This week, I've been considering the value of tax cuts as an effective economic stimulus. On the one hand, government spending appears to provide the most bang-for-the-buck. That is: for every dollar deployed by the government, the resulting economic boost is greater when the government spends money rather than when it cuts taxes.

On the other hand, however, there are only so many projects and programs that the government can fund that would put money into the economy quickly enough, so some tax cuts make sense. At a reported 40 percent, Paul Krugman thinks this proportion of tax cuts in the Obama plan is too high.

Now, Howard Gleckman at the Tax Policy Center blog TaxVox throws water on the business tax cuts of the Obama plan:

The net operating loss idea makes some sense. But other than trying to buy votes from pro-business Capitol Hill Republicans, it is hard to see what the other two schemes would accomplish. Bonus depreciation in its many incarnations has been tried a half-dozen times over the past four decades and its benefits are, shall we say, hard to find. It won't help companies with losses (most of them, these days), or non-profits. A year ago, while both were at The Brookings Institution and TPC, Obama advisor Jason Furman and CBO director-designate Doug Elmendorf wrote of the 2001-2003 versions, "bonus depreciation for business investment did not seem to be very effective in spurring economic activity."

Especially pointed are Gleckman's comments on the hiring incentives for businesses. I haven't seen enough of this criticism, because this kind of tax cut really is just a giveaway.

Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today's recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.

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

It's not official, but DefSec Gates has sent Congress an estimate of what he thinks the Pentagon will request to round out FY 2009 war funding. His "personal assessment" comes in at just under $70 billion, which is somewhat less than the $83 billion he mentioned in December.

CQ Politics: "Gates Estimates Another $69.7 Billion Needed for Wars This Fiscal Year"

A C-130J-30 Super Hercules aircraft brings its six propeller engines up to speed while cargo is loaded Jan. 3, 2009, on Joint Base Balad, Iraq. The aircraft is the newest version of the Hercules and the only model still in production. The J-model can climb and fly faster and higher and lands in shorter distances and adds 15 feet to the fuselage, creating more usable space in the cargo compartment. (DoD photo by Tech. Sgt. Erik Gudmundson, U.S. Air Force/Released)

Today is the official start of the 111th Congress, with new Senators and Representatives being sworn in and votes on a new rules package expected in the House. The House Majority Leaders office put out a fact sheet that describes the new rules package. Donny Shaw, blogging over at OpenCongress has a nice summary of some of the key changes in the House rules, or you can read more details about the new rules package on the House Rules Committee website.

The two big issues we are following in the new rules package are PAYGO and earmark disclosure. Let's start with PAYGO. The new rules continue what the Speaker's office and Majority Leader's office are calling the "tough PAYGO rules" from the 110th Congress that helped "reinstitute fiscal discipline." The House PAYGO rule is also aligned with the Senate's version so both the House and Senate can use the same baseline from the Congressional Budget Office. This alignment is a smart change, but I cringe every time Democrats trumpet their move to reinstate PAYGO in the 110th Congress and claim the righteousness of fiscal responsibility. While it is better to have the rules on the books than not, too often legislation was passed in the 110th Congress that was not deficit neutral, particularly when it came to tax cuts. So while the 110th Congress was better than most in recent memory, there is still a long way to go before we can say Congress shows true fiscal discipline. Democrats (and Republicans too) are going to need to bring a stronger commitment to actually following PAYGO rules during the 111th.

Second, earmark disclosure. It appears new rules for disclosure of earmark requests are continuing to inch toward the 21st Century, sort of. The releases from the Democratic leadership are a bit vague about earmark rules, but the Appropriations Committee Chairman - Rep. David Obey (D-WI) in the House and new Senate Appropriations Chairman Daniel Inouye (D-HI) - also issued a release today that gives a bit more detail. The two major reforms come closer to embracing a proposal that Sen. Jim DeMint (R-SC) introduced during the 110th Congress that would post information on earmarks online before votes on legislation, not after. Specifically, Obey and Inouye are calling for:

Posting Requests Online: To offer more opportunity for public scrutiny of member requests, members will be required to post information on their earmark requests on their websites at the time the request is made explaining the purpose of the earmark and why it is a valuable use of taxpayer funds.

Early Public Disclosure: To increase public scrutiny of committee decisions, earmark disclosure tables will be made publically available the same day as the House or Senate Subcommittee rather than Full Committee reports their bill or 24 hours before Full Committee consideration of appropriations legislation that has not been marked up by a Senate Subcommittee.

It isn't exactly clear how this new online disclosure rules will work or how much good it will do. For instance, in order to track and analyze the earmark requests, a clear link between a Member's earmark request website information and the Appropriations Subcommittee tables will be necessary. It would be better for public access and easier for lawmakers if earmark requests were put into a central online database that was fully searchable, but getting them to put information up online at all, and before voting, is a welcome and long overdue change.

