Yeah, I was looking at the chart Matt posted and thought “isn’t the best course of action to do nothing?” I don’t think I quite appreciated just how much TJCA contributed to the deficit until I saw the chart.
And it’s not as though TJCA was at all necessary. I know there has been some research recently that purportedly shows a small boost to private investment. But in the grand scheme of things, as far as I can tell the costs of TJCA completely outweigh the benefits
There are a lot of reasons why a GOP senate and a Harris presidency would be immensely frustrating (say goodbye to protecting abortion rights on a federal level). But the strong likelihood that a compromise to extend TJCA can’t be reached seems…kind of ideal.
The SALT Cap simply breaks politics. I thought it was and remains a brilliant strategy but it looks like it's been costing the GOP in formerly competitive high-tax districts and Trump is reacting to that local pressure.
I generally agree but here in Illinois the 5% income tax and huge property tax rates create a different financial reality. Long term I think IL is fucked unless we can break the pension liabilities but there's a real race to the bottom problem right now where people are just leaving or at least leave ASAP when the kids finish school. The SALT deduction at least made the problem slightly more manageable.
Sure. Illinois government is uniquely terrible. But still ... the SALT deduction has been around for > 100 years so the sudden change on such a long-term policy breaks things.
I'd love to see a post mortem on what went wrong with the progressive income tax amendment. Pritzker was explicitly in favor of it as a path to ameliorate the state's debt apocalypse, but the "yes" campaign was one of the least effective efforts in history. It was run by the state Democratic party rather than the governor's office, to my understanding. I can't imagine a campaign that bad happens by accident, so my supposition is the the state party deliberately tanked it. But I have no hard evidence of that.
It's the simplest thing ever -- it was just a terrible idea. IL doesn't have a revenue problem. They have a cost problem tied in part to rampant corruption* and no one trusted Pritzker to do anything about it. It also didn't help that Pritzker himself dumped $56M of his own money into the Fair Tax campaign.
* The best example of the level of corruption face - that I personally know of is all our road construction projects are awarded through rigged bids where the major construction companies have ~ carved up territories of exclusivity.
Let's just keep calling it the "Tax Cuts for the Rich and Deficits Act of 2017." Democrats should at least have amended the name in 2021. The only thing "jobs" about the "Tax Cuts and Jobs Act" was that growth-sucking deficits > Σ(expenditures with NPV>0) reduce the real wages of jobs.
I’m no TCJA expert but does that include the expiration of the SALT cap and the larger standard deduction? Because those both seem like actual substantive wins for the tax code.
The SALT deduction limitation was sold to conservaties as a way to stick it to blue state liberals. And now that they are against it, they are too dumb to realize that Trump is the one that took the deduction.
I personally don't think we should have ANY itemized deductions - state & local taxes, charity - nothing. The Federal government should not be in the business of subsidizing these things. If your state & local taxes are too high, then you should lobby your local government for cuts (with cuts in services). If you donate $1,000 to a charity or church, you should not be getting a subsidy from the government for it. The whole thing is a big con - and don't even get me started on how the rich exploit this deduction.
Eliminating the larger standard deduction would result is a big increase people needing to itemize and greatly increase the headache factor for people whose deductions are currently less than the expanded standard deduction. That seemed like the one good idea in the TCJA, though when you add dependents it gets less clear (since exemptions are eliminated).
I think the phrasing of my original comment was unfortunately somewhat ambiguous: I am in favor of both the larger standard deduction obviating the need to itemize deductions, and the SALT cap, and would prefer that those TJCA provisions, at least, remain part of the tax code.
The way the SALT deduction is structured is regressive though since rich people get essentially a 40% federal rebate on their state taxes while non-itemizers get nothing.
It makes the tax code less progressive than it could be. Unless you are actively experiencing a Communist revolution, most features are like that. Why doesn’t the top bracket start at $1 above median income? Why is the top rate only 37% and not 99%?
Is there any locality in the world that does a progressive consumption tax as a major element of their tax code? I know people like the idea of it, but do we have any real-world idea about how it cashes out?
What does progressive even mean in the context of a consumption tax? You track all your spending over a year and its gets taxed more and more the more you spent earlier that year?
I think it's hard to do good reporting on something where the answer to the question is different based on several different election outcomes. If you ask each campaign they'll just tell you how they want things to work assuming a clean sweep for their party, AND everyone falling in line with what their Prez says.
But the real question to be asked is something like what's going to happen if you win and:
a) lose the House and Senate
b) lose the House, and win the Senate
c) win the House and lose the Senate
d) win the House, win the Senate but your most cantankerous Senators disagree with you?
No one's going to answer that question, and any reporter or pundit gaming it out is going to be so deep into speculation that it wouldn't make any sense to publish it.
I have wondered about the strategic merits of Harris saying your last paragraph somewhat explicitly. If you start from the premise that many undecided voters are double haters or at least double skeptics, I wonder if Harris has ground to gain by explicitly saying 1) I will likely not have a Dem trifecta, and therefore will be an honest bipartisan broker with Republicans in Congress to reach responsible oversight of America's finances and 2) DJT would not have to do so and would destroy our fiscal standing.
Harris is not an Obama level communicator (few are) but I always think pols leave stuff on the table by not saying more complex things for fear of lack of understanding. Harris should workshop how to explain in simplest terms why 2024 =/ 2017 economic conditions and why Trump's plans now would destroy the economy not save it.
By impulse, it seems Democrats are just never really comfortable talking about deficit reduction. There's no group in their coalition that is pushing for it. But agreed, Harris could have hammered the disastrous economic consequences of a second Trump term harder during the debate.
That stat is all you need to know about why no one talks about it today. For at least those 28, and more like 40, years people have been talking about how we need to do something about the deficit. No one has done anything at all for more than like 4 of those years, and what was done was quickly undone.
Somebody was wrong many times in those 40 years about the dire consequences of what would happen absent action. To think that now, today, it's FINALLY a real problem isn't something that many people are going to take seriously.
At the risk of looking very dumb with this question: is there any chance that this time isn't quite as dangerous as all the centrists want us to believe? For the record, I think Dems should take deficit reduction more seriously because even if the danger is overstated it's still a responsible thing to do. Nevertheless, I don't understand how you make it popular. Voters always express concern about the deficit and debt in polls and they all want to cut "spending" but when you spell out the cuts they don't like them. Tax increases are non-starters because you just can't do them without cooperation from the GOP.
Again this may be dumb, and I am more than happy to be politely corrected for my own educational benefit, but don't rates going down somewhat help the cause going forward?
I got my MBA in 1992, and all my very smart professors convinced me that deficits were generally bad any time other than as a way to smooth the business cycle in a recession, and that if we kept having deficits the size of the ones we were having then they would quickly crowd out private borrowers, drive up rates, prevent useful government spending, etc. I remained convinced, kind of despite the evidence, through about 2008, and about that time I became skeptical. I understand all the arguments that deficits are bad and too big now, etc., and the logic still makes sense to me in the abstract, but I can't help noticing that the arguments aren't that different now from then and I haven't seen anybody convincingly reconcile the constant non happening of the terrible things so often projected.
No major party candidate is going to tell the electorate that it's time to take their castor oil and prepare for major deficit reduction. That's a sure ticket to loserville.
The best outcome would be 1992: talk about all your great spending plans in the campaign and then when you take office and you're told the full picture, regretfully turn toward deficit reduction in order to stave off the bond vigilantes and bring down interest rates. It worked like a charm for Clinton -- at least by 1996 if not by the disastrous year of 1994.
Politicians are often foolish, but when push comes to shove I think most of them want to do something good. It’s why there hasn’t been a default, and why when the markets really did signal in the late 80s that Congress *finally* acted.
Nobody running for president ever says "don't worry, if I win, we won't have the votes in Congress to do anything". Saying that would simply convey weakness and lack of confidence.
Agree, and this is why it's helpful to have an Explainer in Chief who can boil things down to the level of simplicity and clarity one might use in presenting a complex case to a jury.
I think it's one thing to say that a "Trump sales tax" will raise your families costs by thousands a year. That's straight line causality. Saying instead (or in addition) that Trump tax policies will lead to much higher deficits which will lead to much higher interest rates is . . . oh damn, all the voters are already asleep or switching the channel.
I don't care how good you are; multiple bank shots do not work in campaign rhetoric.
Right. I think the challenge is: you're realistically (at this moment in our political history, anyway) only targeting ten percent or thereabouts of the electorate. More than 40% of the electorate is unreachable, and an even larger chunk is already on board.
The modest number who are persuadable aren't political hobbyists, which I think also means they're not policy hobbyists. The "explain complexity" idea might have worked better with 1976's electorate.
Simple is better even if the technical details are less true but the result is true. “No, it isn’t a direct tax but it is effectively one with an extra step or two.”
The way I would summarize the argument: When the government needs to borrow a trillion dollars to keep the lights on in DC, it competes with you and me looking for a car loan or a mortgage, and that drives up interest rates. The only way the Fed can counter that is by printing money, which gets you a short term shot in the arm but then sets off another round of inflation.
I wish she leaned into this even more! She clearly has the faculties for it! I do think there is something to like the instrumentality-substance divide here. In theory I totally agree, Prosecutor president ought to be great at this. But perhaps there really is a big gap between explaining the elements of a crime and explaining mildly complex economic factors. Being a SF DA may not help as much to the latter. Matt hinted at as much on a previous Politix episode, Harris seems at her best in very justice/rights coded issues and less so in the blocking and tackling of economic mgt. Doesn't mean she personally doesn't understand this, she was an econ major, but she is not above replacement level at then explaining it to Joe Plumber in Wilkes-Barre.
I worry about this too. I feel bad sending Tester and Brown to the wolves but maybe the message could be coded as Senate specific? Or still emphasize you should vote for them but realistically... I appreciate that the answer of how to handle this is not obvious.
The reason we can’t do belt-tightening is because Republicans always use Lucy and the football tactics. They yell at Democrats to balance budgets when Democrats control the government, then blow holes in the budget when they gain control. It’s been happening for 40+ years. Republicans have no credibility on this issue, and Democrats are tired of being played for chumps.
Obama specifically tried to work with Republicans to raise taxes AND cut spending to reduce the deficit, and Republicans just said "fuck you, no tax increases ever, even with spending cuts, even to explicitly reduce the deficit".
As far as I'm aware, the only time the budget has been "controlled" since Bush Sr. was president is when Democrats control the presidency and Republicans control the House. There are a few other exceptions such as when Democrats control the house late in Bush Jr. tenure, but otherwise unified party control is almost always maximal spending/tax cuts.
Democrats set the stage for a prolonged drop in the debt-GDP ratio—and an eventual return to (probably ill-advised) surpluses, when Democrats had a trifecta in 93-94. The legislation that actually put us on that glide path was entirely the creation of a Democratic Congress and President.
