While we here in the Budget Brigade are thankful that our respective alma mates are poised to clinch BCS bowl berths (hook 'em, Horns!), we are even more thankful that President Elect Obama has serious concerns about the current BCS system. That's change we can believe in!

The Budget Brigade will return to the BudgetBlog on Monday.

Have a great Thanksgiving and enjoy the day.

Image by Flickr user Jennifer13 used under a Creative Commons license.

House Majority Leader Steny Hoyer (D-MD) provides us with a teaching moment (BNA [$]):

House Majority Leader Steny Hoyer (D-Md.) said Nov. 18 House Democrats still hope to adhere in 2009 to the pay-as-you-go budget rule they put in place at the start of the 110th Congress, but acknowledged the troubled economy and other priorities may outweigh it.

"We will continue to be committed to the principle of pay-as-you-go," Hoyer said at a speech at the National Press Club. "The reality, however, is that recovery legislation will raise the deficit in the short term. Fiscal hawk that I am, I still believe that that is the right course, because a wide consensus of economists tells us that deficit spending is both the way out of a recession like this one and the way to prevent even more catastrophic decline."

Hoyer makes the classic mistake of believing that PAYGO stops all deficit spending. What PAYGO actually does is (theoretically) prevent deficit increases resulting from tax cuts or increases in mandatory spending. Much of the proposed spending in the Senate's latest stimulus package (like unemployment insurance and infrastructure spending) would increase discretionary spending, which does not have to be offset with revenue increases or spending cuts.

However, some of the spending proposals in the Senate package do increase mandatory spending (like increased Medicaid spending) and would have to be offset in PAYGO-land. But to say that this would wreck the economy is, well, just plain wrong.

Keynesian economics tells us that increasing budget deficits (or reducing budget surpluses) spurs economic growth. Fidelity to PAYGO, because it enforces deficit neutrality, would be economically neutral. True: 100 percent deficit-neutral budget changes would be a mistake, as now is the time to increase the deficit to boost economic growth, but adherence to PAYGO would have no impact on the economy.

So, yes, deficit spending is absolutely necessary right now. Adhering PAYGO, however, would not stop Congress from pursuing this course of fiscal policy.

Image by Flickr user foundphotoslj used under a Creative Commons license.

The National Journal has been reporting this week that current Congressional Budget Office (CBO) Director Peter Orszag is in line to head up the Office of Management and Budget in the upcoming Obama administration. Orszag formerly served as a senior economic adviser during the Clinton administration and held a post in the economics studies program at the Brookings Institution.

Orszag has been impressive in his two year stint as the head of the CBO, which he began in January, 2007 and I think he would be an excellent choice to run the OMB for Obama. BudgetBlog readers will certainly know that we have high esteem for Dr. Orszag.

Senate Finance Chairman Max Baucus, D-Mont., said Monday that he hopes to make sure a health care overhaul proposal he released last week is paid for over a 10-year period. But he left open the possibility that it would not comply with pay-as-you-go budget rules over five years, or perhaps at all.

"There are going to be some upfront costs, but they'll be investments," Baucus said after speaking at a Brookings Institution seminar on health care reform. "Over 10 years, some of the bulk of the upfront investments will be offset by cost reductions. But that's over a 10-year period."

The budget rules, which Democrats adopted at the beginning of the 110th Congress, generally require legislation authorizing new spending to be offset with spending decreases elsewhere or with tax increases. Democrats have often pointed to the budget rules as evidence of their fiscal discipline.

I've got a bit of an issue with that last sentence - or perhaps my issue is with the Democrats. They do like to cite PAYGO rules as evidence of their fiscal discipline. And it is good they voted to reinstate those rules in early 2007. But to be fiscally responsible, they actually need to follow the rules rather than waiving them whenever they please. Unfortunately, their commitment to PAYGO has been much more rhetorical than real over the last two years. The CQ article goes on to state that Democrats will feel pressure from their supporters, particularly labor unions, to pass health care reform regardless of costs. That's comforting. Who is steering this ship anyway?

The Republicans have been no better. In the same article, Senate Finance Committee Ranking Republican Charles Grassley (R-IA) states that "paying for health care reform needs to be done in an intellectually honest way for the fiscal health of our country." Is Grassley serious? I almost fell out of my chair when I read that. It leaves me wondering why Grassley hasn't had any problems with eight years of irresponsible, reckless, and downright stupid justifications for passing budget-busting tax cuts at any cost?

He hasn't seem too concerned with the fiscal health of our country when he has repeatedly advocated that since the Alternative Minimum Tax (AMT) was never intended to impact millions of Americans, we might as well not pay for repealing it. That's what fiscal responsibility is about - intentions.