Update:
Bill Allison at the Sunlight Foundation has a more succinct post about the proposed earmark reforms and why Congress can't create a better system. And Roll Call has a story up about the new rules as well, although there isn't much new info there.

In the post below, I expressed concern about emphasis on tax cuts in an economic recovery plan. Paul Krugman has similar concerns, but also paints a complicated picture of where we are economically and comes around to qualified support for tax cuts.

We need stimulus fast, and there's a limited supply of "shovel-ready" projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress — unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don't have to cut spending — avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I've heard says that even with all these things it's hard to come up with enough spending to provide all the aid the economy needs in 2009.

What this says is that there's a reasonable economic case for including a significant amount of tax cuts in the package, mainly in year one.

But the numbers being reported — 40 percent of the whole, two-year plan — sound high.

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

Details are emerging on the What and How of the imminent economic stimulus recovery package.

The latest -- and perhaps most surprising -- figure to be associated with the legislation is a $300 billion tax cut. Over two years, the total cost of the bill, which may include massive infrastructure spending and state aid, could be $775 billion. The tax cut portion of the bill would be targeted to individuals who pay income taxes and businesses. And the scale of the tax cuts would best Bush's 2001 and 2003 cuts.

Mr. Bush's 10-year, $1.35 trillion tax cut of 2001, considered the largest in history, contained $174 billion of cuts during its first two full years, according to Congress's Joint Committee on Taxation. The second-largest tax cut -- the 10-year, $350 billion package engineered by Mr. Bush in 2003 -- contained $231 billion in 2004 and 2005.

I'd be lying if I said I was totally comfortable with this. Economic stimulus legislation should do two things: 1) Stimulate the economy and 2) provide assistance to the hardest hit. While tax cuts for individuals can accomplish (2), there are more efficient ways of accomplishing (1). The economic results of the tax rebates issued in 2008 were mixed, and tax cuts for businesses are the least efficient means to putting the economy back on track.

And while timing is critical here, so is taking the time to craft a more effective bill. So, I'm glad House Majority Leader Steny Hoyer (D-MD) is showing a modicum of concern as to how much and on what economic recovery funds should be spent:

"It's going to be very difficult to get the package put together that early so that it can have sufficient time to be reviewed, and then sufficient time to be debated and passed," Hoyer, D-Md., said on "Fox News Sunday." "But we certainly want to see this package passed through the House of Representatives no later than the end of this month, get it over to the Senate, and have it to the president before we break for the presidential break." Congress goes on a week hiatus the week of Feb. 16.

While we were glad to see Peter Orszag tapped to head OMB, we were equally sad to see the Congressional Budget Office (CBO) robbed of such an outstanding leader.

But House Speaker Nancy Pelosi's (D-CA) selection Douglas W. Elmendorf to succeed Orszag indicates we shouldn't be too upset. Elmendorf has plenty of experience in government economic analysis (The Fed, Treasury, Council of Economic Advisors, and CBO), and like Orszag, Elmendorf has headed up the Brooking Institution's Hamilton Project.

Elmendorf was a few steps ahead of Treasury Secretary Paulson in favoring capital injections into banks (though, not without reservations). His paper on the distributional effects 2001-2003 Bush tax cuts employed an interesting angle. And while I can't claim that I'm extremely familiar with the rest Elmendorf's work, his publications at Brookings indicate that he will continue to lead the CBO in the same competent and responsible manner as Orszag.

The Budget Brigade is back from the holiday break and ready to hit the ground running in 2009 - and it looks like we're not the only ones. Sens. Kent Conrad (D-ND) and Judd Gregg (R-NH) published an op-ed in the Washington Post this morning that restarts their effort to create a bipartisan entitlement reform commission to study the long-term fiscal imbalances in the federal government. Conrad and Gregg are the leaders of the Senate Budget Committee and introduced legislation in late 2007 that would create such a commission (they call it a task force). According to their op-ed, the proposal would:

Establish a process to confront the long-term fiscal imbalance. It would consist of a bipartisan panel of lawmakers and administration officials tasked with developing a legislative proposal to steer our budget back on course. Everything, including spending and revenue, would be on the table.

The panel's proposal would be given fast-track consideration in Congress. But, importantly, nothing could be put forward by the task force without a strong bipartisan agreement among its members.

Progress on this legislation stalled in 2008 as election-year pressures made major policy changes or initiatives difficult to enact (two other proposals from the 110th Congress that would establish similar commissions also made little progress). But Conrad and Gregg are wasting little time in 2009 - launching an op-ed on the first day Congress returns from the holiday break. And with a new administration interested in thinking big, it may be possible to enact one of these commission proposals this year.

The Budget Brigade would like to wish you all a great holiday season and a super New Year.

We would also like to thank all of our readers for following our work supporting us in 2008. We will be on vacation until January, but will return in 2009 to continue keeping an eye on things.

