Thune, Toomey, Vitter, and Wicker (Republicans), all of whom voted for the 2001 tax cuts (some of them as members of the House). (Sources here.) Senator Nelson and all of the Republicans (except Snowe and Thune) also voted for the 2003 tax cuts, too. Of course, John Boehner and Eric Cantor also voted for both tax cuts.

That doesn’t necessarily mean that the 2001 and 2003 tax cuts were necessarily bad policy (although I think they were). But it does mean that if these people are going to complain about the long-term deficit, they should admit to being part of the problem.

* Actually, you can now get CBO reports back to the 1970s online. The previous time I checked, the website only went back about ten years, which is why I went to the library for older versions.

(Warning: Very elementary post ahead. Most of you probably know all this already.)

Mitch McConnell, Senate Republican Leader, quoted in Bloomberg: “We have seen the consequences of giving Washington a blank check. My message to the president is simple: It’s time for Washington to focus on fixing itself. It’s time Washington take the hit, not the taxpayers.”

That sounds good (if you don’t like “Washington,” that is), but what does it mean? McConnell wants people to think that their tax dollars go to feed some animal named “Washington,” and therefore our budget problems can be solved by simply feeding Washington less — without “taxpayers” taking the hit.

That might be true if “Washington” simply consumed money for its own sake, but the problem is that most of the federal budget isn’t consumed by the federal government.

Of the $3.8 trillion in outlays in President Obama’s proposed FY 2012 budget, more than half comes in one door and immediately goes out another door back to ordinary people, the vast majority of whom are or were previously taxpayers. $742 billion gets paid out in unrestricted cash by Social Security; another $762 billion goes to pay for people’s health care expenses. Other entitlement programs such as retirement benefits for federal employees (civilian and military), food stamps, and unemployment insurance add up to another $716 billion.* There’s no way to reduce this spending without directly hurting “taxpayers.” You can argue that some of these programs should be eliminated, but you can’t argue that you can eliminate those programs without hurting ordinary people.

Another $207 billion goes to pay interest on the outstanding debt. There’s no way to reduce this spending without triggering a massive financial crisis, which would ordinarily be unthinkable.

Of the rest, almost two-thirds goes to pay for national security. Mitch McConnell might be open to cuts in defense spending, although I doubt that he’s come out and said so.

That leaves only $507 billion for discretionary, non-security programs. To start off with, this is less than a third of the projected 2011 deficit, so even if you think that all of it is money wasted on bureaucrats who do nothing, you still can’t balance the budget on their backs. (And besides, they are “taxpayers,” too — so shutting down the government is just a way of concentrating the pain on federal government employees.) And even there, a lot of that $507 billion simply flows right out to ordinary people (not federal employees): educational grants through the Department of Education, low-income housing vouchers through the Department of Housing and Urban Development, farm subsidies through the Department of Agriculture, and so on.

So what is “Washington”? You might legitimately believe that the Environmental Protection Agency provides no value to society and should be entirely eliminated; I don’t, but at least that position is logical. But that would only save you $10 billion.  Alcohol, Tobacco, and Firearms? $1 billion. You can also believe that some of the services provided by the government could be provided more cheaply by the private sector; but even if the government stopped providing those services, you would still have to pay someone something for them. The truth is, there is no animal named “Washington” that eats money. Most of what Washington does (in dollar terms) is write checks to people, so reducing a dollar of Washington’s spending generally takes a dollar, or close to a dollar, out of someone’s pocket.

And the Republicans know this. Much as they would love to kill EPA, ATF, CFPB, and the like, they know that is peanuts. That’s why Kevin McCarthy, the third-leading Republican in the House, “insisted that limits on Medicare must also be included in a bipartisan deal,” according to the same Bloomberg article. It’s very clear that “taxpayers” — in this case, Medicare recipients — are going to get hurt in any budget-cutting deal. The only question is which ones.

Saying “it’s time Washington take the hit, not taxpayers,” is not the only part of the Republican position that flies in the face of logic. The other part is the refusal to consider tax increases, especially when they are defined to include all revenue increases.

According to Bloomberg, Eric Cantor walked out of debt negotiations because he opposed administration revenue-raising proposals such as eliminating last-in, first-out (LIFO) accounting for inventory costs and ending subsidies for oil and gas companies. Now, you may or may not think that subsidies to oil and gas companies are good policy (theoretically, they promote exploration, which theoretically reduces our dependence on foreign sources). But your willingness to consider eliminating such subsidies should not depend on whether those subsidies are effected as cash payments by the government or as loopholes in the tax code.

