Orzag: Extend the Tax Cuts for Two Years

In his editorial debut at the New York Times, not long after abandoning his post as the director of the White House Office of Management and Budget, Peter Orzag offers these thoughts on the Bush tax cuts and the nation’s perilous fiscal and economic condition.

The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term. This month, the Senate will be debating an issue with significant implications for both — what to do about the Bush-era tax cuts scheduled to expire at the end of the year.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

Orzag goes on to argue that higher taxes are simply unavoidable if the government’s ends are to come a little closer to meeting each year. When is that new fiscal year budget due?

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Here’s a pretty good pair of graphics that show just how unsustainable California public sector finances have become over the last couple of years.

Outgoing Governor Arnold Schwarzenegger had a few words to go along with the pictures in this WSJ op-ed where the charts were spotted, but the words don’t seem necessary.

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A quick check of the California budget crisis reveals that the state will not make scheduled payments to the public schools and county governments totaling a few billion dollars and that they’re getting ready to issue IOUs again. Details are in this LA Times report:

California’s top fiscal officials Monday ordered the deferral of $2.5 billion in payments to the state’s public schools next month to conserve cash and stave off the need to begin issuing IOUs.The state’s budget is 54 days late, and that delay has stretched the state’s depleted treasury to the breaking point. Issuance of scrip could come within weeks.

The deferral announced Monday “was not taken lightly,” state Controller John Chiang, Treasurer Bill Lockyer and Department of Finance Director Ana Matosantos wrote in a joint letter to the Legislature.

State officials acknowledged the added hardship. “The lack of a state budget is levying additional fiscal stress on schools … deferral of state payments will further exacerbate the situation,” Chiang, Lockyer and Matosantos wrote.

Fiscal officials also ordered that a $400-million payment to counties be delayed; $700 million in county funds were pushed off in July.

The latest skipped payments to counties and schools must be repaid within 90 days, said H.D. Palmer, a spokesman for the Department of Finance.

Apparently these moves were expected, but they came a bit earlier than most officials were thinking. Furloughs are back, thanks to a recent court ruling that upheld Governor Arnold Schwarzenegger’s order and it’s just another typical late-summer in the Golden State.

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It’s not clear whether overeating and obesity are the perfect allegory for a consumption based economy that has finally run aground (e.g., where are the rising and falling asset prices?), but Michael Pento nonetheless transforms many of today’s economic problems into something that anybody can understand in this commentary at Real Clear Markets.

A morbidly obese gentleman labored into Dr. Hayek’s office suffering from severe chest pain. The patient also complained that he was unable to consume his usual 10,000 calorie-per-day diet; in fact, he was feeling so sick that he could barely scarf down 9,000 calories. He noted that his love for food remained as strong as ever, but his body just wasn’t keeping up with his demands.

After having a thorough look at the patient, the good doctor could not find anything wrong outside of the patient’s extreme portliness. After a moment of reflection, he delivered to his patient a troubling diagnosis. He explained that the chest pain stemmed from the strain the patient’s 500lb body was putting on his heart, and that the lack of appetite was his body’s attempt to protect itself from this imbalance. Dr. Hayek’s prescription was simple: the patient had to dramatically reduce his consumption while undertaking a moderate exercise program, with the goal of losing 250lbs as quickly and safely as possible. Dr. Hayek was aware that it would be a physically painful and emotionally difficult process for the man, but it was the only way to avert a life of suffering – or even a heart attack.

Of course, it should come as no surprise that Dr. Keynes across the street has a completely different prescription for  this gentleman’s “temporary lack of hunger”. This is well worth reading in its entirety and its simplicity goes a long way in explaining why the American public now seems to favor the treatment of Dr. Hayek over Dr. Keynes.

Sales Tax Rates Across the U.S.

The graphic below from this CNN/Money story should make clear one of the many reasons why, in recent years, we have moved from California to Oregon and then on to Montana.

State income taxes in Oregon are quite high (in the top two or three as I recall) and, while it costs practically nothing to register your car, property taxes are expensive in some counties. Here in Montana, motor vehicle taxes are surprisingly high but, from what I’ve seen, property taxes are very reasonable. I’ll let you know about state income tax next year.

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More Furloughs and IOUs in California

The Sacramento Bee reports that California’s furlough program, a measure aimed at helping to shrink a state budget shortfall now estimated at $19 billion, survived its latest court challenge and, for the next few weeks or so, government offices will be quiet on Fridays.

State workers endured the latest tortuous turn in an off-again-on-again furlough saga that has left roughly 144,000 of them uncertain from week to week of their work schedules.

But the California Supreme Court’s decision Wednesday to side with Gov. Arnold Schwarzenegger and allow furloughs to start again Friday should be the last twist – at least until next month.

“The result of the California Supreme Court ruling today means that the furloughs will continue until the court says otherwise,” Schwarzenegger spokesman Aaron McLear said, adding that furloughs also will stop if the state budget is approved.

Otherwise, he said, “furloughs will continue as planned Friday the 20th, the 27th, and one additional floating furlough between now and the end of the month.”

Schwarzenegger ended a similar policy in June, but with state lawmakers at an impasse over how to close a $19 billion budget deficit, the Republican governor issued an executive order July 28 restarting the policy as a way to save $136.7 million per month in payroll costs, about $75.5 million for the general fund.

In related news, State Controller John Chiang said that the government will begin issuing IOUs in two to four weeks unless the legislature approves a budget. The state previously issued IOUs in 1983, 1992, and 2009, the back-to-back issuance this year further evidence that the state is nearly impossible to govern during recessions.

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