1) Bush Sr. violated his no new taxes pledge and raised taxes - probably lost the election because of it.
2) Picking up the story with Clinton, he came into office and Democrats raised taxes again, but also increased spending some.
3) Republicans came into office in 1995 and stopped Clinton/Democrats from increasing spending even more.
I agree that Democrats raised taxes to start the glide path, but their natural impulse was going to be to increase spending. Republicans in Congress stopped Democrats from changing the glide path and pushed even further with welfare reform and other spending restraints.
Arguing counterfactuals is the point. Like people who say that Gore would have been than Bush - they're arguing a counterfactual. Maybe he wouldn't have been. But given what we know, we can make credible assumptions. One of mine is that if Democrats has retained control in 1994, they would have tried again to pass health care legislation and that would have been expensive and eaten up most of the savings from 1993-94. I think there's a good possibility that it would have been worth it! But there is way to much history and reporting around what they wanted to do for me to believe otherwise.
The Dems would only be chumps in your description if they responded to Republican criticism of their spending. They don’t….they spend away. So I don’t think the Democrats are chumps but it is true the Republicans are hypocrites.
No, this isn't correct. Democratic politicians have been more responsible on the budget than Republicans for decades. Bill Clinton returned 4 years of budget surpluses, and then George W. Bush blew it all away.
Argh. You could just as easily say that the only time that the US has had surpluses in the last 65 years is when Republicans were in control of Congress. I agree that Republicans have been profligate tax cutters, but disagree that Democrats have been any better on the spending side. The only time the deficit doesn't explode is during mixed government.
No. The operative point here is that Republicans will blow up the budget, and only when Democrats have some level of control are they restrained. Under unified Republican govt control, the budget deficit explodes. That doesn't happen under Democratic control.
Aside from 93-94, think about when Ds had unified control. 2009-2011 - major recession, there probably wasn't enough of a budget deficit. 2021-2023 - major recession, there was too much of a deficit, but only because of overlearning lessons from 2009-2011. Some deficit was definitely necessary.
The Congress controls the purse maybe it’s more instructive to look at who controls the congress. I am curious if a split congress provides less spending because of gridlock.
I don't fully understand this comment. Republicans have shown they aren't serious about cutting the deficit. They prefer tax cuts and revenue shortfalls.
I think it's basically that Republicans (through their capture by the Grover Norquists of the world) will ~never raise taxes, even when it's the obviously correct thing to do. therefore, the Democrats have to be willing to fight to do the right thing, even when it's costly, because the alternative is disaster.
All the people with white hair and red hats who were pissing and moaning about low interest rates during the Obama years were the most hysterical complainers about the inflation burst. They basically want the impossible: sky high interest rates for their CDs, and low inflation to protect the purchasing power of their savings.
The funny thing is that we kind of have that now (at least in the short term, and in the sense that saving account interest rates > inflation) and they're still pissy about it
The only viable solution to our debt problem (not yet a crisis, but...) will be inflation. The sooner the Fed shifts to a 4% target inflation rather than 2%, the better.
Inflation is immensely unpopular. Sure, 4% is less unpopular than 8%, but I think it's way more noticeable than 2%. Bankers argue that *some* inflation (like, 2%) is healthy, and I think it's low enough that people give this low rate of inflation a pass.
But I can't imagine that accepting a rate that's twice the currently accepted inflation rate would be politically viable.
The alternatives -- significant tax increases on the middle class, spending cuts -- are even less popular.
Even Matt, who is one of the most fiscally prudent and honest commenters in the arena, uses "doomsday cuts to programs for the poor" in today's column to describe unspecified spending cuts. Amp that up to 11 when actual reductions are proposed.
No, I actually think what Florida John is proposing is the likeliest long term scenario, everybody will simply bitch as it happens. But it will happen in fits and starts and lurches over time.
The $400K pledge is now a $333K pledge. Biden made that pledge in the 2020 campaign. With four years of inflation, that $400K translates to $333K in 2020 dollars. I don't have the numbers in front of me, but I bet a *lot* more people make $400K/year now than in 2020. So the Democrats are pretty quickly walking back that $400K limitation.
"Between 2019 and 2023, the number of American households earning more than $400,000 swelled by nearly half, from 2.6 million to an estimated 3.8 million out of roughly 131 million households." (1)
Going from 2% of households to 3% is doubling, but still a pretty small percentage overall.
I agree. People also just don't get how many suburban homeowners and small business owners they lose when they bring this up. If your kids have to sell your house or your business when you die to pay the tax, then you won't vote for it and if you have to add some caveat like "exempt up to X million dollars" then you're broadcasting it isn't really about raising revenues.
I await the brave new future where a Republican administration blows up the deficit, leading the Fed to quietly raise the target inflation number during the following Democratic administration, easing the pressure and creating some fiscal space for the Republican administration that comes in on a wave of anti-inflation rhetoric, then blows up the deficit, leading the Fed...
It doesn't, but this whole discussion is in the context of inflating away the debt, a strategy which I think is absolutely going to push inflation higher and higher over time.
Especially since the 2% target is completely arbitrary! This seems like a fairly obvious lesson from the Great Recession that should have been learned. Unfortunately there are a lot of powerful voices who want to keep the 2%, so...
Pre covid, they treated the 2% “target” as an upper bound. If 2% is the target and your tools are crude, you would go somewhat above 2% before you tightened.
I'm waiting for someone to explain to me why it's so important for the Fed to get inflation down to 2% to maintain its credibility whereas its total failure to get inflation *up* to 2% in the teens did not undermine its credibility.
The statute that gives the Fed its powers give it a mandate to maintain “price stability.”. Even the 2% target is a bit of a fudge. The statute keeps the fed from being fully transparent about having a higher target.
Any target is forward looking, based on the drip drip of "ordinary/average" shocks. Extraordinary shocks require temporary over-target inflation, so ex-post FIAT will average over target.
My understanding is that the 2% target has always been acknowledged to be an empirically-supported target in the sense of “this works well in practice,” rather than purporting to be a theoretically optimal rate of inflation.
Presumably there was a particular reason why they chose to adopt the NZ option rather than just ignoring it and doing their own thing, right? It's not like New Zealand was ever in a position (even had it for some reason wanted to be) to dictate inflation targets to the United States or anyone else.
As I understand it the issue with the GRC generally isn't held to to be interest-rate mediated precisely because we were at the ZLB for so long. The common wisdom from people who are more economically-informed than I seems to be that the coordinate demand shortfall basically just needed deficit spending to mechanically increase M2.
Put another way, inflation wasn't immiserating during the GRC, and the goal was never to *make* it immiserating, just to alleviate unemployment, which because the proximate cause of the employment slump was a secular demand shortfall, could actually be done in a way that was essentially a "free lunch" without the traditional inflation/unemployment tradeoff of the misery index because there was a lot of spare productive "slack" in the economy such that rather than having more money chasing the same number of goods and services, the number of goods and services could actually rise to accommodate an increased money supply (i.e., lower unemployment without a corollary inflation increase). Given that demand wasn't responsive to interest rate deceases alone, the policy solution was Keynesian deficit spending (preferably on something more productive than digging holes and filling them in again). But none of this seems to me to have been specifically targeted at or directed to inflation -- indeed, part of it's attractiveness was precisely that it *wouldn't* screw with that basically-okay part of the misery-index gauge.
Yes, in 2008 (and for years afterwards) there was insufficient aggregate demand, which caused a recession. But this should have been fixed by additional monetary stimulus -- NOT "Keynesian deficit spending". (The ZLB does not prevent additional monetary stimulus.) You're, right, though, that it was indeed an opportunity for a free lunch ... which, unfortunately, the US left on the table, uneaten.
I thought it was because New Zealand adopted the 2% target and the people here who prefer "sound money" to upholding the Fed's mandate on employment thought that was just peachy.
Whether or not it was completely arbitrary when picked, it's not arbitrary now, because what matters is the Fed's credibility in committing to a target. If it had been 3% when picked, it would be important to stick to 3% now, but if the Fed says "eh, 2% was arbitrary, maybe 3% was better," the market will understand that to mean that if 3% is hard they will up it to 4%, etc.
How is this viable in any long term sense? Doesn’t this inflate existing debt at the cost of making future deficits even more painful while doing nothing to alleviate the dynamic influencing debt size and perpetual deficits, as well as having no direct effect on underlying demographic and productivity trends?
It works in conjunction with a tax increase and spending decrease. You cut spending for a couple of years, raise taxes, hit the inflation button and 3 years later the budget looks much better. The public absolutely hates it and everyone involved which is why it always requires both parties to get it done.
>>It works in conjunction with a tax increase and spending decrease.
"Assume a can opener."
(I all seriousness, thank you very much for the helpful explanation. I'm not trying to be flippantly dismissive of your productive comment, merely expressing grave skepticism at Congressional capacity to act like adults. This seems like exactly the sort of thing "popularism" is terrible at fixing -- high-profile issues whose solution is important but short-term unpopular.)
Totally agree! Incumbents are fully aware the public will hate it and so will only do it when they feel like they absolutely have to. They've been kicking the can down the road for a long time and will continue to do so as long as they can.
It doesn’t make future deficits more “painful” because revenues and expenditures both increase with inflation. Inflation priorities present economic decisions and activities over the past
They are totally going to obfuscate because they are under a legal mandate to maintain “price stability.”. They’ve already defined price stability as modest inflation, which is pragmatic if legally dubious
What makes you think that? Inflation is currently between 2.5 and 3%. The Fed is supposed to skate to where the puck is going, not where it is. That suggests that inflation may continue to decline for a while.
The Fed should set the target inflation rate at the rate that maximizes real income. Higher inflation has some negative effects, too. They are not as bad as too little inflation (unemployment slower growth) but they exist (making it more difficult to agree on efficient long-tern contracts).
I am not persuaded that 2% PCE is not in fact near optimal. I think that the Fed has succeeded in returning inflation to target w/o much excess unemployment demonstrates this.
The solution to our debt problem is deficits < Σ(expenditures with NPV>0).
Higher taxes and reduced spending aren't like vegetables vs. cake for a meal, they have real impact on people's lives. It's a leap of faith to assume that the same system that's gotten us in this position over the last couple decades is suddenly going to work better when your paycheck is smaller, or your Medicaid benefits are stingier, or you're no longer eligible for SNAP due to stricter requirements... I'm not surprised that people instead opt for "money now, I'll figure it out".
Also feels like the fairest solution: all holders of nominally denominated debt (ie, basically everyone without TIPS) gets to pay for this in equal measure, togethe, rather than ex: food stamp recipients, retirees, or vets getting uniquely screwed as their entitlements get cut.
