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Wonkbook: House passes FinReg; unemployment insurance fails; CBO makes the case for stimulus

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The House passed the revised conference report for FinReg, but with the Senate delaying its vote until after the Fourth of July, final passage remains uncertain. The Senate, meanwhile, did not pass the standalone unemployment insurance extension, meaning checks will cease for millions of Americans.

Testimony from CBO director Doug Elmendorf suggests that short-term stimulus may make budgetary sense, and can play nice with long-term deficit reduction. A Senate proposal to eliminate the cap on oil company liability for spills moved closer to passage, and the Department of Health and Human Services launched www.HealthCare.gov, their major health-coverage options portal.

Is it only Thursday? Sigh. Welcome to Wonkbook.

Top Stories

The House passed the conference report for FinReg as the Senate delayed passage until after the Fourth of July, report Brady Dennis and Jia Lynn Yang: "After two final hours of debate, 234 Democrats and three Republicans voted for the overhaul. The margin of victory was greater than when the House initially voted on its version of the bill in December, when no Republicans voted yes....The uncertainty over key Republican votes, coupled with the loss this week of Sen. Robert Byrd (D-W.Va.), prompted Senate Majority Leader Harry Reid (D-Nev.) to delay the Senate vote until after the July 4 recess. Reid will likely push for a final vote the week of July 12."

Jonathan Cohn -- whose has a new blog -- argues that CBO director Doug Elmendorf's recent testimony makes the case for short-term stimulus: "The ideal solution, if you follow Elmendorf's logic, would be to pass tax and spending bills that raised deficits now but reduced them later. If even a few conservatives were willing to talk about such a package, it might have a chance of passing. Instead, conservatives--including the whole of the Republican Party and a depressingly significant fraction of the Democrats--insist we must tighten belts now."

The Senate voted down Harry Reid's latest jobs package last night, but voted unanimously to extend the housing tax credit: http://bit.ly/aUGEWZ

The political history of unemployment insurance extensions has been much mire fraught than one might assume: http://bit.ly/b3RNst

A Senate committee voted to remove oil spill liability limits, but the measure could run into trouble yet, report Tennille Tracy and Siobhan Hughes: "Democratic leaders are considering rolling some or all of the measures directly related to the Gulf oil spill into broader energy and climate legislation that may not have the votes to pass the Senate....Republicans--and at least one Democrat--expressed concern that removing the cap on damage claims would shut all but the largest oil companies out of offshore drilling by making it impossible to obtain insurance."

The Department of Health and Human Services has launched is health-coverage portal: http://www.healthcare.gov/

8-bit interlude: Twilight as an NES game.

Still to come: A program aiding homeowners with energy improvements is running into trouble with Fannie Mae and Freddie Mac; the CBO also warned that extending the Bush tax cuts could steer the budget off course; Elena Kagan dodged yet more political questions in her last day of testimony; and scientists have discovered an ancient, giant, carnivorous, and generally terrifying whale.

Economy/FinReg

CBO director Doug Elmendorf stressed the deficit exploding impact of extending the Bush tax cuts, reports Lori Montgomery: "[With] a permanent reduction in the alternative minimum tax and a plan to extend tax cuts enacted in the Bush administration for families making less than $250,000 a year...the CBO said the national debt would soar to 87 percent of gross domestic product by 2020, exceed its historical peak of 109 percent by 2025 and hit 185 percent by 2035 -- 'uncharted territory,' Elmendorf said, that could include higher interest rates, more foreign borrowing, less private investment and lower income growth, if not a full-blown fiscal crisis."

The EU has adopted binding budget restraint rules: http://bit.ly/d3corR

The debt panel is focusing on spending cuts, reports John McKinnon: "Erskine Bowles, the Democratic co-chairman of the bipartisan White House Commission on Fiscal Responsibility and Reform, floated a long-term goal of reducing federal spending to about 21% of U.S. gross domestic product, slightly above the recent norm but significantly lower than current spending projections....The outlook for agreement among the 18-member panel, however, remains uncertain. Mr. Bowles, while suggesting that the weight of deficit reduction should rest on spending cuts, also said long-term federal tax revenue should rise to about 21% of GDP, above the current 18% or so."