Grassley can't even be honest about the money-suck that is the IRS's private tax collection program, which has repeatedly been shown to cost the government more money than it brings in. Now he's seen the light and wants to be intellectually honest about budgeting and being fiscally responsible? That's not change we can believe in.

Image by Flickr user PhotoJonny used under a Creative Commons license.

Sen. Charles Grassley (R-IA), has asked the Treasury Department's Inspector General to initiate an investigation into the "facts and circumstances" that led Treasury to issue a revised guidance to tax code section that could give banks $140 billion in tax breaks. On Thursday, we noted our indignation about this quiet change in the tax rules governing the implementation of section 382 of the tax code. Grassley, however, thinks something other than Executive overreach may be at work.

...there is reason for concern about the appearance of preferential treatment created by the Treasury Department's decision to issue Notice 2008-83. The Notice, issued just days before Congress voted on the Emergency Economic Stabilization Act of 2008, appears to have had the effect of benefiting Wachovia Corporation executives and Wells Fargo. Robert Steel, the CEO of Wachovia, was a former Undersecretary for Domestic Finance and was a vice chairman at Goldman Sachs prior to that. He joined Treasury in 2006 to work on issues pertaining to Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia just this summer.

Treasury's issuance of the Notice apparently enabled Wells Fargo to take over Wachovia despite a pending bid from Citibank. Without the issuance of the Notice, Wells Fargo would have only been able to shelter a limited amount of income. Under the Notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits. It also potentially enabled Wachovia's senior executives to qualify for parachute payments that may not have been available under the Citibank deal.

The facts and circumstances surrounding the issuance of the Notice, particularly as it relates to Wells Fargo's purchase of Wachovia Corporation, raise concerns about the independence of the decision makers.

(click to enlarge)

Back in August, I blogged about a report issued by the U.S. Senate Permanent Subcommittee on Investigations about how foreign banks, specifically large European banks, were helping wealthy Americans evade U.S. taxes.

This week on Wednesday, the Justice Department, in conjunction with the Internal Revenue Service (IRS), announced the indicment of Raoul Weill, a senior executive at the Swiss banking giant UBS. Sharp BudgetBlog readers will remember that UBS was one of the European banks named in the Senate investigation released over the summer. Seems like things have come full circle for UBS. From the Justice Department press release:

According to the criminal indictment, between 2002 and 2007, Weil oversaw the Swiss bank's cross-border private banking business that provided services to some 20,000 U.S. clients who reportedly concealed approximately $20 billion in assets from the IRS. Weil, who allegedly referred to this business as "toxic waste," mandated that Swiss bankers grow the cross-border business, despite knowing that this would cause bankers to violate U.S. law.

According to the indictment, when given a choice to wind down, sell or spin off the cross-border business, Weil chose to continue the business because of its profitability. Between 2002 and 2007, the United States cross-border business generated between $200 million a year in revenue for the Swiss bank.

Unfortunately, prosecutors may not be able to obtain the information necessary to convict Mr. Weill or expand their investigation to pursue U.S. clients who participated in tax evasion. Even if they are able to convict Mr. Weill, it's not assured that Switzerland would extradite him to the U.S. According to a report in the Wall Street Journal, the Swiss government has "firmly dug in its heels against the U.S. investigation, citing Swiss laws that generally prohibit banks from revealing the names of clients." The U.S. has demanded that the Swiss government step in to assure the investigation can continue, but doing so would likely hurt the prospects for Swiss banks, which have long served as a refuge for the rich and powerful in their attempts to horde assets.

It is unclear how much trouble Mr. Weill has gotten himself into, but if convicted of the felony charge of conspiring to defraud the U.S. government, he could serve up to 5 years in jail. Somehow that doesn't seem to me like enough for stealing $1.2 billion from the American people.

Jail time for Mr. Weill aside, the broader hope is that this case will open up Swiss banks and indeed the international banking industry generally, so we have a more honest, transparent, banking system that is held accountable to laws and regulations. That's the hope, but I'm not holding my breath.

This is just unacceptable:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

...

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

...

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

The good folks at Citizens for Tax Justice have put together a handy guide on what the IRS ruling says and why it's just so very wrong (quoting directly):

• The IRS has apparently usurped the legislative role of Congressional tax writers.
• The new rules give an artificial competitive advantage to banks that can afford to expand now .
• The change could be incredibly costly to federal taxpayers.
• The new rules present an unnecessary and harmful challenge to already-stressed state governments.