Really good explainer. Somewhat tangential to the main point -- why does the Fed move incrementally at all? Are they just afraid of losing credibility on inflation? Too much uncertainty means no sweeping moves? I know there was an episode in the early days (can't find it now, but maybe post-WWI around 1920?) where they jacked up rates quickly and the economy immediately went into recession, but that's a long time ago and it seems like they're always behind the curve, so to speak. Not my area of expertise at all so would love some comments from those in the know.
I think the counterpoint from the Fed staff would be that their current approach works pretty well and they have been becoming more successful over time.
Inflation is a noisy signal -- it's constantly being revised in either direction -- so it's important to use other laggier metrics alongside it to avoid yanking the controls hard in the opposite direction every other month. On the other hand, a large part of the effect of interest rates is due to investor expectations, a leading indicator that also adds noise to the system. If you don't know *quite* where you are *or* how quickly you're moving, it makes sense not to update in response to every new signal.
But Powell has been far more willing to make large rate movements than almost any other modern fed chair. I also dispute the notion that the fed has been generally successful—nearly all of their growth assumptions have been too optimistic and they never seemed to learn from the mistake.
They've been optimistic about growth assumptions and slow to cut rate to head off recessions because they're worried about inflation, and the public reaction to the 2021-22 inflation proved that concern to be well-founded.
Certain financial institutions are very sensitive to rapid changes in interest rates, particularly if their balance sheets are poorly hedged (think SVB).
Huge swings in rates might therefore increase financial instability.
Even a perfectly calibrated regulatory environment cannot save a bank from a bank run. SVB could have been better, but it wasn't too terribly managed from an asset perspective; it was that their depositors all decided to pull their money at the same time.
Yes but SVB did take some risks on the asset side. Putting basically everything in Treasuries (betting everything that rates will stay low) creates an obvious weakness (the rates may rise).
We should always be a bit skeptical about easy explanations when it comes to bank failures. Banks always take risks on the asset side -- it is their entire reason for existence: to transform "safe" deposits into "risky" assets while doing their best to hide that risk from flighty depositors.
It is necessary and healthy for the banking system to be able to point to "bad management" whenever a bank fails, and there will always be something that can be pointed out that a bank management did wrong. It is in all of our interests to be able to do so -- regulators, the public at large, the banks themselves -- because banking is, at its core, a confidence game. If confidence wanes, the entire enterprise is at risk.
Disclaimer: I'm not affiliated in any way with SVB, or with any bank. Have never worked for one, don't invest in them (except through index funds) and have no affinity for SVBs management or any other bank's management.
IDK John from FL ... the losses on their bond portfolio would have wiped out nearly their entire equity capital base. That's not "could have been better". That's catastrophic mis-management. They got greedy chasing yield.
It’s worse than that. They pulled their hedges! They assumed (as most in banking seemed to assume back in 2022) that rates will never rise. The hedges were an inconvenient drag of approx 3-5% of earnings…
Taxpayer suffers a bit (in expectation). De facto the FDIC deposit insurance now has no limit, but insurance fees on banks haven’t been increased by a corresponding amount.
I think saying there's a $250K limit and acting like there is no limit is terrible policy and may really bite us someday, hopefully not too soon. So agree totally.
I'm not sure what that has to do with the failures of SVB. Did they take the actions they did because they thought there was no cap on making depositors good if their bank failed?
The fed has been getting better at its job over time. Recessions are less common now than two or three decades ago. The debt bubble that caused the great recession would have done far more damage in an earlier era
My original comment was essentially this: deficits and debt have fallen out of political fashion after we’ve had a snootful for the last 30+ years. But as much as I want my president to *lead*, I also want my candidate to *win*…Harris/Wolz making deficit talk cool again doesn’t seem like a good path to victory.
One of the under-remarked-upon things Trump has done is rob the country of a more constructive debate between progressive and conservative approaches, because he's so obviously ill-suited to governance at a pre-political level that it's worth tolerating a lot of crappy left policies and rhetoric to stop him.
Apart from Ross Perot, no major candidate has ever profited from harping on deficit reduction. Since Walter Mondale, I'm not sure a D or R candidate has even raised the issue during a campaign.
Leaders today are facing an unprecedented challenge of voters who mostly get their news from sources who at least on some level just tell their audience what it wants to hear. Pod Save America calls itself as a "no-bullshit conversation about politics" and even they've been sniggering about "nerds" who responded to Harris' "price gouging" initiatives by pointing out widespread government price control efforts have a sobering track record. You go a level further and "the only reason" various trillion dollar initiatives aren't enacted is that every single politician to the right of AOC / left of Trump (depending on faction) is nothing but a slave to some special interest or other.
Meanwhile in reality across most of the Western world both debt and deficit are relatively high by historical standards and populations are growing older.
I'm not suggesting this dooms democracy in any way but potentially some major shock will be required to bring people to reality. Britain had one of those but the jury remains very much out as to whether that was enough, it did make people realise there is some limit to borrowing but many people seem to have pivoted their silver bullet from borrowing to taxing the rich. It's quite a concerning situation.
Josh Barro had a piece earlier this year basically saying that *eventually* America's fiscal standing will reach a point to fundamentally alter the tenor of our politics in a much wonkier and saner direction. The optimistic case was this could happen ex ante of a fiscal crisis. I think unfortunately it seems unlikely to happen until 2028 or 2032 ex post. https://www.joshbarro.com/p/when-will-interest-rates-make-voters
"Some of these proposed cuts would mechanically accelerate bankruptcy of the Social Security Trust Fund and cut benefits..."
This seems to be common wisdom (that when the "Trust Fund" runs out, automatic benefit cuts will ensue so that outlays equal Social Security revenue). And this may be how the law is currently structured.
But it seems to me that what's most likely to happen is that Congress will muddle through and change the law so that everything just continues as is: payroll taxes stay the same, and benefits stay the same. The resulting deficit would be paid out of general revenue and deficit spending.
What am I missing? This wouldn't require the political will that other proposed changes would require.
Because the deficit is too large [1] to avoid massive inflation, particularly if it's leading to immediate consumption from an every growing pool of retires. A key part of taxes isn't just financing programs and benefits but also removing spending from elsewhere in the economy. Otherwise its just more money chasing the same limited supply of goods and services, thereby causing inflation as the rationing mechanism. And we've recently learned how much voters hate even a moderate burst of inflation and elevated interest rates. Hopefully politicians have learned their lesson on that one.
And no one is in favor of the types of tax increases that would sure up SS. Even Democrats oppose any increase in taxes for all but the richest. Even just uncapping SS taxes (which is insufficient to fill the financing gap on its own) would be wildly unpopular. It would just require too much transfer of resource consumption from current workers to retires to be sustainable at current benefit levels.
My guess is we have a highly partisan fight, possibly even some internecine warfare within parties, while each group pushes their preferred strategy that puts the burden on someone else. We'll get some minor patch ups, but largely get the default SS benefit cuts, while factions continue to push for there preferred strategy. No chance any proper fix will get the necessary 60 votes in the senate.
Yes, this all makes sense. But there is no "cliff". The so-called Trust Fund is just a label for a bucket of income. We can continue with the same sort of unfavorable cash flow we have now, which will gradually worsen over time. At some point, this will gradually become untenable (as you describe), but there's nothing sudden about it, and it seems hard to imagine that the solution will involve benefit cuts - which would be the least popular and most noticeable solution.
The cliff refers to the automatic benefit cut such that payments equal tax revenue once the trust fund is exhausted. That is the default case as the law is currently written. Congress would need to pass new legislation for something else to happen.
Here's the clearest wording I could find on the Security Security Adminstration's website after 2 min of Googling. The Future Financial Status of the Social Security Program [2010], https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
> As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.
To me, this seems almost identical to the perennial debt-ceiling cliff.
Every so often, Congress is faced with either (1) Doing nothing and facing a catastrophic default, or (2) Legislatively raising the debt ceiling and finding a way to fund the debt going forward, or (3) Legislatively just raising the debt ceiling and kicking the can down the road. Congress always chooses (3). This does require legislation.
With Social Security, Congress can (1) Do nothing and face a catastrophic automatic cut in benefits, or (2) Legislatively raise payroll taxes and/or cut benefits to fund Social Security going forward, or (3) Legislatively just fund existing benefits out of existing payroll taxes and general revenue, thereby kicking the can down the road.
But what's more likely - Congress enacts a new policy to raise payroll taxes and/or cut benefits (which would also happen if Congress does nothing); or it kicks the fan down the road and just funds the deficit from general revenue?
I really suspect the latter (and I don't understand why this isn't considered the default option). I totally agree with you that this is not sustainable policy, but it seems to me to be the most likely policy for the first few years after the "cliff."
The consumption that will need to be throttled here is housing, which in a NIMBY gerontocracy is just another type of transfer from workers to retirees.
I guess SS is more egalitarian in that it includes retirees who don’t own property. But it’s not clear that retirees as a whole can even benefit here.
They raise the debt ceiling every time it comes up. I believe in their ability to change the social security trust fund from a minimum of zero to a borrowing limit that they keep changing.
Just a quick correction on rates: the 30-year mortgage rate most closely follows the U.S. 10-year Treasury Note, not the 30-year long bond. Why? Mostly it's due to 'duration,' which is concept that looks at the expected life of a debt instrument*, and the understanding that most mortgage notes are paid off well before 30 years' time. Many homeowners will sell their house before then, and many may also take the opportunity to refinance or make principal-only payments to shorten the life of the bond. Very, very few notes are held for the full 30 years today. Also, the 30-yr bond has not been consistently issued through the years, while the 10-yr note has always been sold and is thus a better reference. But the bigger issue is that of duration.
*Duration can also be considered in some equities, like for example an early-stage biotech company that is many years from potential revenue. In that case, changes in interest rates will affect the way investors approach such a company, just like they would with a bond.
I’ll skip the very cogent and brilliant point I was going to make and ask this question (since it’s top of mind):
I am *constantly* losing half-finished Substack comments on my iPhone - is it my imagination or does this app in particular have an incredibly sensitive ‘swipe to go forward/back’ feature?
It’s like it misinterprets the slightest horizontal movement (eg to highlight a line of my comment I want to move or delete) and *woosh* I’m back on the main article and my unpublished half-written comment is gone forever. I’ve searched and can find nothing on this. Doesn’t happen on any other app so I’m hesitant to change a setting on my phone, but by god at this point I’m willing to try anything.
Hoping the crowd knows an easy fix that I’m overlooking (beyond ‘be more careful’)
Note that sometimes the iphone will “reload[1]” the page while one is writing, which due to “like” ordering changes the relative position of one’s viewing point, but doesn’t actually kill a comment being drafted because it preserves that part of client state, so if you can find where you were, you can still edit it.