Image by Flickr user wan · der · lust used under a Creative Commons license.

Thomas Frank wrote an excellent column in the Wall Street Journal before Thanksgiving that is a great overview of the problems of a government contracting system run amok. The entire column is worth reading, but here's a key passage:

Instead the [federal spending] expansion went, largely, to private contractors, whose employees by 2005 outnumbered traditional civil servants by four to one, according to estimates by Paul Light of New York University. Consider that in just one category of the federal budget -- spending on intelligence -- apparently 70% now goes to private contractors, according to investigative reporter Tim Shorrock, author of "Spies for Hire: The Secret World of Intelligence Outsourcing."

Today contractors work alongside government employees all across Washington, often for much better pay. There are seminars you can attend where you will learn how to game the contracting system, reduce your competition, and maximize your haul from good ol' open-handed Uncle Sam. ("Why not become an insider and share in this huge pot of gold?" asks an email ad for one that I got yesterday.) There are even, as Danielle Brian of the Project on Government Oversight, a nonpartisan watchdog group in Washington, D.C., told me, "contractor employees -- lots of them -- whose sole responsibility is to dream up things the government needs to buy from them. The pathetic part is that often the government listens -- kind of like a kid watching a cereal commercial."

Frank calls for a bold vision at the end - a massive government investigation to bring accountability to federal contracting systems and reconstitute the process. Might not be a bad idea.

Buried in this article on Secretary of Defense Robert Gates staying in office for the incoming Obama Administration, is this mention of the next war funding request from the current administration:

And Gates said that the next request for emergency war funding, an estimated $83 billion, would be delivered to Congress in a matter of weeks. If approved, it would bring the cost of the wars in Iraq and Afghanistan to about $947 billion.

I guess this news is competing emergency financial rescue sums with the word "trillion" attached to their numbers. Anyway, $83 billion is still a lot of cheddar, so this is something to keep an eye on.

An F/A-18C Hornet assigned to Strike Fighter Squadron (VFA) 113 refuels from a U.S. Air Force KC-135R Stratotanker aircraft while two F/A-18E Super Hornets assigned to VFA 115 fly alongside during flight operations above Afghanistan Aug. 28, 2008. VFA 113 and VFA 115 are attached to Carrier Air Wing 14 aboard the Nimitz-class aircraft carrier USS Ronald Reagan (CVN 76). (DoD photo by Cmdr. Erik Etz, U.S. Navy/Released)

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.

Updated: See below.

The number most commonly-associated with the federal government's role in bailing out the nation's banks (and various other institutions that move money around the economy) is $700 billion -- the amount authorized by Congress for the Treasury Department to spend on...well, that keeps changing...banks generally. But, according to a tally by Bloomberg News, to date, the federal government has put $7.76 trillion of taxpayer funds on the line to shore up the nation's financial network.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department's $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

...

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government's rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

And if you thought the lack of transparency around Treasury's Troubled Asset Relief Program was disconcerting, this quote from Fed Chair Ben Bernanke will have you reaching for your favorite antacid:

"Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting," Bernanke said Nov. 18 to the House Financial Services Committee. "We think that's counterproductive."

Update: Spoke too soon! Make that $8.56 trillion:

The United States government unveiled $800 billion worth of new loans and debt purchases on Tuesday [Nov. 25], hoping another massive infusion of cash would smooth troubled credit markets and make borrowing easier for homebuyers, small businesses and students.

The Federal Reserve said it would buy up to $600 billion in mortgage-backed assets from government-sponsored mortgage giants Fannie Mae and Freddie Mac. It would buy up to $100 billion in debt directly from the companies and up to $500 billion in mortgage-backed securities.

...

Separately, the Fed and Treasury Department announced a $200 billion program to ease commercial lending on debt like student loans, car loans or business loans. The Fed would lend up to $200 billion to holders of asset-backed securities supported by car loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration.

Image by Flickr user jurek d. used under a Creative Commons license.

When going to Washington to ask Congress for $25 billion to help you out of jam because your company is going bankrupt, it's probably best to leave the private jet at home.

...the chief executives of the Big Three automakers opted to fly their company jets to the capital for their hearings this week before the Senate and House -- an ill-timed display of corporate excess for a trio of executives begging for an additional $25 billion from the public trough this week.

"There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands," Rep. Gary L. Ackerman (D-N.Y.) advised the pampered executives at a hearing yesterday. "It's almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn't you all have downgraded to first class or jet-pooled or something to get here?"

The Big Three said nothing, which prompted Rep. Brad Sherman (D-Calif.) to rub it in. "I'm going to ask the three executives here to raise their hand if they flew here commercial," he said. All still at the witness table. "Second," he continued, "I'm going ask you to raise your hand if you're planning to sell your jet . . . and fly back commercial." More stillness. "Let the record show no hands went up," Sherman grandstanded.

Image by Flickr user kilobar 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.