David Wessel argues Obama's aggressive posture is building support for free trade: "In international forums, as he did at the Copenhagen climate-change talks, he is arguing that China is posing as a developing country even though it has grown up and needs to be treated like the economic powerhouse it is. At home, he knows--no matter what his economists tell him--that neither voters nor Democrats in Congress will be convinced that free trade is good for them. So he is styling himself as a tough bargainer, who can beat other countries at their own game."

John Taylor argues the Dodd-Frank bill gives government powers it didn't need in the crisis: "The biggest misdiagnosis is the presumption that the government did not have enough power to avoid the crisis. But the Federal Reserve had the power to avoid the monetary excesses that accelerated the housing boom that went bust in 2007. The New York Fed had the power to stop Citigroup's questionable lending and trading decisions and, with hundreds of regulators on the premises of such large banks, should have had the information to do so."

"The world's thirstiest gerbil" interlude: The worst first sentences of novels from the past year.

Domestic Policy

Elena Kagan kept declining to answer political questions in her last Senate hearing yesterday, report Robert Barnes and Amy Goldstein: "Sen. Jon Kyl (R-Ariz.) pressed Kagan on whether her statement at her solicitor general confirmation hearings that there is not a constitutional right to same-sex marriage is her personal opinion or merely a reflection of current law. 'I don't think that that would be appropriate' to answer, she said. She said pending cases might call on the court to make just such a decision."

The NRA may count the Kagan nomination as a "key vote" http://bit.ly/cOpxGt

Children born into poverty are likely to spend many years there, reports Justin Lahart: "Using data from a University of Michigan program that has been tracking the same families for over 40 years, economists at the Urban Institute found that 49% of children who are born into households below the poverty line spend at least half of their first 18 years in poverty. Among children not poor at birth, just over a quarter spend any of their childhood years poor, and only 4% are poor for at least half of their childhood."

The administration has unveiled a new health care website: http://bit.ly/bh4DWc

Almost a million jobs could be lost if states do not receive more aid, reports Michael Fletcher: "States face a combined deficit of $89 billion in the fiscal year that begins Thursday, according to the National Conference of State Legislatures. And because every state but Vermont is required to balance its budget, the only recourse is cutting employees or vital programs, including education spending, medical services, programs for the disabled and elderly, and police and fire protection. All that cutting could mean the loss of 900,000 jobs -- in the public sector and in private companies that rely on state business, according to the Center on Budget and Policy Priorities, a liberal research group."

Paleontology interlude: Scientists discover a huge, 12 million year old, hypercarnivorous whale.

Energy

The PACE program, which enables local loans to homeowners to increase energy efficiency, is facing opposition from Fannie and Freddie, report Todd Woody: "Fannie Mae and Freddie Mac, the government entities that guarantee more than half of the residential mortgages in the United States, have different priorities. They are worried that taxpayers will end up as losers if a homeowner defaults on a mortgage on a home that uses such creative financing. Typically, property taxes must be paid first from any proceeds on a foreclosed home. In letters sent to mortgage lenders on May 5, Fannie Mae and Freddie Mac stated that energy-efficiency liens could not take priority over a mortgage."

La. Gov. Bobby Jindal is trying to keep documents involving the oil spill hidden: http://bit.ly/bweTFA

The Interior Department has delayed hearings on expanding offshore drilling, reports John Broder: "The department said on Wednesday that more extensive environmental and safety reviews were needed before moving ahead with any new leasing decisions.The process was to have begun with public hearings in Alaska, along the Gulf Coast and the southern Atlantic Coast in June and early July. Those hearings have now been put off until later in the year, the department said in a statement. No new dates were given."

