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Monday, December 09, 2019 {{ new Date().getDay() }}

Is Bridgegate Politics As Usual, Or Beyond The Pale?

A perspective on the Christie administration’s behavior from someone who’s seen firsthand how government operates.

For those who are not familiar with the story — perhaps that same set of people who in questionnaires do not know where the Mississippi River or the Pacific Ocean is — Governor Chris Christie’s staff created a several-day monstrous traffic jam around the George Washington Bridge last September, apparently to get back at the Democratic mayor of Fort Lee, New Jersey for not supporting the governor for re-election. After denying for months that anything happened, the governor fired everyone he could find, held the world’s longest and most lachrymose press conference, denied all knowledge, said he was “very sad,” and seemed to conclude that he was the victim here. The poor jerks who sat in traffic for several hours apparently didn’t count.

The best and funniest column on this by far was by Gail Collins in The New York Times; I can’t come close to that, so I’ll ask the deep questions.

1. What are the odds that Governor Christie is telling the truth when he says he knew nothing?

Zero, or bagel, as they say in the finance business. I suspect he didn’t order the dirty deed, but this is exactly the kind of stunt political advisors pull when they’re riding high and want to show how tough they are. There would have been lots of smirking around the governor — remember, at the time they would have been quite proud of it — and you would have had to be about as unaware as a tree not to notice. The governor is not known for being unaware.

2. Has there been any kind of pattern that might suggest this sort of behavior was part of the governor’s genotype?

The only way you can say there was no pattern here is if you are a denier of combinatorial probabilities and a lot of introductory math. The Times has specified several incidents which sure look like revenge bullying. If I give the governor a 60 percent probability that each of these events was not part of a pattern (way above my gut feel), there’s still a 92 percent chance that this is all part of a pattern. I’m going with a pattern.

3. Is it surprising that the governor threw everyone on his staff within reach under the bus and denied knowing David Wildstein, a senior staff member and a friend since high school?

Are you kidding me? This is pure “homo politicus” stuff. Take my word on this: There is essentially no one in big-time American politics who wouldn’t gut his or her best friend in an instant for almost any temporary advantage. (The high-school friend matter is almost too easy. No one in the known universe who graduated from an American high school believed any single word, including “a,” “an,” and ” the,” of this story.)

4. Is the actual behavior just life in the big leagues or a touch disturbing?

Certainly this traffic stunt was more inventive than anything I’ve heard before, and I’ve been close to this game since 1970. The other acts were nowhere near as clever but seem to be similar to the traffic stunt in two other big ways: they feel out of proportion, and they targeted civilians, not political pros. They imposed large arbitrary penalties on normal professional people who were simply doing their jobs. But I keep coming back to the folks caught in traffic. Let’s say 500,000 people were caught in the traffic jams for, say, four additional hours each. That’s 2 million traffic jam person-hours. If I value people’s time at $20 per hour, that’s a $40 million cost, all because someone got angry that a Democratic mayor didn’t support a Republican governor who was already winning by a landslide and was simply trying to run up the score. Probably some of the commuters actually lost their jobs because of this.

So ask yourself, if you’re just a citizen, and this guy becomes president with a lot more power and lots more reasons to get angry, how likely are you to be collateral damage in some scheme some other political “advisor” comes up with? I think you have to come down on the “disturbing behavior” side. I know “politics ain’t bean bag,” as Christie said, and if one pol wants to take a whack at another pol, I couldn’t care less. But this crosses a lot of lines.

So back to the question in the title. There’s no way this is normal behavior for normal human beings. Some of it is very normal for “homo politicus,” and for athletes and hedge fund billionaires who feel particularly entitled. But the behavior at the core is way beyond the pale. Life is tough enough without leaders dedicated to getting even at your cost for the tiniest slight or the smallest act of dissent.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

Cross-posted from the Roosevelt Institute’s Next New Deal blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Gage Skidmore via Flickr

Why Obama And Baucus Should Push For A Carbon Tax

A carbon tax would bring long-term rewards, but it will take leaders willing to make short-term sacrifices.

We are at an unacknowledged turning point for the economy and the environment. We could, right now, substantially reduce our debt and deficit projections, take a major step toward a better environment, create a simpler and fairer tax system, make job creation easier, and raise economic growth a bit. For all of these reasons, we could and should adopt a carbon tax.