This, of course, is the old tax expenditure issue. Anything the government can do by spending, it can also do (though perhaps not as efficiently) by granting a tax exemption. By Cantor’s logic, if the government were awarding cash bonuses to oil companies, he would be open to eliminating those bonuses; but since instead the government awards tax goodies (such as accelerated deductions) to oil companies, those goodies must be off the table.

It bears repeating that this is not an issue of what is or is not good policy. You could say the same thing about the subsidy for dependent care: because it’s implemented as a tax credit instead of as a spending program, it’s off limits to the House Republicans. Whatever your views are on the actual policies, it’s absurd to base your deficit-cutting strategy on whether they are labeled as spending programs or as tax goodies.

But it’s also absurd to think that the federal government exists independently from the American people. Really it’s a kind of fetishism: in Wikipedia’s words, “the attribution of inherent value or powers to an object.” Apparently some people have hated the government so long that it has become a kind of magical totem in their minds.

One of the new old ideas floating around Washington these days is an aggregate spending cap for the federal government. For example, both the House Republicans’ budget and one of those “moderate bipartisan” Senate proposals calls for limiting total government spending at around 21 percent of GDP. This is silly for at least two reasons.

First, and less controversially, the number of dollars that flow from the federal government to entities that are not the federal government is not an economically significant number*. The most obvious example of this is tax expenditures: subsidies that are implemented through the tax code, usually as deductions or credits. For example, let’s say the government wants to promote renewable energy. It can increase taxes and write checks to companies that produce solar panels; or it can keep taxes the same and enact tax breaks for companies that produce solar panels. Same difference — except that the former “counts” as government spending and the latter doesn’t. So a spending cap simply motivates Congress to spend money through tax credits rather than by writing checks, which is bad for all sorts of reasons. (It is harder to target, it reduces the tax base, etc.).

There are plenty of other ways to game the system, too. The federal government could impose unfunded mandates on the states — and then provide federal tax credits that make it easier for states to raise money. Think this is unlikely? This is what we have already with the federal tax deduction for state and local taxes and the federal tax exemption for state and local government bonds.

Second, even without the tax expenditure issue, the federal government lumps together all sorts of different kinds of animals that should not be thought about in the same way. I’ve discussed this a bit in a previous post, but let’s try again. Take Social Security, for example. Let’s say the government offered an optional add-on to Social Security where you could elect to increase your payroll taxes by 2 percentage points. That additional tax levy would go into an individual account that you could control. The plan would be administered by the Social Security Administration, but you could select from a range of funds managed by private sector fund management companies. It would have the same tax preferences as a typical IRA. Such a plan would count as an increase in “taxes” and “spending,” even though it’s voluntary (and therefore, for you free marketers out there, unambiguously welfare-increasing). Yet a spending cap says that you can’t even have incremental self-funding government programs that increase individual choice, which by definition do not contribute to the deficit.

The implication is that we need private-sector solutions, which doesn’t sound all bad. But what about areas where the private sector has failed to come up with a viable solution, like long-term care insurance? There, a spending cap means we’ll either get nothing — or we’ll get heavy regulation of private sector actors to try to get them to do what the government is no longer allowed to do, which will be both costly and inefficient.

(For an example, imagine the following: Eliminate the U.S. Postal Service. Say that licensed private companies can provide mail service. But, they have to deliver first-class mail to every address in the country for the same price — and a price that is regulated by the government. If no one is willing to do that in a competitive market, then you have to create a licensed monopoly with cost-plus pricing. Now you’re worse off than where you started — except that the whole operation is off the government’s books, so you have “smaller government.”)

In addition to those two problems, there’s the more obvious problem with setting a hard cap on government spending: What if we go to war? (Wait, we’re at war already.) What if we have a massive epidemic? What if an earthquake devastates California? For that matter, what if we have a recession and spending increases because of automatic stabilizers? I have to imagine that the people proposing these spending caps have considered this, but the answer can’t be that if we have to increase military spending because of a war, we automatically cut everything else; by that logic, in World War II the government would have completely disappeared.

Taken on its face, the idea of having rules that enforce deficit targets is not a terrible one. But having targets just for spending is both misguided and dangerous. Deficit targets are better, but they still have to be set and enforced over a cycle, with a buffer for catastrophic events. (And when it comes to catastrophic events for the national balance sheet, there is almost nothing worse than a financial crisis, as the past few years have proven.)

* For more on this topic, see Daniel Shaviro, Taxes, Spending, and the U.S. Government’s March Towards Bankruptcy.