The full “back button” effect plus comment nuke is unsalvageable and used to happen to me all the time but seems much less frequent lately. Maybe it’s related to gesture-based navigation attempts by Apple? (An Achilles heel of the iphone remains that features have essentially negligible discovery if they aren’t explicit menu options….also inter alia the placement of the period button where the space bar should still be.)
[1] Actually appears to be client-side AJAX javascript operating on the DOM so local state is preserved.
Yes, this is on Apple trying to be clever by making periods "easier" to type in web addresses because they're frequently used, at the expense of actually allowing people to type correctly.
I’m so glad that Google usually figures out that I’m searching a three word phrase with accidental periods instead of spaces rather than typing in a weird url.
Your section about how credit card rates are set sound so fake that I'm truly struggling. There isn't, I don't know, a market? They all just wait until each of their competitors post a number and then they pick their credit card rates?
Well that’s how they pick the prime rate. Different cards offer different interest rates (usually expressed as a number APR) to different classes of customers in a competitive market.
Fair enough. I would read the heck out of a overthorough explanation of just this.
I just feel a little like I did when I read about the LIBOR. Scandal aside, I couldn't believe that apparently everyone was just cool with how they chose their interest rates?
A lot of this stuff is in the "It's not broken" camp, where it would take a whole lot of effort to change (the prime rate is written into hundreds of millions of credit card contracts), so it just keeps going until something forces a switch. Switching from LIBOR to SOFR (or various other things) took years, and nobody wants to bother unless there's some strong reason to do so.
If you're interested in finance arcana, I highly recommend https://www.bitsaboutmoney.com/ and anything else by this author, including their Twitter profile etc. Patrick McKenzie is just inimitable on this topic.
But are most credit card rates really set as a function of prime? Seems to me they are set for many other reasons and are generally pretty stable even as rates change underneath. Like the Target credit card has an APR of 29.99, I don’t think that if prime rates went up a quarter point they’d make it 30.24.
Mostly they are actually set as a function of the prime rate, yeah. It's theoretically possible that Target has a card with a fixed APR, but if you Google "target credit card agreement" you get a link to a document on Target's website that shows a credit card agreement where the APR is Prime + 19.65%.
Wow interesting. But that 29.99 seems clearly designed to be right below 30 from a marketing perspective.
Is it possible that if prime dropped by 25 basis points they would just update the terms to say that the APR is Prime + 19.90 to keep the 29.99 anchor?
I’ve worked in pricing at a large bank and can confirm, yes your credit card rate (and HELOC rate for that matter) are basically determined by WSJ prime plus whatever margin we’ve calculated based on our pricing models.
The deep logic of this is that what a bank is doing is borrowing money in the market and then lending it on to you, so what you want to know is "what interest rate is the bank paying" so the bank can answer the question "what's a 20% markup?" It's almost (ALMOST) like a retail markup over wholesale prices but for money (money is, after all, the bank's "product"--I never know if it helps people understand this to think of banks as a "money store" or if it's not helpful because banks are not that at all in a lot of ways).
The problem is that banks don't borrow money in a transparent market, it's mostly individual transactions that are negotiated directly with each other. The LIBOR solution to this was to simply call banks up and ask them "hey what are you paying to borrow money" but it turns out that that's super unreliable because there's no one answer to the question and also if people have a reason to lie about it then they can and will. Prime is a reasonable proxy in that the intuition is that banks will set their prime rate at some reasonably consistent markup, or at least they will in aggregate, so you can use that as a proxy. In theory you could use other published interest rates (SOFR, various treasury rates) but the problem is that you can imagine a scenario where the banks' own borrowing costs diverge from those rates (usually when something bad is happening and you care the most about getting this kind of thing right) and in that scenario the bank could end up with "incorrect" margins if they're pricing to the wrong benchmark.
The money store analogy is roughly what I have in my head. But then I'm always confused about stone-age processes like the ones you talk about.
If you're a big grocery chain, these days you've got a few data scientists on staff to help you figure out prices.
But it's as if Kroger, Walmart, Wegmans etc. gave bread prices to the New York times. Then each grocery chain took the NYT Median Bread price, added 40 used that to set the cost of sandwiches.
Maybe this was the best you could do when JP Morgan knew every bank president, but today? I find it bizarre.
Yield curve is easier to think of from the investor side of things. Most of the time, the longer you're willing to lock up your money, the better a return a bank or financial institution is willing to offer you.
Anyways, where I have a bigger question mark on Harris is "what is she going to prioritize?" She's thrown out some one-off policies for better or for worse, but I still don't really know what her first move will be if she wins. Biden wins and signs the ARP. Ok. If Harris wins, I don't really have a sense of what her first attempt at legislation will be.
But, her opponent is Donald Trump, so none of that matters lol, that's just a question that would be nice to have answered at some point in the next six weeks.
My view as a fanatical Harris supporter is that the main and almost only job is to keep Trump out of the White House (and the Republicans from control of Congress). Other than that, I think the country is in pretty good shape. I don't care so much what her legislative priorities should be or what she could get through Congress.* Sometimes doing little is just fine.
*Well, except for permitting reform. I personally would love to see that happen.
I am not a fanatical Harris supporter (I'll be voting for Chase Oliver in my state where Harris is expected to win by 10%+), but I endorse this message!
I think the prime rate is supposed to be related to (or reflect a spread to) the bank's own cost of capital, which is related to but not identical to the fed rate. This was the idea behind LIBOR too. So, in a situation where the bank's cost of capital diverges from the fed rate for some reason, it would important for their lending rates not to be based directly on the fed rate so they don't end up with no or negative margins.
There's no way that there'll be benefit cuts in Social Security. First, no Congress which allowed it to happen would be reelected. Second, there's no reason to cut them. The bonds which are redeemed to pay about 30% of them are redeemed with money collected in the general revenues. When the bonds are gone, Congress will just go ahead & let those revenues pay those benefits--just as it funds highways above & beyond what gas taxes bring in.
Up until about three to five years ago, I would have agreed with you that Congress would under no circumstances allow Social Security benefits to be cut. Now, I'm frankly not sure -- it seems like enough Republicans have either genuinely gone full nihilist or are paid Russian agents that it's very easy to imagine them forcing Social Security cuts so long as there's a Democratic President in office at the time.
True, although I'm not sure at this point how much of that is simply because of being responsive to high income donors who don't want their bond portfolios destroyed.
Why a Democratic Congress doesn't simply enact a "Protecting SS Benefits" act do instruct Treasury do do as you suggest indefinitely (in the event of trust fund exhaustion) is beyond me.
That's a great question, and I suspect the answer lies in the possibility of making political hay by appropriating money for SS. Back in the day, Congress raised benefits; now it's done by a formula. Don't remember why Congress agree to give up buy us old folks' votes, but it did.
I feel like one of the most under-covered issues this cycle is the fact that the TCJA is going to expire.
Yeah, I was looking at the chart Matt posted and thought “isn’t the best course of action to do nothing?” I don’t think I quite appreciated just how much TJCA contributed to the deficit until I saw the chart.
And it’s not as though TJCA was at all necessary. I know there has been some research recently that purportedly shows a small boost to private investment. But in the grand scheme of things, as far as I can tell the costs of TJCA completely outweigh the benefits
There are a lot of reasons why a GOP senate and a Harris presidency would be immensely frustrating (say goodbye to protecting abortion rights on a federal level). But the strong likelihood that a compromise to extend TJCA can’t be reached seems…kind of ideal.
Except that it'd be super easy to take the sitting president that let it expire with the accusations that they "raised taxes"...
Tragically Trump now wants to reinstate the full SALT deduction and I'm not sure about Harris, but Schumer wants it back
The SALT Cap simply breaks politics. I thought it was and remains a brilliant strategy but it looks like it's been costing the GOP in formerly competitive high-tax districts and Trump is reacting to that local pressure.
https://www.politico.com/news/2024/09/20/trump-salt-cap-house-gop-tax-00180245
I hate the SALT deduction so much. Curbing it was one of the best things Trump did. I am sad now.
https://youtu.be/ECR1ZRO6tJE?si=9ofZuNvzSALgE2HR
I generally agree but here in Illinois the 5% income tax and huge property tax rates create a different financial reality. Long term I think IL is fucked unless we can break the pension liabilities but there's a real race to the bottom problem right now where people are just leaving or at least leave ASAP when the kids finish school. The SALT deduction at least made the problem slightly more manageable.
"The SALT deduction at least made the problem slightly more manageable."
Couldn't you just write this as "the federal government subsidizing Illinois' spending makes Illinois' problems more manageable?"
Sure. Illinois government is uniquely terrible. But still ... the SALT deduction has been around for > 100 years so the sudden change on such a long-term policy breaks things.
I'd love to see a post mortem on what went wrong with the progressive income tax amendment. Pritzker was explicitly in favor of it as a path to ameliorate the state's debt apocalypse, but the "yes" campaign was one of the least effective efforts in history. It was run by the state Democratic party rather than the governor's office, to my understanding. I can't imagine a campaign that bad happens by accident, so my supposition is the the state party deliberately tanked it. But I have no hard evidence of that.
It's the simplest thing ever -- it was just a terrible idea. IL doesn't have a revenue problem. They have a cost problem tied in part to rampant corruption* and no one trusted Pritzker to do anything about it. It also didn't help that Pritzker himself dumped $56M of his own money into the Fair Tax campaign.
* The best example of the level of corruption face - that I personally know of is all our road construction projects are awarded through rigged bids where the major construction companies have ~ carved up territories of exclusivity.
Let's just keep calling it the "Tax Cuts for the Rich and Deficits Act of 2017." Democrats should at least have amended the name in 2021. The only thing "jobs" about the "Tax Cuts and Jobs Act" was that growth-sucking deficits > Σ(expenditures with NPV>0) reduce the real wages of jobs.
I’m no TCJA expert but does that include the expiration of the SALT cap and the larger standard deduction? Because those both seem like actual substantive wins for the tax code.
I believe so (and agree with you on the normative point).
Funny how Trump is now opposed to two of Trump's biggest accomplishments (operation warp speed and mostly killing the SALT deduction)
The SALT deduction limitation was sold to conservaties as a way to stick it to blue state liberals. And now that they are against it, they are too dumb to realize that Trump is the one that took the deduction.
I personally don't think we should have ANY itemized deductions - state & local taxes, charity - nothing. The Federal government should not be in the business of subsidizing these things. If your state & local taxes are too high, then you should lobby your local government for cuts (with cuts in services). If you donate $1,000 to a charity or church, you should not be getting a subsidy from the government for it. The whole thing is a big con - and don't even get me started on how the rich exploit this deduction.
Eliminating the larger standard deduction would result is a big increase people needing to itemize and greatly increase the headache factor for people whose deductions are currently less than the expanded standard deduction. That seemed like the one good idea in the TCJA, though when you add dependents it gets less clear (since exemptions are eliminated).