The EPA has judged that the oil dispersant used does more good than harm: http://bit.ly/cR98Rn

Electric car company Tesla had an impressive IPO, reports Peter Whoriskey: "In a burst of enthusiasm for electric cars, investors are saluting the company's prospects, raising more than $200 million at its initial public offering Monday and, on its first day of trading Tuesday, sending share prices up again from $17 to $23.89. Co-founder and chief executive Elon Musk said the enthusiasts were making a smart bet. 'We had an incredibly positive outcome from the smartest investors in the world,' he told CNBC on Tuesday. 'When people look at the list of the investors...they will be amazed at the quality and strength of the investor group in Tesla.'"

Closing credits: Wonkbook compiled with the help of Dylan Matthews and Mike Shepard. Photo credit: White House

By Ezra Klein  |  July 1, 2010; 6:19 AM ET
Categories:  Wonkbook  
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Next: Unemployment bill fails to beat filibuster, 59-37

Comments

You should be fined for not having insurance because if you have an emergency and go to the emergency room, then you do not have the money for the bill, it gets charged to everyone else. Get medical insurance for your entire family at the best price from http://bit.ly/9sfoMb By contributing to the pool and doing your part, overall costs come down. Its like stores that have to charge more because of all the theft. People go to the hospital and then not pay, it gets charged to everyone else.

Posted by: davidjones01 | July 1, 2010 7:00 AM | Report abuse

Alan greenspan is on cnbc right now and stated among other things that if this version of finreg passes it will have serious negative consequences on this country as money will move overseas. he also said employers are afraid to hire which is proven by output per hour going up. He also warned of the raising of the capital gains tax increase as choking off potential recovery and tightening credit markets at a time when they need to loosen them. IMO as I've said before president obama saved us from depression but his policies will keep us from recovery

Posted by: visionbrkr | July 1, 2010 8:03 AM | Report abuse

Alan greenspan is on cnbc right now and stated among other things that if this version of finreg passes it will have serious negative consequences on this country as money will move overseas. he also said employers are afraid to hire which is proven by output per hour going up. He also warned of the raising of the capital gains tax increase as choking off potential recovery and tightening credit markets at a time when they need to loosen them. IMO as I've said before president obama saved us from depression but his policies will keep us from recovery

Posted by: visionbrkr | July 1, 2010 8:03 AM | Report abuse

Greenspan has no idea what he's talking about. Employers aren't refusing to hire because of fear about finreg. They're not hiring because they already have trained staff that is underutilized. It's another meme that falls flat upon observation.

Posted by: jldarden | July 1, 2010 9:21 AM | Report abuse

@visionbrkr : Is this the same genius fiscal conservative who was so worried that the country would pay off its debt that he supported 2 rounds of deficit exploding tax cuts? Is this the same master of the universe who artificially kept interest rates low that boosted Bush's re-election, fed the housing bubble, and enticed financial firms to make all those exotic MBS and CDO instruments so there was something to buy with all that cheap money? The same sage that totally missed the housing bubble? The same guy that thought that markets would regulate themselves? Why should anyone listen to anything he says now, especially about tax policy since he got it so terribly wrong just a few years ago?

Posted by: srw3 | July 1, 2010 9:30 AM | Report abuse

Srw3


Isn't this administration following that same policy of artificially keeping interest rates low? So do you or any other liberal on here (including ezra) think that drastically raising the capital gains tax would not severely hamper job creation in the private sector? I'd sign onto your financial transaction tax over the capital gains increase any day. Also what is to stop large banks from moving operations overseas to some extent in a NAFTA like scenario.

Posted by: visionbrkr | July 1, 2010 9:41 AM | Report abuse

@vb: I assume you agree with all of those observations about Greenspan as you didn't address any of them. Don't you think that keeping interest rates artifically low in the midst of a housing bubble is different from lowering interest rates in the midst of the biggest recession since 1932? Its the same with taxes. Cutting them as Greenspan suggested in 2001 and 2003 was just a giant giveaway to the wealthy which exploded the deficit when we should have been paying it down. Deficit spending IS NECESSARY DURING A SEVERE RECESSION. It is not called for when the economy was at least nominally growing as it was during the tax cut years of the bush admin.

