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Posted at 5:26 AM ET, 01/14/2011

Wonkbook: Obama's tax woes; health-reform repeal vote rescheduled; do we know who is too-big-to-fail?

By Ezra Klein

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Top Stories

Obama's pledge to not raise middle-income people's taxes could prevent a tax overhaul, reports Lori Montgomery: "President Obama's refusal to raise taxes for the vast majority of Americans will prevent him from pursuing a broad overhaul of the tax code and is making it difficult for him to achieve his goals for reducing the budget deficit, according to administration and congressional sources. Barely a month after Obama's fiscal commission laid out a road map for reining in the soaring national debt, the president's resistance to tax increases for families making less than $250,000 a year has ruled out a key prescription: a plan to reduce cherished but expensive tax breaks for individuals."

Polls show strong public opposition to raising the debt ceiling: http://reut.rs/fWO7Ic

Treasury Secretary Tim Geithner expressed doubt that the government can identify "systemically important" financial institutions, reports Tom Braithwaite: "Tim Geithner, the Treasury secretary, has questioned the feasibility of identifying financial institutions as 'systemically important' in advance of a crisis, just as the regulatory council he chairs is supposed to start doing precisely that. A report by a government watchdog into the rescue of Citigroup quotes Mr Geithner as saying: 'What size and mix of business do you classify as systemic?...It depends too much on the state of the world at the time. You won’t be able to make a judgment about what’s systemic and what’s not until you know the nature of the shock.'... Mr Geithner’s comments on systemic risk are published a week before a new Financial Stability Oversight Council, which he chairs, is due to consider which companies are big enough or interconnected enough to present dangers to the entire financial system."

The House will hold a vote on health care reform repeal next week, reports Felicia Sonmez: "The House will begin debating the health-care repeal bill next week, following a week during which legislative action came to a standstill in the wake of the Tucson shooting tragedy. House Majority Leader Eric Cantor's (R-Va.) office announced Thursday that debate on the bill, which passed a procedural hurdle late last week, is expected to begin when the House convenes early next week. A vote is expected Wednesday. 'As the White House noted, it is important for Congress to get back to work, and to that end we will resume thoughtful consideration of the health-care bill next week,' Cantor spokesman Brad Dayspring said."

Karaoke interlude: Björk sings Joy Division's "Love Will Tear Us Apart" for charity.

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Got tips, additions, or comments? E-mail me.

Still to come: Congress' TARP oversight panel has given a mixed review to the auto bailouts; a health care repeal vote is set for Wednesday; Rep. Carolyn McCarthy's new gun control bill is tougher than the Clinton-era assault weapons ban; GM and Chrysler are lobbying against fuel economy rules while still owned in part by the government; and a baby elephant plays on the beach.

Economy

A Congressional report gives a mixed assessment of the auto bailouts, reports Brady Dennis: "The Treasury Department's bailouts of General Motors, Chrysler and their major financing arms will cost taxpayers far less than initial estimates and have placed the firms on what appears to be 'the path to financial stability,' a watchdog group says in a report due out Thursday. But the bipartisan Congressional Oversight Panel warns that even as the government's 'ambitious actions' have put the companies on 'a promising course,' the bailouts of the nation's automotive sector continue to place taxpayer money at risk and create moral hazard that will outlive the recent crisis."

S&P and Moody's have expressed concern about the US' future debt rating: http://on.wsj.com/hIbys9

Treasury is moving into the endgame of the AIG rescue, reports Brady Dennis: "The federal government on Friday is poised to take a major step toward recouping the massive taxpayer investment in American International Group as the long-troubled insurance giant moves closer to regaining its independence. Treasury Department plans to convert its preferred shares in the company into nearly 1.7 billion shares of common stock, giving the agency a 92 percent stake in AIG that it hopes to sell over the next two years. If the company's stock continues to perform well, the government stands to make billions on its AIG investment over time."

Commerce Secretary Gary Locke is pushing back on China's trade, IP practices, reports Michael Birnbaum: "Commerce Secretary Gary Locke on Thursday called for China to make its economy more open to international investment and to respect intellectual property laws, on the same day his department released November figures that showed an unexpected narrowing of the U.S. trade deficit...Locke praised China for its growth and increasing openness over the past 20 years, but he said its old policies of protecting domestic industries would no longer suffice. 'The gross trade imbalances between our countries...threaten global stability and prosperity,' Locke said. Locke made the remarks in a speech given to the US-China Business Council ahead of Chinese President Hu Jintao's state visit next week."