I think the phrasing of my original comment was unfortunately somewhat ambiguous: I am in favor of both the larger standard deduction obviating the need to itemize deductions, and the SALT cap, and would prefer that those TJCA provisions, at least, remain part of the tax code.
SALT if paid for is good. It moves the "income" tax a smidgen toward being the progressive consumption tax that we ought to have.
The way the SALT deduction is structured is regressive though since rich people get essentially a 40% federal rebate on their state taxes while non-itemizers get nothing.
It makes the tax code less progressive than it could be. Unless you are actively experiencing a Communist revolution, most features are like that. Why doesn’t the top bracket start at $1 above median income? Why is the top rate only 37% and not 99%?
Is there any locality in the world that does a progressive consumption tax as a major element of their tax code? I know people like the idea of it, but do we have any real-world idea about how it cashes out?
What does progressive even mean in the context of a consumption tax? You track all your spending over a year and its gets taxed more and more the more you spent earlier that year?
It's basically income tax with a deduction for documented savings/investments. Consumption = earnings - savings.
Do capital goods count as consumption or investment in this context?
I think it's hard to do good reporting on something where the answer to the question is different based on several different election outcomes. If you ask each campaign they'll just tell you how they want things to work assuming a clean sweep for their party, AND everyone falling in line with what their Prez says.
But the real question to be asked is something like what's going to happen if you win and:
a) lose the House and Senate
b) lose the House, and win the Senate
c) win the House and lose the Senate
d) win the House, win the Senate but your most cantankerous Senators disagree with you?
No one's going to answer that question, and any reporter or pundit gaming it out is going to be so deep into speculation that it wouldn't make any sense to publish it.
I want it to expire
I have wondered about the strategic merits of Harris saying your last paragraph somewhat explicitly. If you start from the premise that many undecided voters are double haters or at least double skeptics, I wonder if Harris has ground to gain by explicitly saying 1) I will likely not have a Dem trifecta, and therefore will be an honest bipartisan broker with Republicans in Congress to reach responsible oversight of America's finances and 2) DJT would not have to do so and would destroy our fiscal standing.
Harris is not an Obama level communicator (few are) but I always think pols leave stuff on the table by not saying more complex things for fear of lack of understanding. Harris should workshop how to explain in simplest terms why 2024 =/ 2017 economic conditions and why Trump's plans now would destroy the economy not save it.
By impulse, it seems Democrats are just never really comfortable talking about deficit reduction. There's no group in their coalition that is pushing for it. But agreed, Harris could have hammered the disastrous economic consequences of a second Trump term harder during the debate.
The 2012 D platform mentioned the deficit 9 times. 1992 7 times. 2020 0 times (technically once but in a non-budgetary context).
These things are not set in stone.
That stat is all you need to know about why no one talks about it today. For at least those 28, and more like 40, years people have been talking about how we need to do something about the deficit. No one has done anything at all for more than like 4 of those years, and what was done was quickly undone.
Somebody was wrong many times in those 40 years about the dire consequences of what would happen absent action. To think that now, today, it's FINALLY a real problem isn't something that many people are going to take seriously.
At the risk of looking very dumb with this question: is there any chance that this time isn't quite as dangerous as all the centrists want us to believe? For the record, I think Dems should take deficit reduction more seriously because even if the danger is overstated it's still a responsible thing to do. Nevertheless, I don't understand how you make it popular. Voters always express concern about the deficit and debt in polls and they all want to cut "spending" but when you spell out the cuts they don't like them. Tax increases are non-starters because you just can't do them without cooperation from the GOP.
Again this may be dumb, and I am more than happy to be politely corrected for my own educational benefit, but don't rates going down somewhat help the cause going forward?
I got my MBA in 1992, and all my very smart professors convinced me that deficits were generally bad any time other than as a way to smooth the business cycle in a recession, and that if we kept having deficits the size of the ones we were having then they would quickly crowd out private borrowers, drive up rates, prevent useful government spending, etc. I remained convinced, kind of despite the evidence, through about 2008, and about that time I became skeptical. I understand all the arguments that deficits are bad and too big now, etc., and the logic still makes sense to me in the abstract, but I can't help noticing that the arguments aren't that different now from then and I haven't seen anybody convincingly reconcile the constant non happening of the terrible things so often projected.
No major party candidate is going to tell the electorate that it's time to take their castor oil and prepare for major deficit reduction. That's a sure ticket to loserville.
The best outcome would be 1992: talk about all your great spending plans in the campaign and then when you take office and you're told the full picture, regretfully turn toward deficit reduction in order to stave off the bond vigilantes and bring down interest rates. It worked like a charm for Clinton -- at least by 1996 if not by the disastrous year of 1994.
Good chance that being serious about the deficit lost both Bush Sr. and the House Democrat majority. The public hates fiscal prudence.
Perhaps American voters are the one constituency the bond market can't intimidate....
Politicians are often foolish, but when push comes to shove I think most of them want to do something good. It’s why there hasn’t been a default, and why when the markets really did signal in the late 80s that Congress *finally* acted.
We need a better coalition.
Nobody running for president ever says "don't worry, if I win, we won't have the votes in Congress to do anything". Saying that would simply convey weakness and lack of confidence.
Agree, and this is why it's helpful to have an Explainer in Chief who can boil things down to the level of simplicity and clarity one might use in presenting a complex case to a jury.
I think it's one thing to say that a "Trump sales tax" will raise your families costs by thousands a year. That's straight line causality. Saying instead (or in addition) that Trump tax policies will lead to much higher deficits which will lead to much higher interest rates is . . . oh damn, all the voters are already asleep or switching the channel.
I don't care how good you are; multiple bank shots do not work in campaign rhetoric.
Right. I think the challenge is: you're realistically (at this moment in our political history, anyway) only targeting ten percent or thereabouts of the electorate. More than 40% of the electorate is unreachable, and an even larger chunk is already on board.
The modest number who are persuadable aren't political hobbyists, which I think also means they're not policy hobbyists. The "explain complexity" idea might have worked better with 1976's electorate.
Simple is better even if the technical details are less true but the result is true. “No, it isn’t a direct tax but it is effectively one with an extra step or two.”
The way I would summarize the argument: When the government needs to borrow a trillion dollars to keep the lights on in DC, it competes with you and me looking for a car loan or a mortgage, and that drives up interest rates. The only way the Fed can counter that is by printing money, which gets you a short term shot in the arm but then sets off another round of inflation.
I wish she leaned into this even more! She clearly has the faculties for it! I do think there is something to like the instrumentality-substance divide here. In theory I totally agree, Prosecutor president ought to be great at this. But perhaps there really is a big gap between explaining the elements of a crime and explaining mildly complex economic factors. Being a SF DA may not help as much to the latter. Matt hinted at as much on a previous Politix episode, Harris seems at her best in very justice/rights coded issues and less so in the blocking and tackling of economic mgt. Doesn't mean she personally doesn't understand this, she was an econ major, but she is not above replacement level at then explaining it to Joe Plumber in Wilkes-Barre.
It seems like this could backfire and harm down ballot races by emphasizing the upsides of mismatched parties.
I worry about this too. I feel bad sending Tester and Brown to the wolves but maybe the message could be coded as Senate specific? Or still emphasize you should vote for them but realistically... I appreciate that the answer of how to handle this is not obvious.
She should also be ending ever speech with a plea for a Congress to let her do what the says she wants to do.
The reason we can’t do belt-tightening is because Republicans always use Lucy and the football tactics. They yell at Democrats to balance budgets when Democrats control the government, then blow holes in the budget when they gain control. It’s been happening for 40+ years. Republicans have no credibility on this issue, and Democrats are tired of being played for chumps.
Obama specifically tried to work with Republicans to raise taxes AND cut spending to reduce the deficit, and Republicans just said "fuck you, no tax increases ever, even with spending cuts, even to explicitly reduce the deficit".
As far as I'm aware, the only time the budget has been "controlled" since Bush Sr. was president is when Democrats control the presidency and Republicans control the House. There are a few other exceptions such as when Democrats control the house late in Bush Jr. tenure, but otherwise unified party control is almost always maximal spending/tax cuts.
Democrats set the stage for a prolonged drop in the debt-GDP ratio—and an eventual return to (probably ill-advised) surpluses, when Democrats had a trifecta in 93-94. The legislation that actually put us on that glide path was entirely the creation of a Democratic Congress and President.
1) Bush Sr. violated his no new taxes pledge and raised taxes - probably lost the election because of it.
2) Picking up the story with Clinton, he came into office and Democrats raised taxes again, but also increased spending some.
3) Republicans came into office in 1995 and stopped Clinton/Democrats from increasing spending even more.
I agree that Democrats raised taxes to start the glide path, but their natural impulse was going to be to increase spending. Republicans in Congress stopped Democrats from changing the glide path and pushed even further with welfare reform and other spending restraints.
No. You are arguing what would have happened based on counterfactuals. It remains the case that full Democratic control produced budget restraint.
Arguing counterfactuals is the point. Like people who say that Gore would have been than Bush - they're arguing a counterfactual. Maybe he wouldn't have been. But given what we know, we can make credible assumptions. One of mine is that if Democrats has retained control in 1994, they would have tried again to pass health care legislation and that would have been expensive and eaten up most of the savings from 1993-94. I think there's a good possibility that it would have been worth it! But there is way to much history and reporting around what they wanted to do for me to believe otherwise.
The Dems would only be chumps in your description if they responded to Republican criticism of their spending. They don’t….they spend away. So I don’t think the Democrats are chumps but it is true the Republicans are hypocrites.
No, this isn't correct. Democratic politicians have been more responsible on the budget than Republicans for decades. Bill Clinton returned 4 years of budget surpluses, and then George W. Bush blew it all away.
Argh. You could just as easily say that the only time that the US has had surpluses in the last 65 years is when Republicans were in control of Congress. I agree that Republicans have been profligate tax cutters, but disagree that Democrats have been any better on the spending side. The only time the deficit doesn't explode is during mixed government.
No. The operative point here is that Republicans will blow up the budget, and only when Democrats have some level of control are they restrained. Under unified Republican govt control, the budget deficit explodes. That doesn't happen under Democratic control.
Which period of Democratic unified control would you point to where the budget deficit hasn't exploded?
Aside from 93-94, think about when Ds had unified control. 2009-2011 - major recession, there probably wasn't enough of a budget deficit. 2021-2023 - major recession, there was too much of a deficit, but only because of overlearning lessons from 2009-2011. Some deficit was definitely necessary.
93-94 as mentioned below.
What’s our most recent data? I do think it’s great Clinton balanced budgets. Kudos to him. If he had more self control his legacy would be greater.
Trump and George W. Bush vs. Obama is instructive, especially since the Republicans refused multiple deals during the Obama term.