Taking this step depends on two men: President Obama and Senator Max Baucus, chair of the Senate Finance Committee. Both men want to leave an important legacy, and both are in a unique political position: They still possess real political power, but neither will ever face another election. (Obama, of course, is limited to two terms, and Baucus has just announced that he will retire.) Acting together, the two of them could completely change the odds of enacting a carbon tax this year.

Right now, if you ask around, as I have, there are many across the ideological spectrum who agree that a carbon tax would help us solve a lot of problems, but they won’t take a public step because they see no leadership support. My own gut feeling is that there would even be energy industry support for a carbon tax. President Obama and Senator Baucus could change this picture by making a carbon tax a priority and building bipartisan support for the project.

Why should we care? Let’s look at four issues: federal revenues, the tax system, jobs, and – oh, yeah – the environment.

First, a carbon tax of $20 a ton would raise about $120 billion a year, or $1.2 trillion over a decade. Right now, everyone anywhere near the budget debates is in a convenient and delusional state of mind about revenues. The conventional wisdom is that we either do not need more revenues or they are easy to find. So here are some counter-assertions: (1) despite the right’s imagination, we are not going to cope with the retirement of the boomers, the doubling of folks on Medicare, and our need for fundamental infrastructure investment without new revenues; (2) despite the speeches the left makes to itself, the problem won’t be solved by taxing whomever the left decides is rich; (3) we aren’t going to end the home mortgage and charitable deductions. There will come a point when $1 trillion in new revenue over the next decade that actually makes the economy and the world a little better will look pretty interesting, so why not try for it now?

Second, the tax system is a mess and more caught in a state of political gridlock than even the rest of the federal budget. The system is far too complicated, and it probably lowers economic growth and job creation. More practically, raising new revenues from this structure is next to impossible; the 40-year strategy of broadening the base and lowering rates (a strategy I agree with) has played itself out. With the carbon tax’s $1 trillion, you could exempt low-income families, reduce the payroll tax, lower overall tax rates, and still bring down the debt and deficit. Sure, there would be fights about how to use the extra revenue, but those are fights the political system is supposed to have.

Third, jobs. We rely way too much on payroll taxes. They are very, very inefficient, and they directly and visibly add to the costs of job creation. Back when the U.S. economy was an unstoppable job machine, these taxes looked as though they were cost-free. Not anymore. I am optimistic about our long-term economic prospects, but I also think the jobs of the future will require much more education and training content than the jobs of the past, and therefore employers will be much more sensitive to other costs, i.e., taxes. Anything sensible we can do to make job creation easier and less costly is a step we should take.

Finally, the environment. A lot has been published recently about climate change and its sensitivity to greenhouse gases. Cutting through all of the models and the uncertainties, the net conclusion is that warming is probably a small bit less sensitive to greenhouse gases than we have thought. Climate change deniers have used this for the obvious purposes. But the actual end conclusions haven’t changed much. At current rates, we will put half a trillion more tons of carbon into the atmosphere by 2045 and a trillion more by 2080. Because of this the Earth’s temperature will probably warm about three-quarters of a degree in the next 30 years and 1.5 degrees over the next 50. (30 years may seem a long time to some of you; from my perspective, it’s a blink of an eye away.) And the math keeps suggesting that the earth’s sensitivity to extreme events is increasing more rapidly than global warming. So the future may be less hot but more dangerous.

Isn’t it worth a small amount of political difficulty and a fairly small tax now to slow down these trends? Everyone in politics talks a lot about political courage – mostly their own. As far as I can tell, political courage normally consists of doing something your supporters love and your opponents hate and then bragging about it. But maybe the two leaders I mentioned at the start will realize that they can afford to change that definition and leave a real legacy.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles for two Democratic presidents.

Cross-posted from the Roosevelt Institute’s Next New Deal blog.

The Roosevelt Institute is a nonprofit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

The Bold State Of The Union Speech We Need

This is not the moment to give the same economic speech, but to be bold and long-term.