Hey, almost all of Europe is also proposing a bank tax so it should be less likely that banks will flee to Europe. And given the strength of the Eurozone, I don't anticipate an exodus of capital to Europe. What is a drastic rise going from 20% to 30%? Who receives most of the benefits of the CGT. Why its the top 1% of all income earners! What a surprise.

Posted by: srw3 | July 1, 2010 9:56 AM | Report abuse

Who is proposing a large capital gains tax increase? The rates will reset to their previous rate next year, but that's not a big increase (from 15% to 20%).

Posted by: jldarden | July 1, 2010 9:59 AM | Report abuse

Srw3

Yes it was MORE irresponsible to keep rates artificially lower them but that doesn't absolve the current group of their irresponsible behavior. And while I would agree to some responsible short term stimulus spending because some deficit spending is necessary during a recession you also don't starve a recovery by raising capital gains. You raise them in good times as they should have done in the earlier part of the last decade. And proposing and doing are two different things. Also many markets will now set their finreg proposals under what we've done (IMO) to make their markets more attracive to institutions. It happened with NAFTA and it will hapen now. The question is to what extent

Posted by: visionbrkr | July 1, 2010 10:17 AM | Report abuse

Srw3

Yes it was MORE irresponsible to keep rates artificially lower them but that doesn't absolve the current group of their irresponsible behavior. And while I would agree to some responsible short term stimulus spending because some deficit spending is necessary during a recession you also don't starve a recovery by raising capital gains. You raise them in good times as they should have done in the earlier part of the last decade. And proposing and doing are two different things. Also many markets will now set their finreg proposals under what we've done (IMO) to make their markets more attracive to institutions. It happened with NAFTA and it will hapen now. The question is to what extent

Posted by: visionbrkr | July 1, 2010 10:17 AM | Report abuse

If there is any justice in this world, and if Ezra is married, one day when he loses his job his wife will go out and run up $25,000 on a credit card and call it "stimulus".

Six months later, when he's still unemployed, his wife will run up another $50,000 on credit cards. You know, because in a liberals world it's more important to "feel" like there are no problems, rather than to actually fix the problems.

I love it whenever I hear a liberal refer to 'deficit-exploding' tax cuts. It's usually evidence they can't do 5th grade math....fairly amusing.

Let me help the liberal simpletons....find me a year in our recent history where there was a deficit. Ok, plenty to choose from. Now, here's the catch....find one year - just one - where a tax cut was enacted, REVENUE decreased...and SPENDING did not increase.

If you can find just one year like that, then you'll have my ear when you want to blame tax cuts for deficits.

Posted by: dbw1 | July 1, 2010 10:41 AM | Report abuse

"The Senate voted down Harry Reid's latest jobs package last night, but voted unanimously to extend the housing tax credit"


So we can't extend unemployment benefits because doin so would enlarge the deficit, but reinstating the home buyer's tax credit won't have the same effect?

Posted by: Patrick_M | July 1, 2010 10:49 AM | Report abuse

"Who is proposing a large capital gains tax increase? The rates will reset to their previous rate next year, but that's not a big increase (from 15% to 20%)."

Plus the 3.8% Medicare tax. That brings the rate to 24%. The deadweight loss of taxation is proportional to the square of the rate, so the deadweight loss cost rises by 152% ((23.8^2/15^2) - 1).

This is in addition to:

-Inflation and taxation of both real and nominal returns (10% capital gain and 5% inflation with a 23.8% rate reduces your real return from 5% to ~2.6%, meaning your 'real' tax was 48%).
-Corporate taxation
-Heighted uncertainty from a perceived anti-business federal government and the uncertain effects of legislation such as ACA, cap and trade if it comes, uncertain marginal tax structure, etc.