Image by Flickr user TheTruthAbout... used under a Creative Commons license.

On Thursday, in an interview with the Wall Street Journal, House Speaker Nancy Pelosi (D-CA) said that she is considering a two-stage economic stimulus strategy. The first would be a bill totalling $60 billion to $100 billion (composed of what exactly, she didn't say) and would be passed in November during a lame-duck session of Congress. The second bill would be composed of tax cuts and passed in early 2009 (totalling what exactly, she didn't say). Calling the first a "down payment," Pelsoi said that "the economy needs something sooner" and that Congress "take the longer view as soon as we take over in January."

But on Friday, House Majority Leader Steny Hoyer (D-MD) said that a lame-duck session would be unlikely if Congress and President Bush could not arrive at some sort of agreement on what an economic stimulus package should look like. However, guaranteeing (even more) loans to the failing auto industry could be sufficient to warrant a late-inning session.

House Speaker Nancy Pelosi (2nd-R) and House Majority Leader Steny Hoyer (R), along with other members of Congress, participate in a meeting with executives from American car companies on Capitol Hill in Washington, DC. (AFP/Getty Images/Brendan Hoffman)

It's up from 6.1 percent in September to 6.5 percent in October. Also according to the Bureau of Labor Statistics, the economy lost 240,000 jobs in October, as the year-to-date number of jobs shed rose to 1.2 million.

October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction, and several service-providing industries. Health care and mining continued to add jobs.

The unemployment rate rose by 0.4 percentage point to 6.5 percent in October, and the number of unemployed persons increased by 603,000 to 10.1 million. Over the past 12 months, the number of unemployed persons has increased by 2.8 million, and the unemployment rate has risen by 1.7 percentage points.

The Government Accountability Office (GAO) has created a website "designed to help make the [presidential] transition an informed and smooth one across the federal government." In addition to suggesting myriad policies for various governmental issues like the long-term fiscal outlook, management challenges, and major cost-saving opportunities GAO highlights what it believes to be 13 issues demanding urgent attention. They are:

• Oversight of financial institutions and markets,
• U.S. efforts in Iraq and Afghanistan,
• Protecting the homeland,
• Undisciplined defense spending,
• Improving the U.S. image abroad,
• Finalizing plans for the 2010 Census,
• Caring for service members,
• Preparing for public health emergencies,
• Revamping oversight of food safety,
• Restructuring the approach to surface transportation,
• Retirement of the Space Shuttle,
• Ensuring an effective transition to digital TV, and
• Rebuilding military readiness.

A paper released last month by tax guru Joel Slemrod and Andrew Johns of the IRS analyzing "newly available data from the IRS's most recent comprehensive study of individual income tax noncompliance, the National Research Program, [assesses] the distributional consequences of income tax noncompliance in the U.S. federal income tax for the tax year 2001."

Slemrod and Johns find that "the ratio of aggregate misreported income to true income generally increases with income, although it peaks among taxpayers with adjusted gross income between $500,000 to $1,000,000, and is lower than the peak ratio for individuals with income above $1,000,000."

In other words, the biggest tax cheats earn $500,000 to $1,000,000.

And yet, in 2007, over 36 percent of all individual income tax audits (see table 9) performed by the IRS were on returns of Earned Income Tax Credit (EITC) claimants. And with the income ceiling for EITC eligibility is $37,783, I'm not so sure that this is very best strategy the IRS could pursue.

Writing in The New Yorker, Steve Coll meditates on the significance of the reactions certain political élites who are now lining up in favor using the government to better the economy.

The country is fortunate in one respect: the sudden buckling of financial safeguards has put just about everyone in touch with his inner New Dealer. Even Alan Greenspan recently confessed to Congress a crisis of faith in self-regulation. Meanwhile, former free-market true believers in the Bush Administration have tossed out money from the public vault like looters...

[...]

Embedded in this festival of emergency measures, however, is an important and possibly durable ideological shift. Last week, in an op-ed in the Washington Post, Martin Feldstein, the chairman of the Council of Economic Advisers in the Reagan Administration, and, more recently, an adviser to John McCain, endorsed large-scale spending on public works as a way to stimulate economic recovery....The essay's appearance indicated that a broad coalition is emerging, where none existed a year ago, in favor of New Deal-style expenditures on roads, bridges, broadband lines, alternative energy, and the like, to support economic recovery and future growth.

If Coll's observation proves durable, then there will be greater political elbowroom -- to a greater or lesser extent depending on the outcome of today's contests, but room nonetheless -- to strengthen public investments.

If you had your say, what would you move to the top of the agenda?

Email us at , and let us know.