The Congress controls the purse maybe it’s more instructive to look at who controls the congress. I am curious if a split congress provides less spending because of gridlock.
Whihc mean that _Democrats _ have to raise the revenue. And lean to fight harder when Republicans try to reduce them.
I don't fully understand this comment. Republicans have shown they aren't serious about cutting the deficit. They prefer tax cuts and revenue shortfalls.
I think it's basically that Republicans (through their capture by the Grover Norquists of the world) will ~never raise taxes, even when it's the obviously correct thing to do. therefore, the Democrats have to be willing to fight to do the right thing, even when it's costly, because the alternative is disaster.
As a homeowner who enjoys high interest rates on his saving accounts, I am now switching my vote from Harris to Trump. Thanks Matt!
All the people with white hair and red hats who were pissing and moaning about low interest rates during the Obama years were the most hysterical complainers about the inflation burst. They basically want the impossible: sky high interest rates for their CDs, and low inflation to protect the purchasing power of their savings.
The funny thing is that we kind of have that now (at least in the short term, and in the sense that saving account interest rates > inflation) and they're still pissy about it
Yep. If you locked in high rates in 2023, you're now basically golden, provided Trump doesn't win and blows up inflation.
Took me a moment with this one. Poe’s Law strikes again.
Lower interest rates will bring higher returns in the stock market.
The stock market is already overvalued
Better switch back to Harris. After taxes, the extra interest you get won't cover the added inflation that you get hit with.
The only viable solution to our debt problem (not yet a crisis, but...) will be inflation. The sooner the Fed shifts to a 4% target inflation rather than 2%, the better.
Inflation is immensely unpopular. Sure, 4% is less unpopular than 8%, but I think it's way more noticeable than 2%. Bankers argue that *some* inflation (like, 2%) is healthy, and I think it's low enough that people give this low rate of inflation a pass.
But I can't imagine that accepting a rate that's twice the currently accepted inflation rate would be politically viable.
The alternatives -- significant tax increases on the middle class, spending cuts -- are even less popular.
Even Matt, who is one of the most fiscally prudent and honest commenters in the arena, uses "doomsday cuts to programs for the poor" in today's column to describe unspecified spending cuts. Amp that up to 11 when actual reductions are proposed.
Some party is going to have to raise taxes on Americans making less than 400k per year
No, I actually think what Florida John is proposing is the likeliest long term scenario, everybody will simply bitch as it happens. But it will happen in fits and starts and lurches over time.
The $400K pledge is now a $333K pledge. Biden made that pledge in the 2020 campaign. With four years of inflation, that $400K translates to $333K in 2020 dollars. I don't have the numbers in front of me, but I bet a *lot* more people make $400K/year now than in 2020. So the Democrats are pretty quickly walking back that $400K limitation.
"Between 2019 and 2023, the number of American households earning more than $400,000 swelled by nearly half, from 2.6 million to an estimated 3.8 million out of roughly 131 million households." (1)
Going from 2% of households to 3% is doubling, but still a pretty small percentage overall.
(1) https://www.usatoday.com/story/money/2024/05/31/400000-tax-hike-more-americans-affected/73890456007/
About 40% of households pay no income tax, and many more pay virtually no tax. Call it 50% that pay effectively zero income taxes.
So I see your 2 to 3% and raise it to 4 to 6% of households that actually pay income taxes.
Good point. Let's hope they don't update that 400K figure to, erm, 500K or 600k to account for inflation!
it was not too long ago that they were using 250k as the top end of the middle class.
Which is why the adjustment needs to come mainly from higher revenues: progressive consumption taxes and VAT.
There are other alternatives, eg eliminating the stepped up basis loophole and increasing the inheritance tax.
Neither of which are large enough to make a difference. See this interactive tool for lots of alternatives: https://www.crfb.org/debtfixer
I agree. People also just don't get how many suburban homeowners and small business owners they lose when they bring this up. If your kids have to sell your house or your business when you die to pay the tax, then you won't vote for it and if you have to add some caveat like "exempt up to X million dollars" then you're broadcasting it isn't really about raising revenues.
Lots of suburban homes worth $10m?
Well, it raises some revenues. And it's good for fairness.
I await the brave new future where a Republican administration blows up the deficit, leading the Fed to quietly raise the target inflation number during the following Democratic administration, easing the pressure and creating some fiscal space for the Republican administration that comes in on a wave of anti-inflation rhetoric, then blows up the deficit, leading the Fed...
I'm good with a 3% target.
You gonna be good with 4% a few years after that?
I wasn't aware that the 2% target ineluctably led to 3% inflation (though that would have been fine).
It doesn't, but this whole discussion is in the context of inflating away the debt, a strategy which I think is absolutely going to push inflation higher and higher over time.
Especially since the 2% target is completely arbitrary! This seems like a fairly obvious lesson from the Great Recession that should have been learned. Unfortunately there are a lot of powerful voices who want to keep the 2%, so...
Pre covid, they treated the 2% “target” as an upper bound. If 2% is the target and your tools are crude, you would go somewhat above 2% before you tightened.
I'm waiting for someone to explain to me why it's so important for the Fed to get inflation down to 2% to maintain its credibility whereas its total failure to get inflation *up* to 2% in the teens did not undermine its credibility.
Oh of course I know why that is. Silly me.
The statute that gives the Fed its powers give it a mandate to maintain “price stability.”. Even the 2% target is a bit of a fudge. The statute keeps the fed from being fully transparent about having a higher target.
Any target is forward looking, based on the drip drip of "ordinary/average" shocks. Extraordinary shocks require temporary over-target inflation, so ex-post FIAT will average over target.
My understanding is that the 2% target has always been acknowledged to be an empirically-supported target in the sense of “this works well in practice,” rather than purporting to be a theoretically optimal rate of inflation.
2% is a number that most central banks have landed on because New Zealand picked it in the 1970s
Presumably there was a particular reason why they chose to adopt the NZ option rather than just ignoring it and doing their own thing, right? It's not like New Zealand was ever in a position (even had it for some reason wanted to be) to dictate inflation targets to the United States or anyone else.
Does it though? Considering that we were below the ZLB for years during the Great Recession, there's a pretty strong counterargument that it doesn't.
As I understand it the issue with the GRC generally isn't held to to be interest-rate mediated precisely because we were at the ZLB for so long. The common wisdom from people who are more economically-informed than I seems to be that the coordinate demand shortfall basically just needed deficit spending to mechanically increase M2.
Put another way, inflation wasn't immiserating during the GRC, and the goal was never to *make* it immiserating, just to alleviate unemployment, which because the proximate cause of the employment slump was a secular demand shortfall, could actually be done in a way that was essentially a "free lunch" without the traditional inflation/unemployment tradeoff of the misery index because there was a lot of spare productive "slack" in the economy such that rather than having more money chasing the same number of goods and services, the number of goods and services could actually rise to accommodate an increased money supply (i.e., lower unemployment without a corollary inflation increase). Given that demand wasn't responsive to interest rate deceases alone, the policy solution was Keynesian deficit spending (preferably on something more productive than digging holes and filling them in again). But none of this seems to me to have been specifically targeted at or directed to inflation -- indeed, part of it's attractiveness was precisely that it *wouldn't* screw with that basically-okay part of the misery-index gauge.
Yes, in 2008 (and for years afterwards) there was insufficient aggregate demand, which caused a recession. But this should have been fixed by additional monetary stimulus -- NOT "Keynesian deficit spending". (The ZLB does not prevent additional monetary stimulus.) You're, right, though, that it was indeed an opportunity for a free lunch ... which, unfortunately, the US left on the table, uneaten.
I thought it was because New Zealand adopted the 2% target and the people here who prefer "sound money" to upholding the Fed's mandate on employment thought that was just peachy.
https://www.reuters.com/markets/mouse-that-roared-new-zealand-worlds-2-inflation-target-2023-01-30/
Whether or not it was completely arbitrary when picked, it's not arbitrary now, because what matters is the Fed's credibility in committing to a target. If it had been 3% when picked, it would be important to stick to 3% now, but if the Fed says "eh, 2% was arbitrary, maybe 3% was better," the market will understand that to mean that if 3% is hard they will up it to 4%, etc.
How is this viable in any long term sense? Doesn’t this inflate existing debt at the cost of making future deficits even more painful while doing nothing to alleviate the dynamic influencing debt size and perpetual deficits, as well as having no direct effect on underlying demographic and productivity trends?
It works in conjunction with a tax increase and spending decrease. You cut spending for a couple of years, raise taxes, hit the inflation button and 3 years later the budget looks much better. The public absolutely hates it and everyone involved which is why it always requires both parties to get it done.
>>It works in conjunction with a tax increase and spending decrease.
"Assume a can opener."
(I all seriousness, thank you very much for the helpful explanation. I'm not trying to be flippantly dismissive of your productive comment, merely expressing grave skepticism at Congressional capacity to act like adults. This seems like exactly the sort of thing "popularism" is terrible at fixing -- high-profile issues whose solution is important but short-term unpopular.)
Totally agree! Incumbents are fully aware the public will hate it and so will only do it when they feel like they absolutely have to. They've been kicking the can down the road for a long time and will continue to do so as long as they can.
It doesn’t make future deficits more “painful” because revenues and expenditures both increase with inflation. Inflation priorities present economic decisions and activities over the past
Have they maybe silently shifted to a 2.5% or 3% target? I can’t imagine Bernanke cutting this early in the business cycle.
That’s my understanding of what FAIT is but it’s somewhat unclear.
Powell has done FAIT pretty well just being a little too "F" on the upside and not quite ""F" enough coming down.
Yes but that was the original conceit of FAIT. My read was that it was designed to combat secular stagnation.
They are totally going to obfuscate because they are under a legal mandate to maintain “price stability.”. They’ve already defined price stability as modest inflation, which is pragmatic if legally dubious
It is not "pragmatic;" it is real income-maximizing optimal.
What makes you think that? Inflation is currently between 2.5 and 3%. The Fed is supposed to skate to where the puck is going, not where it is. That suggests that inflation may continue to decline for a while.
Bernanke (or maybe it was his Board) was a disaster. And Powell should have cut sooner.
The Fed should set the target inflation rate at the rate that maximizes real income. Higher inflation has some negative effects, too. They are not as bad as too little inflation (unemployment slower growth) but they exist (making it more difficult to agree on efficient long-tern contracts).
I am not persuaded that 2% PCE is not in fact near optimal. I think that the Fed has succeeded in returning inflation to target w/o much excess unemployment demonstrates this.
The solution to our debt problem is deficits < Σ(expenditures with NPV>0).
The problem with your formula is that "expenditures with NPV > 0" is almost impossible to measure and ludicrously easy to manipulate.
This is, after all, how we financed the cold war after paying for ww2
I mean, Americans could be adults and accept either higher taxes or austerity…
I specifically said "viable solution".
