TAX BILL | Do You Consider the Tax Bill Immoral? Sen. Heinrich Does.

Senator Martin Heinrich (D-N.M.)

After the passage of the Senate Republican tax bill on Saturday, December 2, U.S. Senator Martin Heinrich (D-N.M.), Ranking Senate Member of the Joint Economic Committee, issued the following statement:

Today, Senate Republicans passed their tax bill that harms working families, will blow a huge hole in the deficit, and I fear will lead to drastic cuts to vital programs in the years ahead. 

Yet again, our children and our communities will end up paying the price for irresponsible and immoral Republican tax giveaways. 

Under the Senate bill, nearly 28 million working families will face a tax increase by 2027. 

This bill spends money we don’t have on tax breaks the rich don’t need. 

The legislation adds $1.4 trillion to the national debt, an average of $140 billion each year in increased deficits, further damaging our long-term fiscal situation. Blowing a hole in the deficit to give tax breaks to the wealthy and special interests is the standard Republican playbook. 

Meaningful tax reform is a big, complicated, and complex undertaking. It doesn’t happen behind closed doors, and doesn’t happen with one party calling all the shots. 

We could craft a better bill that would lower taxes in a way that doesn’t add to the deficit. I urge my colleagues—let’s work together to find real solutions to health care, to tax reform, and to all of our nation’s challenges.

For more information, contact Latoya Veal at Latoya_Veal@jec.senate.gov or 202-224-0379.

FOMC | Job Numbers Mean EZ Decision (Comment)

The Effective Fed Funds Rate. Source: FRED, St. Louis Fed. Since Dec. 2008
 the target rate has been between 0 percent and 0.25 percent, i.e., at the
"zero bound"; rate will likely be raised at the next FOMC meeting.

The job numbers from the BLS this morning show total nonfarm payroll employment increased by 211,000 in November.

The unemployment rate was unchanged at 5.0 percent.

Job gains occurred in construction, professional and technical services, and health care. Mining and information lost jobs.

The numbers have been widely anticipated because they are the last before the Ides of December FOMC meeting.

Fed Chair Janet Yellen made clear yesterday in her testimony before the Joint Economic Committee of the Congress that the Fed is ready to raise the zero-bound Federal Funds rate that has been at the zero-bound level since December 2008. The only major concern is lackluster economies in the rest of the world.

Comment

The Fed has a dual mandate (besides the basic one of ensuring stability in financial markets) – its traditional 1913 mandate to preserve the value of the dollar by reining in lending during periods of speculation and therefore inflation, plus its 1946 mandate to ensure full employment.

Interest-rate doves like Paul Krugman and Brad DeLong argue that since the United States has no inflationary pressure, interest rates should not be raised. If inflation is below the 2 percent Fed inflation target, leave rates alone. While unemployment is low, the employment/population ratio is also low and economic growth has been slow.  Why is anyone is thinking of raising interest rates? They are afraid raising rates will kill the economy.

One answer is that the zero-bound rate is an unnatural one, giving no flexibility on the stimulus side. The Fed wants to be able to respond to economic developments in either direction. So long as it is at the zero bound, it is powerless to do much to stimulate demand, notwithstanding the QE initiatives.

LABOR | Dan Coats Opines on Low Participation

Although unemployment has fallen, the civilian labor force participation
rate has not yet recovered. Chart of BLS data by the St. Louis Fed.

In October last year I posted here something on the decline in labor force participation. It had more than 1,000 page views and I added two follow-up posts.

Last week the Joint Economic Committee of the Congress held a hearing on the subject.

Sen. Dan Coats (R-Ind.), chairman of the JEC, yesterday wrote in the Washington Times about possible explanations of the decline in labor force participation, based on the hearing:

• Baby boomers retiring? He notes that while Americans are living longer, which means more retirees, the participation rate for older workers has been rising. (One reason is that the age for pickup of Social Security has been rising along with longevity.)
• Younger people entering the workforce later? Yes, he says that more young people are delaying the start of the working careers by remaining full-time students.

Coats adds other explanations that persuade him:

• Unexpectedly slow recovery from the deep financial crisis of 2007-08, and the difficulty that  laid-off workers have had in re-entering the workforce. 
• Federal disability programs, described as a "shadow unemployment program", because they reduce incentives to look for work.
• A rising number of single-parent families, where the head of household has difficulty holding down a job at the same time as looking after children.

Other explanations are offered in my three prior posts. The latest data suggest a possible bottoming-out of the rate.