Inaugural addresses are about poetry and vision; State of the Union speeches are about prose and governing. (I acknowledge the inaccurate theft from Governor Mario Cuomo.) But they can and should be about more than a simple listing of policy and budgetary goodies, which is more often what they have become, or the inevitable, and politically necessary, announcement that the state of the union is “good.” President Obama should raise the level of the genre and his own game in Tuesday night’s speech. Because second-term presidencies are two real years rather than the Constitutional four years, the president has a lot at stake in making this his best State of the Union.

The president’s advisors have told the media that this speech will reflect a “pivot” back to the economy after the inaugural address’s focus, largely, on inequality. That would be very welcome. But he still has a choice.

He can give the standard, dull, plain-vanilla generic presidential speech about the economy. This would have three major themes: (1) The economy is not in good enough shape, but it’s getting better; (2) Everything my administration has done to date is the reason why the economy is getting better; and (3) Here is my list of actions we intend to take that will immediately make the economy even better. That last point invariably emphasizes job creation, immediate job creation, immediate American job creation, and immediate American good job creation. The generic speech always has a number of good things to say about infrastructure spending. This is all always said with the implicit assumption that the economy of tomorrow will be much the same as the economy of yesterday and today and that no one need worry too much about change. You have to remember that State of the Union speeches are drafted by political advisors and consultants who, across all political parties and all times, share two views about the American people: They go into catatonic states at the prospect of any change, and their time horizon is at most a couple of weeks. This speech would disappear without a trace.

Or he could decide to give a far better economic speech. It would have the following themes:

First, a discussion of long-run economic growth, not the next six months – which matter, but not as much as the long term.

Second, a focus on a particular kind of growth: long-term, equitable, and sustainable. I mention the “sustainable” point in particular because it is always part of any rhetorical flourish but mostly disregarded when the time comes to do anything.

Third, a conversation about change. As is obvious to anyone, and as is detailed by the fascinating ebook by Andrew McAfee and Erik Brynjolfsson, The Race Against the Machine, we are in the middle of a huge, long-term period of enormous dislocating technological change, and that’s only one aspect of the change we are going to see. The American people need this president to tell them this and to say clearly that this change will fundamentally alter many of the givens of jobs, work, companies, education, etc.

Fourth, an outline of a practical vision. The impending change is real, but so is America’s immense capacity for innovation and reinvention. The president can show how down-to-earth, sensible policies will put the country on the right side of this change.

I haven’t mentioned the omnipresent issues of budgets, deficits, and debt. These issues have to be resolved if we want to establish a strong basis for the economy of the future and if we want to make this economy safer. These issues should be put in this economic context. Resolving them will require movement from both Democrats and Republicans. There is no movement today. In this speech, President Obama should make a thoughtful and genuine proposal to break today’s complete deadlock.

The probability of this second speech being given is well below 10 percent. But the president would be better off if he gave it and if he established a different kind of context for that portion of his second term that really matters. This is a use-it-or lose it moment; this is what second terms are about.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles under two Democratic presidents.

Cross-posted from the Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

The Fiscal Cliff Deal: Useless Little Battles And A Worse Government

The year ahead will be full of petty budget battles that solve nothing and distract from the real issues.

On the one hand, the last-minute December 2012 fiscal cliff deal was in no respects a policy breakthrough, but on the other hand, it didn’t solve any process issues, either. There will be no grand resolution, which pleases the ideologues on both sides. God forbid that we come to any workable compromises. And there is no framework. So the 2013 stage is set for a series of useless little budget/deficit/debt wars.

We face, in turn, 1) the sequestration battles starting in March (over irresponsible cuts we agreed to 15 months ago as a way of avoiding doing anything then), 2) continuing resolution battles starting in April (a series of confrontations over spending this year because Congress couldn’t pass spending bills), 3) 2014 budget battles starting in May (but then we haven’t actually agreed on a budget for years), and 4) the return of the debt limit debacle sometime around August. (You thought this was over because Congress has declared that the debt limit has been suspended, but it’s coming back.)

These little battles will not — either singly or together — lead to a resolution of the deficit/debt/budget debacle. No actual problems will be solved. Everything will be kicked down the proverbial road. My bet is that each of the impending possible battles will wind up the same. There will be high drama moving toward farce, forecasts of doom, tense last-minute negotiations in which various congressional and executive leaders will try to act as though something important is happening. Each time the Republican House will back down, because if your approval rating is lower than cockroaches, you have surprisingly little political leverage.