Obama ignores that the US is fundamentally divided on economic issues, writes Paul Krugman: "Commentators who pine for the days of civility and bipartisanship are, whether they realize it or not, pining for the days when the Republican Party accepted the legitimacy of the welfare state, and was even willing to contemplate expanding it. As many analysts have noted, the Obama health reform -- whose passage was met with vandalism and death threats against members of Congress -- was modeled on Republican plans from the 1990s. But that was then. Today’s G.O.P. sees much of what the modern federal government does as illegitimate; today’s Democratic Party does not...What we’re talking about here is a fundamental disagreement about the proper role of government."

Reaching the debt limit won't cause default, writes Greg Ip: http://econ.st/eZNOHH

Wall Street's dependence on algorithms makes it hard to regulate, write Felix Salmon and Jon Stokes: "Algorithms, like most human traders, tend to follow a fairly simple set of rules. But they also respond instantly to ever-shifting market conditions, taking into account thousands or millions of data points every second. And each trade produces new data points, creating a kind of conversation in which machines respond in rapid-fire succession to one another’s actions. At its best, this system represents an efficient and intelligent capital allocation machine, a market ruled by precision and mathematics rather than emotion and fallible judgment. But at its worst, it is an inscrutable and uncontrollable feedback loop."

Weird parallels interlude: A Calvin and Hobbes/Fight Club mash-up.

Health Care

Investors doubt health care reform will hurt insurers: http://politi.co/gI8YRn

Obama should make a deal with business on health care, writes Steven Pearlstein: "The Business Roundtable was an early backer of a bipartisan reform effort, along with the AARP and the Service Employees Union, and it never expressed outright opposition to the final legislation. Even now, the Roundtable's focus is on 'trying to be helpful to make an imperfect bill better,' according to Larry Burton, its executive director. Another natural ally would be the National Business Group on Health, whose 300 corporate members provide health insurance to 50 million American workers, retirees and family members. President Helen Darling says that although her members are concerned the legislation doesn't go far enough in controlling health costs and improving quality, they understand the new system will be better than anything that would result from outright repeal."

California is cracking down on insurer rate increases: http://on.wsj.com/eS2ae3

Domestic Policy

Rep. Carolyn McCarthy's new gun control bill is tougher than the Clinton-era assault weapons ban, reports Shira Toeplitz: "The fiercest gun-control advocate in Congress released the text of a bill she plans to introduce next week that would outlaw high-capacity magazines like the one a gunman used to shoot 20 people in a matter of seconds in Arizona this weekend. Rep. Carolyn McCarthy’s (D-N.Y.) bill also goes further than than the assault weapon ban that expired in 2004, outlawing the sale or transfer of clips that hold more than ten rounds, even those obtained before the law takes effect, according to a copy of the bill obtained by POLITICO. The bill closes a loophole in the expired assault weapon ban that let gun owners buy high-capacity magazines made before the ban took effect in 1994."

Abortion rights groups might fight filibuster reform: http://politi.co/fpsmL6

Net neutrality will likely face a court challenge, reports Eliza Krigman: "Despite spending more than a year hashing out a so-called 'compromise' on measures to protect the open Internet, the Federal Communications Commission will most likely have to defend its recent net neutrality order in court, industry insiders predict. If challenged, the controversial net neutrality order -- supported by the commission’s three Democratic Commissioners and fiercely opposed by the two Republican commissioners -- may face the same court that last year ruled against the FCC’s earlier net neutrality attempt. In April, the U.S. Court of Appeals for the District of Columbia Circuit overturned the FCC’s order for Comcast to stop interfering with file-sharing traffic."

The State of the Union may feature a bipartisan seating arrangement: http://politi.co/fjahav

Republicans shouldn't try to reform Social Security or Medicare yet, writes Ramesh Ponnuru: "Reform is impossible this year or next unless President Obama takes the lead on it. What’s more, Republicans have no mandate for reform, and a failed attempt will only set back the cause...Republicans have gotten a painful shock every time they have decided it’s finally safe to take on entitlements. Ronald Reagan suffered a defeat in his first year when he tried cutting Social Security’s early retirement benefits. Newt Gingrich’s 1995 Republican revolution fizzled when President Bill Clinton fought him over Medicare cuts. President George W. Bush’s effort to reform Social Security in 2005 ended any political momentum he brought to his second term."

Adorable animal in the sun interlude: A baby elephant plays on the beach.

Energy

GM and Chrysler, still owned in part by the federal government, are lobbying it, reports Peter Whoriskey: "General Motors and Chrysler, the bailed-out automakers still partially owned by the government, have joined an industry coalition that this week lobbied against proposed federal rules on fuel efficiency. The attempt to push back against regulations pursued by environmental groups follows the automakers' efforts last year in which they opposed measures in an auto safety bill, which had been supported by the Obama administration. The notion of federally owned companies lobbying the government - at times on the opposite side of the architects of their bailout - has drawn repeated criticisms from environmental organizations, safety advocates and watchdog groups."