I know, too many Americans are children and want cake over vegetables. Sigh.
Higher taxes and reduced spending aren't like vegetables vs. cake for a meal, they have real impact on people's lives. It's a leap of faith to assume that the same system that's gotten us in this position over the last couple decades is suddenly going to work better when your paycheck is smaller, or your Medicaid benefits are stingier, or you're no longer eligible for SNAP due to stricter requirements... I'm not surprised that people instead opt for "money now, I'll figure it out".
You should run on that platform. You'd make history, you'd be the first formal candidate to lose to every single write in candidate in every state.
Also feels like the fairest solution: all holders of nominally denominated debt (ie, basically everyone without TIPS) gets to pay for this in equal measure, togethe, rather than ex: food stamp recipients, retirees, or vets getting uniquely screwed as their entitlements get cut.
Really good explainer. Somewhat tangential to the main point -- why does the Fed move incrementally at all? Are they just afraid of losing credibility on inflation? Too much uncertainty means no sweeping moves? I know there was an episode in the early days (can't find it now, but maybe post-WWI around 1920?) where they jacked up rates quickly and the economy immediately went into recession, but that's a long time ago and it seems like they're always behind the curve, so to speak. Not my area of expertise at all so would love some comments from those in the know.
I agree with you in principle.
I think the counterpoint from the Fed staff would be that their current approach works pretty well and they have been becoming more successful over time.
Inflation is a noisy signal -- it's constantly being revised in either direction -- so it's important to use other laggier metrics alongside it to avoid yanking the controls hard in the opposite direction every other month. On the other hand, a large part of the effect of interest rates is due to investor expectations, a leading indicator that also adds noise to the system. If you don't know *quite* where you are *or* how quickly you're moving, it makes sense not to update in response to every new signal.
But Powell has been far more willing to make large rate movements than almost any other modern fed chair. I also dispute the notion that the fed has been generally successful—nearly all of their growth assumptions have been too optimistic and they never seemed to learn from the mistake.
https://nymag.com/intelligencer/article/jerome-powell-federal-reserve-profile.html
They've been optimistic about growth assumptions and slow to cut rate to head off recessions because they're worried about inflation, and the public reaction to the 2021-22 inflation proved that concern to be well-founded.
Disagree with this, but primarily because supply shocks can’t be managed by interest rate rises.
_Pretty_ well, but it did contribute to being too slow to raise rates going up and too slow to cut them coming down.
https://thomaslhutcheson.substack.com/p/why-target-ngdp
https://thomaslhutcheson.substack.com/p/improving-fed-decisions
Certain financial institutions are very sensitive to rapid changes in interest rates, particularly if their balance sheets are poorly hedged (think SVB).
Huge swings in rates might therefore increase financial instability.
That is a problem of bad prudential regulation. SVB should never have been allowed to get into the position it was.
Even a perfectly calibrated regulatory environment cannot save a bank from a bank run. SVB could have been better, but it wasn't too terribly managed from an asset perspective; it was that their depositors all decided to pull their money at the same time.
Yes but SVB did take some risks on the asset side. Putting basically everything in Treasuries (betting everything that rates will stay low) creates an obvious weakness (the rates may rise).
We should always be a bit skeptical about easy explanations when it comes to bank failures. Banks always take risks on the asset side -- it is their entire reason for existence: to transform "safe" deposits into "risky" assets while doing their best to hide that risk from flighty depositors.
It is necessary and healthy for the banking system to be able to point to "bad management" whenever a bank fails, and there will always be something that can be pointed out that a bank management did wrong. It is in all of our interests to be able to do so -- regulators, the public at large, the banks themselves -- because banking is, at its core, a confidence game. If confidence wanes, the entire enterprise is at risk.
Disclaimer: I'm not affiliated in any way with SVB, or with any bank. Have never worked for one, don't invest in them (except through index funds) and have no affinity for SVBs management or any other bank's management.
Right I agree with all that. I am just saying SVB made a mistake assuming rates would never rise.
IDK John from FL ... the losses on their bond portfolio would have wiped out nearly their entire equity capital base. That's not "could have been better". That's catastrophic mis-management. They got greedy chasing yield.
https://www.barrons.com/articles/svb-silicon-valley-bank-rates-securities-693c931c
It’s worse than that. They pulled their hedges! They assumed (as most in banking seemed to assume back in 2022) that rates will never rise. The hedges were an inconvenient drag of approx 3-5% of earnings…
In the end, I'm not sure anyone suffered from the SVB failures except for its managers, and I'm not sure its managers suffered in the end either.
Taxpayer suffers a bit (in expectation). De facto the FDIC deposit insurance now has no limit, but insurance fees on banks haven’t been increased by a corresponding amount.
I think saying there's a $250K limit and acting like there is no limit is terrible policy and may really bite us someday, hopefully not too soon. So agree totally.
I'm not sure what that has to do with the failures of SVB. Did they take the actions they did because they thought there was no cap on making depositors good if their bank failed?
But the fed has to live in the world where things like bad prudential regulation exist.
The fed has been getting better at its job over time. Recessions are less common now than two or three decades ago. The debt bubble that caused the great recession would have done far more damage in an earlier era
The Fed caused the Great Recession.
I'm not willing to take the time to back that up, but you may enjoy this and think you'll come away convinced: https://scottsumner.substack.com/p/sahms-rule-mini-recessions-and-american/comment/70040227?utm_source=activity_item#comment-70046018?utm_source=activity_item
The fed should use binary search to converge on the optimal rate.
They ought NOT to move as they do.
https://thomaslhutcheson.substack.com/p/why-target-ngdp
My original comment was essentially this: deficits and debt have fallen out of political fashion after we’ve had a snootful for the last 30+ years. But as much as I want my president to *lead*, I also want my candidate to *win*…Harris/Wolz making deficit talk cool again doesn’t seem like a good path to victory.
One of the under-remarked-upon things Trump has done is rob the country of a more constructive debate between progressive and conservative approaches, because he's so obviously ill-suited to governance at a pre-political level that it's worth tolerating a lot of crappy left policies and rhetoric to stop him.
Deficit reduction commans strong support in public opinion polls: https://www.marketwatch.com/story/voters-deficit-concerns-are-back-in-style-amid-persistent-inflation-885ab4d1
Apart from Ross Perot, no major candidate has ever profited from harping on deficit reduction. Since Walter Mondale, I'm not sure a D or R candidate has even raised the issue during a campaign.
Leaders today are facing an unprecedented challenge of voters who mostly get their news from sources who at least on some level just tell their audience what it wants to hear. Pod Save America calls itself as a "no-bullshit conversation about politics" and even they've been sniggering about "nerds" who responded to Harris' "price gouging" initiatives by pointing out widespread government price control efforts have a sobering track record. You go a level further and "the only reason" various trillion dollar initiatives aren't enacted is that every single politician to the right of AOC / left of Trump (depending on faction) is nothing but a slave to some special interest or other.
Meanwhile in reality across most of the Western world both debt and deficit are relatively high by historical standards and populations are growing older.
I'm not suggesting this dooms democracy in any way but potentially some major shock will be required to bring people to reality. Britain had one of those but the jury remains very much out as to whether that was enough, it did make people realise there is some limit to borrowing but many people seem to have pivoted their silver bullet from borrowing to taxing the rich. It's quite a concerning situation.
Josh Barro had a piece earlier this year basically saying that *eventually* America's fiscal standing will reach a point to fundamentally alter the tenor of our politics in a much wonkier and saner direction. The optimistic case was this could happen ex ante of a fiscal crisis. I think unfortunately it seems unlikely to happen until 2028 or 2032 ex post. https://www.joshbarro.com/p/when-will-interest-rates-make-voters
"Some of these proposed cuts would mechanically accelerate bankruptcy of the Social Security Trust Fund and cut benefits..."
This seems to be common wisdom (that when the "Trust Fund" runs out, automatic benefit cuts will ensue so that outlays equal Social Security revenue). And this may be how the law is currently structured.
But it seems to me that what's most likely to happen is that Congress will muddle through and change the law so that everything just continues as is: payroll taxes stay the same, and benefits stay the same. The resulting deficit would be paid out of general revenue and deficit spending.
What am I missing? This wouldn't require the political will that other proposed changes would require.
Because the deficit is too large [1] to avoid massive inflation, particularly if it's leading to immediate consumption from an every growing pool of retires. A key part of taxes isn't just financing programs and benefits but also removing spending from elsewhere in the economy. Otherwise its just more money chasing the same limited supply of goods and services, thereby causing inflation as the rationing mechanism. And we've recently learned how much voters hate even a moderate burst of inflation and elevated interest rates. Hopefully politicians have learned their lesson on that one.
And no one is in favor of the types of tax increases that would sure up SS. Even Democrats oppose any increase in taxes for all but the richest. Even just uncapping SS taxes (which is insufficient to fill the financing gap on its own) would be wildly unpopular. It would just require too much transfer of resource consumption from current workers to retires to be sustainable at current benefit levels.
My guess is we have a highly partisan fight, possibly even some internecine warfare within parties, while each group pushes their preferred strategy that puts the burden on someone else. We'll get some minor patch ups, but largely get the default SS benefit cuts, while factions continue to push for there preferred strategy. No chance any proper fix will get the necessary 60 votes in the senate.
[1] "CBO’s 2023 Long-Term Projections for Social Security", https://www.cbo.gov/publication/59340
Yes, this all makes sense. But there is no "cliff". The so-called Trust Fund is just a label for a bucket of income. We can continue with the same sort of unfavorable cash flow we have now, which will gradually worsen over time. At some point, this will gradually become untenable (as you describe), but there's nothing sudden about it, and it seems hard to imagine that the solution will involve benefit cuts - which would be the least popular and most noticeable solution.
The cliff refers to the automatic benefit cut such that payments equal tax revenue once the trust fund is exhausted. That is the default case as the law is currently written. Congress would need to pass new legislation for something else to happen.
Here's the clearest wording I could find on the Security Security Adminstration's website after 2 min of Googling. The Future Financial Status of the Social Security Program [2010], https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
> As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.
To me, this seems almost identical to the perennial debt-ceiling cliff.
Every so often, Congress is faced with either (1) Doing nothing and facing a catastrophic default, or (2) Legislatively raising the debt ceiling and finding a way to fund the debt going forward, or (3) Legislatively just raising the debt ceiling and kicking the can down the road. Congress always chooses (3). This does require legislation.
With Social Security, Congress can (1) Do nothing and face a catastrophic automatic cut in benefits, or (2) Legislatively raise payroll taxes and/or cut benefits to fund Social Security going forward, or (3) Legislatively just fund existing benefits out of existing payroll taxes and general revenue, thereby kicking the can down the road.
I understand that.