We are seeing this whole drama playing out now in the run-up to the sequester. To remind everyone, these are cuts (roughly $85 billion in 2013 divided between domestic and defense programs) Congress and the president agreed to because they were thought to be so awful that the same two parties would agree to solving the whole budget problem to keep these cuts from happening. So now they are likely to happen and we’ve decided we hate them.

I hated them a year ago and said so at the time, but predicted that we would in the end make the domestic cuts and finesse the defense cuts. To be clear, I believe we must, over a 10 year period, slow down the growth of public debt, and this has to mean budget cuts. But these reductions will occur at the wrong time, they are done in the wrong way, they hit the wrong part of the budget, and they do nothing whatsoever to alter the 10- year picture of debt growth that impends. They are a wholly symbolic and harmful ritual dance.

We should not make these cuts now. We should, if necessary, make smaller cuts so Congress can say it got a “down payment.” Then Congress and the president should agree there will be no debt ceiling fight this year and should publicly and together commit to a process that might work.

In my dreams.

We seem intent on having these useless little battles. They will not actually lead to disasters. On the other hand, they won’t make anything better. But they will take up time, consume political capital, raise the level of distrust in government, maintain a high level of economic uncertainty, lower our economy’s growth rate, and impede the administration’s and the Congress’s focus on the real issues of our future. Both parties will look worse after all of this.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

Cross-posted from the Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/Jacquelyn Martin, File


In The Last Debate, The President Shone Under The World’s Biggest Spotlight

The last debate wasn’t just about foreign policy. It was about the diverse and difficult responsibilities of being president of the United States.

“Bullfight critics ranked in rows crowd the enormous plaza full, but he’s the only one who knows, and he’s the man who fights the bull.”

For me, that sums up the debate. The president won. He was the commander-in-chief and he played a strong hand well. This isn’t a foreign policy blog, but if you step back from the absurdities of the charge/counter-charge of a campaign, he and Hillary Clinton and Defense Secretaries Gates and Panetta have carried out foreign policy well in an incredibly difficult and confusing time.

Governor Romney did not do badly, but he is like a pilot: there are old pilots and there are bold pilots, but there are no old bold pilots. He doesn’t have any particularly new ideas, and the ones he hints at having are either profoundly wrong, profoundly dangerous, or both.

“Hint” is a good verb. He hints at deep disapproval. He’d be stronger, firmer, altogether better. Events would be less disorderly, and the world would dance to his commands. But he actually wouldn’t do anything differently. Stay in Iraq or Afghanistan? Divorce Pakistan? Invade Iran? Put troops in Syria? Really show China what’s what? On all of these issues you get the impression that he actually doesn’t have a different policy; he is depending on his strong jaw and magnetic personality to command events. Should he actually win, his policy would be exactly the same, except he might get himself bullied into a hasty bombing campaign against Iran. Does anyone think “Bibi” wouldn’t be over in a heartbeat to collect his receivable?

The major preoccupation of that alternate-universe White House would be attempting to demonstrate constantly that there was some sort of difference from the Obama policies. Heck, maybe the world really will sit up and do right with a President Romney. But trapped as he is between the neocons who have learned nothing and President Obama’s mostly successful policies, he was reduced to throat-clearing and ankle-biting. And if his whole approach depends on the argument that he’d do the same things but somehow better, you have to remember that this is man who managed to insult the United Kingdom over the management of the Olympics. (Yes, they used to be enemies, and we all remember the unpleasantness of 1812.)

This was all sort of fun. But I did have a somewhat deeper thought — a profound appreciation for America and for how tough being president is. A really long time ago, I was in a small group of appointees with President-elect Carter a month or so before the inauguration. (I know the fashion now is to be contemptuous of President Carter, but I’m not. I revered the man, loved working for him, and still revere him.) Anyway, I was mostly in such awe that I was even there — how did someone from Loudoun County High School get here? — that I couldn’t talk. But I could think, sort of. What I thought about was the two faces of the president’s job. On the one hand, he had to grapple with the actual issues, facts, and arguments as they affected the most important nation in the world, and then he had to turn around and persuade a nation of 225 million people (at that time).