IRAQ WAR | What Has It Cost?

Nov. 25, 2007–I received an email from a fan of Rep. Ron Paul who said that Paul estimated the cost of the war in Iraq at $3.5 trillion.

That number originated two weeks ago from the Joint Economic Committee Democratic majority.  Two cost-of-war spending clocks (today they read $442 billion and $472 billion) are much lower because they represent only spending to date, whereas the JEC spending includes in addition ten more years of the war.

Looking back on the history of the cost estimates, they keep rising because:

• The Administration wanted to keep the initial estimates as low as possible to ensure support for an invasion.
• When the first estimates wereprepared, the war was projected to last ten years at most. Now, five years later, the war is still being projected to last 10 more years, i.e., 15 years altogether.
• The JEC number includes a factor for payment of interest on the borrowed money.
• Some estimates include the war in Afghanistan; some don't.

A time line of estimates is documented here and summarized below.

Baseline: $50 billion. The Pentagon originally estimated the cost of a war in Iraq at about $50 billion. Michael O'Hanlon of the Brookings Institution said this was fine as an invasion cost, but added that a U.S. occupation could cost $5-$20 billion more per year.

September 15, 2002: $200 billion. Lawrence B. Lindsey, Assistant to the President on Economic Policy, estimates the cost of a war in Iraq would be $100-$200 billion. During the next two weeks, the Democratic Caucus of the House Budget Committee concurs, with a 10-year end date (2012) and the Congressional Budget Office provides an estimate consistent with the other two

October 29, 2002: $1.6 trillion. Yale University Professor William D. Nordhaus argues existing estimates don't include enough to pay for a long occupation. He estimates the cost of a war in Iraq could be $120-$1,600 billion through 2012. Lindsey leaves the White House. On December 31, 2002, the Budget Director puts the cost of the war at $50-$60 billion. On March 20, 2003, the United States invades Iraq. On April 9, Baghdad is occupied. On May 1, President Bush, on the deck of the USS Abraham Lincoln, announces the end of combat operations in Iraq. On June 27, 2003, the various estimates converge slightly. The Department of Defense raises its estimate to $60-$95 billion. In the same month, Professor Nordhaus scales back his upper estimate and raises his lower estimate, for a range of $500-$600 billion over 10 years. On February 27, 2003, George Soros estimates the cost of the war in 2003-2004 at $160 billion. On May 19, 2005, the Congressional Budget Office estimates the cost of the war at $600 billion through 2010, i.e., at the upper limit of the revised Nordhaus range.

January 8, 2006: $2+ trillion. The Boston Globe announces a study by Professors Linda Bilmes and Joseph Stiglitz showing the Iraq war could cost the economy more than $2 trillion through 2010. The authors’ data are published a month later as a National Bureau of Economic Research working paper. The Congressional Research Service estimates the Iraq war is costing nearly $2 billion a week and then later at $12 billion per month. In December 2006, Bilmes and Stiglitz, in a Milken Institute article, specify a range of $2-$2.267 trillion as the cost of the Iraq war through 2016. On October 24, 2007, the Congressional Budget Office estimates the cost of the war at $1.2-$1.7 trillion through 2017. The report covers both the Iraq and Afghanistan wars and other activities related to fighting terrorism.

November 13, 2007: $3.5 trillion. The Joint Economic Committee, which in 2007-2009 was chaired by Sen. Chuck Schumer (D-NY) with Rep. Carolyn Maloney (D-NY) as Vice Chair, announce a new estimate of $1.6-$3.5 trillion, i.e., the economic cost of the Iraq and Afghanistan wars so far (2002-2008) is $1.6 trillion and projected through 2017 is $3.5 trillion. Minority Republican members of the committee dispute individual numbers but do not provide an alternative estimate.

If you think you can come up with a better estimate, here is an Iraq War cost calculator that allows you to estimate the cost of the war based on your own assumptions about, for example, how long U.S. troops will be required in Iraq.

More tragic than the spending is loss of life in the Iraq war with 3,874 Americans dead so far, and 28,451 U.S. wounded. A new report suggests that the wounded figure leaves out 20,000 unrecorded brain injuries suffered by U.S. soldiers. Monthly losses have, blessedly, been declining recently.
Perhaps the best take on all of this is a November 18 article in the Washington Post that lists some of the things we could have done with the money and of other priorities that might have had a better chance. These costs are much greater than the spending itself. Click here for a continuous update of tradeoffs.