But what's more likely - Congress enacts a new policy to raise payroll taxes and/or cut benefits (which would also happen if Congress does nothing); or it kicks the fan down the road and just funds the deficit from general revenue?
I really suspect the latter (and I don't understand why this isn't considered the default option). I totally agree with you that this is not sustainable policy, but it seems to me to be the most likely policy for the first few years after the "cliff."
The consumption that will need to be throttled here is housing, which in a NIMBY gerontocracy is just another type of transfer from workers to retirees.
I guess SS is more egalitarian in that it includes retirees who don’t own property. But it’s not clear that retirees as a whole can even benefit here.
Always bet against Congress doing something.
They raise the debt ceiling every time it comes up. I believe in their ability to change the social security trust fund from a minimum of zero to a borrowing limit that they keep changing.
Except when enraged seniors are breaking down the doors of their congressmen when facing benefit cuts.
The time to pass that legislation will be measured in nanoseconds.
Just a quick correction on rates: the 30-year mortgage rate most closely follows the U.S. 10-year Treasury Note, not the 30-year long bond. Why? Mostly it's due to 'duration,' which is concept that looks at the expected life of a debt instrument*, and the understanding that most mortgage notes are paid off well before 30 years' time. Many homeowners will sell their house before then, and many may also take the opportunity to refinance or make principal-only payments to shorten the life of the bond. Very, very few notes are held for the full 30 years today. Also, the 30-yr bond has not been consistently issued through the years, while the 10-yr note has always been sold and is thus a better reference. But the bigger issue is that of duration.
*Duration can also be considered in some equities, like for example an early-stage biotech company that is many years from potential revenue. In that case, changes in interest rates will affect the way investors approach such a company, just like they would with a bond.
Would be great if this piece also contained a graph of Harris’s proposals’ effect on revenue. Otherwise, an excellent primer.
I’ll skip the very cogent and brilliant point I was going to make and ask this question (since it’s top of mind):
I am *constantly* losing half-finished Substack comments on my iPhone - is it my imagination or does this app in particular have an incredibly sensitive ‘swipe to go forward/back’ feature?
It’s like it misinterprets the slightest horizontal movement (eg to highlight a line of my comment I want to move or delete) and *woosh* I’m back on the main article and my unpublished half-written comment is gone forever. I’ve searched and can find nothing on this. Doesn’t happen on any other app so I’m hesitant to change a setting on my phone, but by god at this point I’m willing to try anything.
Hoping the crowd knows an easy fix that I’m overlooking (beyond ‘be more careful’)
Note that sometimes the iphone will “reload[1]” the page while one is writing, which due to “like” ordering changes the relative position of one’s viewing point, but doesn’t actually kill a comment being drafted because it preserves that part of client state, so if you can find where you were, you can still edit it.
The full “back button” effect plus comment nuke is unsalvageable and used to happen to me all the time but seems much less frequent lately. Maybe it’s related to gesture-based navigation attempts by Apple? (An Achilles heel of the iphone remains that features have essentially negligible discovery if they aren’t explicit menu options….also inter alia the placement of the period button where the space bar should still be.)
[1] Actually appears to be client-side AJAX javascript operating on the DOM so local state is preserved.
The forced reload and reordering of comments is present on Android too, and it's unacceptable in 2024.
Sort the thread to "Newest" and it will avoid that issue.
“also inter alia the placement of the period button where the space bar should still be.”
Is this why I’m constantly accidentally putting periods instead of spaces?? I thought I was just suddenly terrible at typing.
Yes, this is on Apple trying to be clever by making periods "easier" to type in web addresses because they're frequently used, at the expense of actually allowing people to type correctly.
I’m so glad that Google usually figures out that I’m searching a three word phrase with accidental periods instead of spaces rather than typing in a weird url.
Thanks, I hate it.
I've also noted that I only get email notices of "likes" but not for replies anymore. I'm not sure why that changed.
Oh, and the Substack podcast app continually crashes. Nice job, folks.
Yeah that switch happened to me a bit over a month ago. I now have to go to the “activity” section under the bell in the upper right of the page.
I don’t even need to know how to fix it - I’m just glad I’m not alone…so many extra brilliant half-thoughts have disappeared into the ether…
Your section about how credit card rates are set sound so fake that I'm truly struggling. There isn't, I don't know, a market? They all just wait until each of their competitors post a number and then they pick their credit card rates?
Well that’s how they pick the prime rate. Different cards offer different interest rates (usually expressed as a number APR) to different classes of customers in a competitive market.
Fair enough. I would read the heck out of a overthorough explanation of just this.
I just feel a little like I did when I read about the LIBOR. Scandal aside, I couldn't believe that apparently everyone was just cool with how they chose their interest rates?
A lot of this stuff is in the "It's not broken" camp, where it would take a whole lot of effort to change (the prime rate is written into hundreds of millions of credit card contracts), so it just keeps going until something forces a switch. Switching from LIBOR to SOFR (or various other things) took years, and nobody wants to bother unless there's some strong reason to do so.
If you're interested in finance arcana, I highly recommend https://www.bitsaboutmoney.com/ and anything else by this author, including their Twitter profile etc. Patrick McKenzie is just inimitable on this topic.
But are most credit card rates really set as a function of prime? Seems to me they are set for many other reasons and are generally pretty stable even as rates change underneath. Like the Target credit card has an APR of 29.99, I don’t think that if prime rates went up a quarter point they’d make it 30.24.
Mostly they are actually set as a function of the prime rate, yeah. It's theoretically possible that Target has a card with a fixed APR, but if you Google "target credit card agreement" you get a link to a document on Target's website that shows a credit card agreement where the APR is Prime + 19.65%.
Wow interesting. But that 29.99 seems clearly designed to be right below 30 from a marketing perspective.
Is it possible that if prime dropped by 25 basis points they would just update the terms to say that the APR is Prime + 19.90 to keep the 29.99 anchor?
I’ve worked in pricing at a large bank and can confirm, yes your credit card rate (and HELOC rate for that matter) are basically determined by WSJ prime plus whatever margin we’ve calculated based on our pricing models.
The deep logic of this is that what a bank is doing is borrowing money in the market and then lending it on to you, so what you want to know is "what interest rate is the bank paying" so the bank can answer the question "what's a 20% markup?" It's almost (ALMOST) like a retail markup over wholesale prices but for money (money is, after all, the bank's "product"--I never know if it helps people understand this to think of banks as a "money store" or if it's not helpful because banks are not that at all in a lot of ways).
The problem is that banks don't borrow money in a transparent market, it's mostly individual transactions that are negotiated directly with each other. The LIBOR solution to this was to simply call banks up and ask them "hey what are you paying to borrow money" but it turns out that that's super unreliable because there's no one answer to the question and also if people have a reason to lie about it then they can and will. Prime is a reasonable proxy in that the intuition is that banks will set their prime rate at some reasonably consistent markup, or at least they will in aggregate, so you can use that as a proxy. In theory you could use other published interest rates (SOFR, various treasury rates) but the problem is that you can imagine a scenario where the banks' own borrowing costs diverge from those rates (usually when something bad is happening and you care the most about getting this kind of thing right) and in that scenario the bank could end up with "incorrect" margins if they're pricing to the wrong benchmark.
The money store analogy is roughly what I have in my head. But then I'm always confused about stone-age processes like the ones you talk about.
If you're a big grocery chain, these days you've got a few data scientists on staff to help you figure out prices.
But it's as if Kroger, Walmart, Wegmans etc. gave bread prices to the New York times. Then each grocery chain took the NYT Median Bread price, added 40 used that to set the cost of sandwiches.
Maybe this was the best you could do when JP Morgan knew every bank president, but today? I find it bizarre.
Yield curve is easier to think of from the investor side of things. Most of the time, the longer you're willing to lock up your money, the better a return a bank or financial institution is willing to offer you.
Anyways, where I have a bigger question mark on Harris is "what is she going to prioritize?" She's thrown out some one-off policies for better or for worse, but I still don't really know what her first move will be if she wins. Biden wins and signs the ARP. Ok. If Harris wins, I don't really have a sense of what her first attempt at legislation will be.
But, her opponent is Donald Trump, so none of that matters lol, that's just a question that would be nice to have answered at some point in the next six weeks.
My view as a fanatical Harris supporter is that the main and almost only job is to keep Trump out of the White House (and the Republicans from control of Congress). Other than that, I think the country is in pretty good shape. I don't care so much what her legislative priorities should be or what she could get through Congress.* Sometimes doing little is just fine.
*Well, except for permitting reform. I personally would love to see that happen.
I am not a fanatical Harris supporter (I'll be voting for Chase Oliver in my state where Harris is expected to win by 10%+), but I endorse this message!
Yes. The ARP needed a lot more thought (like including some revenue, like actually reforming unemployment insurance) before it was passed and signed.
That would have been nice. But given the exigent circumstances in place at the time, delay would have been destructive.
Sometimes you just have to be sloppy and fast.
I think the prime rate is supposed to be related to (or reflect a spread to) the bank's own cost of capital, which is related to but not identical to the fed rate. This was the idea behind LIBOR too. So, in a situation where the bank's cost of capital diverges from the fed rate for some reason, it would important for their lending rates not to be based directly on the fed rate so they don't end up with no or negative margins.
There's no way that there'll be benefit cuts in Social Security. First, no Congress which allowed it to happen would be reelected. Second, there's no reason to cut them. The bonds which are redeemed to pay about 30% of them are redeemed with money collected in the general revenues. When the bonds are gone, Congress will just go ahead & let those revenues pay those benefits--just as it funds highways above & beyond what gas taxes bring in.
Up until about three to five years ago, I would have agreed with you that Congress would under no circumstances allow Social Security benefits to be cut. Now, I'm frankly not sure -- it seems like enough Republicans have either genuinely gone full nihilist or are paid Russian agents that it's very easy to imagine them forcing Social Security cuts so long as there's a Democratic President in office at the time.
GOP won't do this alone. But if they could force Democrats to put some of their fingerprints on SS cuts, well...that I could see happening.
That's the GOP dream - the way spending really gets cut is if Republicans can somehow jam Democrats into being the ones to do it.
They haven’t yet forced a debt limit breach.
True, although I'm not sure at this point how much of that is simply because of being responsive to high income donors who don't want their bond portfolios destroyed.
Difference is that Social Security costs a lot more than highways do
Doesn't matter. We're already covering the cost from general revenues. That's my point.
Why a Democratic Congress doesn't simply enact a "Protecting SS Benefits" act do instruct Treasury do do as you suggest indefinitely (in the event of trust fund exhaustion) is beyond me.
That's a great question, and I suspect the answer lies in the possibility of making political hay by appropriating money for SS. Back in the day, Congress raised benefits; now it's done by a formula. Don't remember why Congress agree to give up buy us old folks' votes, but it did.
Both sides want leverage against the other.