I felt the same way 37 years later watching President Obama and this debate. You grapple with the most difficult possible issues of foreign policy, some completely unpredictable — at least, I haven’t seen the Romney crowd claim yet that they knew all about the Arab Spring. All of them are confusing, information is never particularly good, and most of the time getting the right thing done in one event runs right into the players and calculations involved in some other event. All you can do is approach each calmly, try to keep a larger framework intact, and live every time with the thought that you didn’t do it perfectly.

Then you have to turn around and debate your opponent, in front of millions, on the details of these policies. Your opponent doesn’t have to deal with all of them at the same time, as you do, and he makes it clear that he would have done everything perfectly. There is a lot you can’t say. Every syllable you utter is going to be parsed by every head of government in the world. And any big misstep can both screw up something big and cost you the presidency.

I could tell that President Obama was both frustrated and, at times, angry about being in this position. But you know what? It’s part of the deal. It’s what we do in America, and our presidents had better be good enough to handle it. I thought President Obama more than met that test. I also thought again as I looked around the bar where I watched this debate en route, a bar that was packed full with maybe half of the audience foreign-born, how proud I am to be a citizen of the country that holds these debates and doesn’t think they are anything special.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the administrations of two Democratic presidents.

Cross-posted from The Roosevelt Institute’s Next New Deal blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/Evan Vucci

Confronting The Post-Election Reality Of Taxes And Revenues

The debate over taxes is trapped in the past. We need new revenue sources — and a carbon tax is a good place to start.

Two big points emerged from the party conventions: As the horse race became clearer; the actual policies became murkier.

Romney received no convention “bounce,” while Obama received a moderate bounce. While the bounce will go away, Governor Romney now faces a tougher uphill climb. The FiveThirtyEight blog gives President Obama an 80 percent chance of winning. The last plausible remaining chance for Mitt Romney is the debates, and maybe he can turn around that 80 percent number, but his convention speech is reasonably good evidence that he won’t.

So President Obama really will have to fashion a set of policies and a governing strategy for the next four years. And there’s the problem. Neither convention offered a shred of useful policy. The ideological core of both parties see returning to the 1950s as the direction to take. Both conventions and both parties have already rejected the idea that there actually are hard choices. I developed my own theory years ago that the more any candidate congratulated himself or herself on their willingness to make hard choices, the less they were actually willing to make any such choices.

Neither of the conventions offered up any view at all of the future beyond the election. Neither party can come to grips with real policy or choices about the future because they are both caught in a struggle to the death about, in essence, the past.

Taxes and revenue are illustrative issues. The right hates the idea of more revenue because it sees government as enemy number one (except for Russia). The left wants more revenue but wants even more to whack (via the tax code) whomever it currently dislikes. Neither side seems to care much about what ought to be the goal — equitable, sustainable growth.

Some realities about the current tax system: It is vastly and overly complex, it is inefficient, and it doesn’t raise enough revenue, which will be necessary even after you make allowances for substantial changes in today’s entitlements. But the big, hidden-in-plain-sight point is that we have reached a dead end with the income tax. The Romney tax plan, which simply assumes there is a free lunch out there somewhere, won’t happen, and would make matters worse if it did. The Obama tax plan doesn’t come close to a solution, even after you assume that the affluent pay more, as we should. We are not going to change the big deductions very much, so the base-broadening strategy won’t work. And not even Paul Ryan is willing to put out the details his budget glosses over. So we are going to need new revenue sources — and as it happens, I have a suggestion.

We should consider a carbon tax. (I have also argued that we should enact a low-level value-added tax, but that’s another day’s argument.) A carbon tax would raise substantial revenue — MIT’s recent study estimated such a tax at about $30 per ton of carbon would yield $1.2 trillion over the next decade. At the same time, a carbon tax would be the single most important step we could take to slow global warming. And now is a perfect time, as the energy revolution America is going through provides some actual pricing flexibility for a tax. We can make this change and still build a cheap energy platform for the next American economy.

Would such a tax solve our debt and deficit problems? Of course not; we are still going to have to cut the growth of spending and raise revenues. But such a tax would put a dent in the problem, make economic growth much more sustainable, and provide some lubrication for a possible bigger fiscal deal.

There is no other idea out there I know of that does these things, taxes “bads” rather than “goods,” and raises $1.2 trillion.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents. He currently chairs Resources For the Future, an economic think-tank in Washington focused on energy, climate, and the environment that is researching the carbon tax.