Deadweight loss:
http://books.google.com/books?id=58KxPNa0hF4C&pg=PA167&lpg=PA167&dq=deadweight+loss+square+of+the&source=bl&ots=YfBmwETsVa&sig=wUBuQkiK98SN5cejcH1Xh14BJGo&hl=en&ei=u6osTKjbBIjenAfQgdH0Ag&sa=X&oi=book_result&ct=result&resnum=7&ved=0CBoQ6AEwBjgK#v=onepage&q=deadweight%20loss%20square%20of%20the&f=false

Posted by: justin84 | July 1, 2010 11:04 AM | Report abuse

Not that hard to do, dbw. After the 2001 tax cut, it took until 2005 for the revenues collected to reach the same level in real terms.

Posted by: jldarden | July 1, 2010 11:10 AM | Report abuse

Patrick,

It looks like they're just extending the amount of time needed to close on a house from 6/30 to 9/30, so that's not much of a budget buster. The homebuyer tax credit certainly was a waste, and a full reinstatement would also be a waste if it occurs. I'll agree with you that if we're going to spend money, I'd rather it go to the unemployed than to borrow future housing market demand.

Posted by: justin84 | July 1, 2010 11:12 AM | Report abuse

Also, inflation isn't a tax on returns, since your returns come back in the same inflated dollars (additionally, inflation isn't at 5%, it's at it's lowest level in 40 years at under 1%).

And the uncertainty doesn't have to do with ACA (which is a known quantity) and cap & trade (because the business community knows it won't pass). It's worry over the state of the economy. They have good reason to be worried, since the new supermajority requirements in the Senate allow Republicans to block measures to address the situation.

Posted by: jldarden | July 1, 2010 11:15 AM | Report abuse

"Not that hard to do, dbw. After the 2001 tax cut, it took until 2005 for the revenues collected to reach the same level in real terms."

Dbw asked for an example that included spending restraint. Bush spent like a drunken sailor. He got involved in two wars and armtwisted Congress into a budget busting new entitlement.

If you had kept spending fixed, there would have been a slight deficit in 2003 of $6 billion, but that's it. The period of 2000-2010 would have seen a $4 trillion budget surplus despite the tax cuts.

If you had let spending grow with the CPI, you would have had a $10 billion deficit in 2002, a $118 billion deficit in 2003, and a $84 billion deficit in 2004. 2005-2008 would have been surpluses, peaking at $402 billion in 2007 (and $735 billion if 2000 spending levels were frozen). With frozen spending, there would have been no deficit in 2009 or 2010, and spending growth at inflation would have been a 2009 deficit of $69 billion and a surplus of $56 billion in 2010. The 2000-2010 period would have seen a $1.4 trillion surplus.

Posted by: justin84 | July 1, 2010 12:01 PM | Report abuse

jldarden,

The point is inflation gets taxed. If inflation is 20%, and your gain is 20%, you pay taxes on your gain, even though your spending power didn't go up.

Also, inflation was 5.6% as recently as two years ago, and for the record you can actually hold positions longer than a year. Inflation isn't going to be low forever either.

The ACA isn't a known quantity, in the sense that it's a very complex bill which will interact with the market in complex ways we cannot fully understand or appreciate in advance.

How will labor supply react to higher marginal taxes / implicit marginal taxes? Will second earners leave the labor force in droves? What sort of raises might be required in order to keep them? How will the structure of the typical American business react to a strong incentive to pay a penalty, knowing their workers will be in well subsizided exchanges? What if the increase cost sharing overwhelms other cost controls and the cost curve bends up? How will the increased Medicaid costs affect state budgets during the next downturn? These aren't known quantities and are real concerns.

Cap and trade probably won't pass, but then again lots of people were proclaiming health care reform dead in the water back in February. People know watch primarily Fox News or read the WSJ might have a different probability of passage for cap and trade - and its effects on their daily lives - than you do.

Posted by: justin84 | July 1, 2010 1:23 PM | Report abuse

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