Cross-Posted From The Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Bo Cutter: President Obama’s Election Year Budget

While not the worst proposal, the budget serves as a political football and shirks the tough decisions staring us in the face.

President Obama’s recent budget is the “numbers” version of his State of the Union speech. It mirrors the speech almost exactly. Of course it is a political budget. What else could anyone possibly have expected? The intent is to emphasize a few key themes, give the president’s general election opponents no handle to grab on to, and to exit stage right as soon as possible. It will be successful in all of these respects.

But it is entirely a placeholder. It moves generally in a direction the vast center of the electorate will view as right — if they care. It has a few interesting details and provides his general election opposition with no new attack points. It is not transformative in any respects. It offers no significant guidance as to how President Obama will conduct his second term. And it won’t be in any serious way the basis for the actual 2013 budget: Congress won’t get its act together to pass a 2013 budget. That would be too much like actually doing its job. So we will have another series of continuing resolutions. Excepting a few ritual attack lines from the left and right, Obama’s budget will quickly disappear from sight, if it hasn’t already. (After all, 24 hours have passed.) I wish the world and this budget were different, but we are where we are.

The print media have obviously seen it as a rationale for restating whatever their editorial positions were already. The Times, predictably, called it a “clear and welcome contrast to the slashing austerity — and protect-the-wealthy priorities.” The Wall Street Journal opens by calling the budget “a brilliant bit of misdirection” and closes by calling President Obama’s fiscal direction as “the worst in modern history.” The Washington Post termed it “a serious, if inadequate, effort to put America on a sustainable path.” If the reception of the budget is utterly predictable, its results will be even more so.

What’s the message? The headline numbers are $2.9 trillion (receipts), $3.8 trillion (expenditures), $900 billion (deficit), 5.5 percent (deficit as a percent of GDP), and 77.4 percent (debt as a percent of GDP). Over 10 years, the deficit falls from 5.5 percent of GDP to 2.8 percent and debt stays at 76 to 78 percent. So the president is not proposing any radical change in fiscal direction, and the big numbers either decline modestly in the right direction (deficit going down) or stay constant (debt as a percent of GDP). The Wall Street Journal to the contrary, these headline numbers are a reasonable fiscal policy — not the best imaginable but not awful. At the very least, it is simply wrong to try to bring the deficit down rapidly in a still fragile economy.

The two substantive messages are entirely predictable, emphasizing tax fairness and the middle class. The president proposes a long list of tax rate increases on the top 5 and 1 percent. And he underlines his deep devotion to the middle class. But — as the joke says — these sardines are for trading and debating, not eating. Barring another political revolution, the tax increases aren’t going to happen. Nothing the president proposes — or right now could propose — is even close to enough to change the deep structural issues facing the U.S. economy.

Robert Samuelson says that “this is a formula for governmental failure and generational unfairness.” Jeffrey Sachs — whose new book The Price of Civilization will be the topic of an upcoming Next American Economy breakfast — says, “The larger truth is that a shrinking federal government will fail to meet America’s skill, education, and infrastructure challenges.” I agree completely. There are major transformational issues facing us. They are all central to what the next American economy will be and carry major budget implications. None of them are addressed in this budget. Here are five such issues:

  • Fiscal policy: To be clear, I believe President Obama’s fiscal policy has been largely correct, but the long-run fiscal policy we need and the government we need cannot both be achieved within the world view and assumptions of this budget.
  • Government spending: Look at tables S-6 and S-7 of the president’s budget. Table S-6 shows you that as a percent of GDP (1) total spending declines from 23.3 percent to 22.8 percent; (2) interest payments rise from 1.5 percent to 3.3 percent; (3) mandatory entitlement spending rises from 14 percent to 14.4 percent; (4) all of the rest of government — defense and domestic spending — falls from 7.7 percent to 5 percent; and (5) domestic spending falls from 2.5 percent to 1.7 percent. Table S-7, continuing the theme, shows actual expenditures in constant dollars: (1) interest payments increase 161 percent; (2) entitlement payments increase 17 percent; and (3) all other domestic spending falls 18 percent. Our fastest-growing program is interest payments. Our government is now mostly about paying interest and sending entitlement checks to the elderly. Nothing goes to all of the other functions of the government. If this trend actually takes place — and it could — we will not make any of the national investments I believe are critical, and we will see an even faster erosion of confidence in government.
  • Tax reform: We need more revenue, but we even more we need fundamental tax reform. Simply piling increased income tax rates on the top 5 percent and all those undeserving millionaires on the same creaky structure we now have won’t raise as much revenue as we think and will make the economy marginally worse. The budget makes a few ritual bows in the direction of reform but no serious moves.
  • Infrastructure: We need vastly more public infrastructure investment over the next decade far removed from the current appropriations process. I thought the president was moving in this direction; this budget doesn’t.
  • Education: The more you pay attention both to some of the scary trends in our economy and society and to the thinking of our best scholars (read The Race Between Education and Technology by Claudia Goldin and Lawrence Katz), the more you realize that we require a fundamental revolution in adult education. The revolution will have to be of the same magnitude as the “high school movement” which Goldin and Katz consider America’s second great educational transformation. We need another, but it won’t be cheap and the money won’t come from the non-existent fund sources of state and local government.

There are other issues, but these are enough to make the point. There is no organized constituency today — not in the electorate, not in the two major political parties, and certainly not in the Congress — for a program of transformational change and, crucially, the trade offs that it might require. Mostly I blame some crucial, big factors: the deep polarization in American society, the lethal and maybe now unstoppable effects of unlimited money in politics, the extent of the changes technology and globalization have forced, and the closed duopoly of the two parties. To a very small extent I think President Obama bears some responsibility. He, correctly, wanted to be a transformative president, but he never really thought deeply about what transformation involved, what choices were implied, and the crucial centrality of his role in preparing the American people for these choices.

But it is I imaginable that President Obama could have posed the acute trade-offs the big issues are going to require. It would have been reckless to do so. It would have fractured his own difficult coalition, led to nothing, and probably killed off any major changes he did propose. In politics sometimes you try and eat the bear, sometimes the bear eats you, and sometimes you best run away from the bear.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Judge Rakoff Demonstrates What Having Guts Looks Like

Citigroup made shameful and dangerous decisions. It should have to explain itself.

On the whole, I have suggested a somewhat bleak view of our political system and our future prospects. But when there are moments and people to celebrate I want to do so. And we should all celebrate Judge Jed Rakoff. (As full disclosure, Judge Rakoff is a friend, and was a graduate school classmate at Oxford.)

On Monday this week, Judge Rakoff rejected an SEC offer to settle a securities fraud case against Citigroup that entailed a $285 million payment by Citigroup but not any admission of fault or wrongdoing. Judge Rakoff said the settlement terms were “neither fair, nor reasonable, nor adequate, nor in the public interest.”

This decision complicates the SEC’s life, and I would imagine that Citigroup is absolutely dead-set against acknowledging wrongdoing. But what Citigroup and other financial institutions did was wrong at a micro and a macro level and should not be glossed over.

First, what’s at issue? Citigroup created a class of securities, Class V Funding III, which consisted of bundled mortgage-backed securities (in the industry jargon they are referred to as “negatively projected,” i.e. they aren’t going to be worth much), then sold these securities to investors, and then bet against their own securities (and their own investors). Judge Rakoff adds some color to this: “This (Citigroup’s ability to ‘dump dubious assets on misinformed investors’) was accomplished by Citigroup’s misrepresenting that the Fund’s assets were attractive investments rigorously selected by an independent investment adviser, whereas in fact Citigroup had arranged to include in the portfolio a substantial percentage of negative projected assets and had then taken a short position in those very assets it had helped select.”

Citigroup made about $160 million on its transactions. Investors eventually lost about $700 million. This stinks.

At a micro level, Citigroup’s blithe willingness to do this is terrifying. For example, I sit on the investment committee of a medium sized foundation. As it happens, we would never make this kind of investment, but someone similar to us could easily have done so. If we had considered this, do you think Citigroup or the broker or the sales person would have told us what these investments really were? Of course not. Someone could have — and, obviously, people did — invest in these securities thinking they were making a reasonably safe investment, not knowing that they were purposely designed to blow up. I haven’t counted, but my sense is that a lot more players than Citigroup did this — so whom can you trust?

This gets to the core of what’s wrong at the macro level. Citigroup’s decisions to design, sell, and short these securities are not ones respectable and responsible business people should make. They erode trust, they are corrosive, and they are dishonest. One of the main functions of our kind of financial system is intermediation, but if the mediators see the investors as prey, and are allowed to do so, then the system isn’t working. This is why the Volcker rule makes sense. And Citigroup’s CEO and board should be ashamed of themselves. They should have to explain why they believe there was no fault or wrongdoing here.

The economy is miserable. The political system is in gridlock. The super committee has just demonstrated that Congress can’t accomplish anything. But on this big issue, Judge Jed Rakoff made a gutsy, and correct, decision.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

The Super Committee Post-Mortem: Get Ready For More Gridlock

Both parties continue to trip over the low bar Americans have set for them, and we can look forward to more of the same for the next four years.

The super committee fell below even my own low expectations. I knew they would not come up with anything resembling an actual deal, but I thought they would at least agree on something, even if that something combined a minimum of anything real and the maximum of fakery. But no, they failed to agree on anything. However, the capacity of this sorry Congress to never fail to miss a chance to miss a chance should not be a surprise. So what are the consequences?

The consequences of sequestration itself — the automatic cuts that were supposed to be the doomsday scenario forcing some deal — will be mostly zilch. The actual cuts do not go into effect until 2013. The domestic cuts will make government a little bit worse, but not a lot, and the defense cuts will all be reversed. President Obama has said he will veto any effort to reverse the defense cuts, but they won’t come to him as a single, separate package and that’s an empty threat anyway. The defense sequestrations will be bundled in the defense appropriation for next year, and I’m willing to accept bets that the president will not veto a defense appropriations bill in the midst of a reelection campaign. In any case, Secretary of Defense Leon Panetta is on record opposing these cuts, and Leon is not someone with whom the White House wants to have a public debate.

The consequences of the inevitable blame game now going on will be a lower level of trust and confidence for everyone involved — Democrats and Republicans, the Congress and the president. No one comes out a winner here, although my guess is that on the margin President Obama is hurt the worst. Why? People know who he is and they know this thing failed. People have no idea who the congressional members of the super committee were. The entire leadership of Congress stayed as far away from this as possible, and if you believe that was an accident then you were probably also visited by the tooth fairy last night.

There are record levels of political dark arts currently being performed as the Republicans try to blame President Obama for this failure. They argue that he should have intervened to save the super committee process, but both sides set it up to fail. Its only purpose was to rescue them all from the debt limit debacle, not to accomplish anything. I’ve been clear that I think President Obama missed an enormous strategic opportunity by not endorsing Simpson-Bowles and Domenici-Rivlin a year ago, but as far as I can tell, the congressional leadership on both sides like where they are and have zero interest in doing anything.

The consequences for the presidential campaign we are about to have inflicted upon us are both straightforward and bleak. This campaign, which will take up the next full year, has nowhere to go but negative. No ideas will be debated and no one will try to establish a mandate. Both sides are locked into positions that have become caricatures of real issues.

President Obama should be worried about this. My own current guess is that he will win reelection — Americans may have declining confidence in him, but the Republican clown-a-week show is terrifying them. But other than a resume enhancer, what will reelection be for? What will he do with it? The Republicans will probably retain the House and win the Senate, and the presidential campaign will not establish any direction or mandate. The next four years could get ugly.

But sequestrations, blame games, and political campaigns are all ephemeral Washington stuff. The real principal consequence of the failure of the super committee is its opportunity cost. Absent another economic crisis, we will now wait at least a year before we even begin to grapple with the several genuine economic problems our nation faces. We will have no debt reduction, no tax reform, no infrastructure initiative, no serious effort to reduce unemployment either in the short or long run, no economic stimulus, no entitlement reform, no energy policy, and no climate policy. Instead, we’re going to have a campaign about socialism versus selfish billionaires.

When I’m feeling apocalyptic, I think of historian Niall Ferguson’s question: “What if collapse does not arrive over a number of centuries
but comes suddenly, like a thief in the night?” But that’s not really where we are. We can wait a year; things will just continue on their current mediocre deadlocked course. Trust in government will continue to decline along with the capacity of government to do anything, and trust in the current political parties will decline further and faster. The opening for the radical center is getting bigger and bigger.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.