Environmentalists are suing the Interior Department to block oil and gas development in Alaska: http://bit.ly/f7sYMM

We should eliminate all energy subsidies, writes Jeffrey Leonard: "It would be better for national security, the balance of payments, the budget deficit and even, yes, the environment if we simply wiped the slate clean and let all energy sources compete for the future. And with anti-pork Tea Partyers loose in Washington and deficit-cutting in the air, it's not as politically inconceivable as one might think. As an investor in clean and green energy, I don't make this suggestion lightly. But as environmentalists are realizing, the energy providers of the last century (oil and coal), and a few politically wired new energy interests (such as corn-based ethanol and nuclear), always seem to come out the big winners in the $20 billion annual energy subsidy game." Read more here.

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: White House.

By Ezra Klein  | January 14, 2011; 5:26 AM ET
Categories:  Wonkbook  
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Next: There's no 'job-killing health-care law'

Comments

"the president's resistance to tax increases for families making less than $250,000 a year has ruled out a key prescription: a plan to reduce cherished but expensive tax breaks for individuals."

That's pathetic. You can scale up personal exemptions (or convert them into tax credits and zero out the EITC) to whatever levels necessary to keep families <$250k from paying more than they do now.

As to where to find additional revenue, see UT-Austin Tax Profesor Calvin Johnson's excellent article, "How to Raise $1 trillion without a VAT or a Rate Hike."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1636915

Posted by: beowulf_ | January 14, 2011 7:44 AM | Report abuse

Ezra,
It isn't the 'algorithm' that is the problem with stock trading and regulation; It is the High Frequency Trading has replaced human thought in the market making process.

Recent reports that the average stock holding period is 11 seconds may be overblown, but the underlying estimate that HFT is at least 35 percent and likely 50 percent of all stock trading and maybe as high as 70 percent -- that is troubling.

The Felix Salmon is quite accurate that gaining some control could be enhanced by a transaction tax -- something that could easily be implemented if not for a GOP that thinks all taxes are bad.

Additionally, HFT could be reined in by having a holding period -- harder to do but also useful in putting more risk into the HFT deal.

Posted by: grooft | January 14, 2011 9:15 AM | Report abuse

"It would be better for national security, the balance of payments, the budget deficit and even, yes, the environment if we simply wiped the slate clean and let all energy sources compete for the future."

Yup.

"But as environmentalists are realizing, the energy providers of the last century (oil and coal), and a few politically wired new energy interests (such as corn-based ethanol and nuclear), always seem to come out the big winners in the $20 billion annual energy subsidy game."

They're just figuring this out now?

Posted by: justin84 | January 14, 2011 9:54 AM | Report abuse

"Investors doubt health care reform will hurt insurers"

Of course not. Insurance company profit margins were already low to begin with and revenue growth should be significantly higher than would otherwise be the case.

Unless insurance companies aren't allowed to raise premiums enough to maintain their modest profit margins, they should be better off.

Posted by: justin84 | January 14, 2011 10:18 AM | Report abuse

Ezra,
Unless I'm really missing something in Ponnuru's argument, it seems to me that he's arguing that entitlement reform is politically toxic for the GOP right now. He goes on to say, though, that absent presidential leadership on the issue, the GOP should take the case to the public and exploit the president's unwillingness to cut Medicare and Social Security.

I guess if Ponnuru wants to make the case that getting from politically toxic to politiically advantageous will require educating the public, that's one thing. But isn't that what all those who have previously tried to revamp (Gingrich, Bush et al) SS or Medicare have tried -- unsuccessfully?

I'd be curious to know your thoughts.

Posted by: lrbrink90 | January 14, 2011 10:36 AM | Report abuse

to assume that insurers are better off is forgetting that some negative costs aspects (of varying degrees of cost) have taken place already (dep to age 26, free preventative care and most importantly covering children with pre-ex.) There has been no offset to that (ie an individual mandate).

If you're saying that they're better off from this point forward then techincally you're correct but its not as if they're in good footing. that's like when you say that PPACA is better than the status quo which is technically correct because the status quo was so horrible.


Its like saying Hirohito was better than Hitler because he killed less people. They're still both horrible.

Posted by: visionbrkr | January 14, 2011 11:27 AM | Report abuse

Trying to neogtiate with China over trade imbalances, is like trying to get your credit card company to remove the arbitration clause from your monthly statement. They say thank you for your input, and then hang up the phone.

Posted by: 54465446 | January 14, 2011 11:39 AM | Report abuse

Regarding energy subsidies, all we would really accomplish is an endless argument over what exactly is an energy subsidy. Then horse trading would be done, mine for yours, and we would have the exact same situation we do today, under a different name.

Posted by: 54465446 | January 14, 2011 12:02 PM | Report abuse

"to assume that insurers are better off is forgetting that some negative costs aspects (of varying degrees of cost) have taken place already (dep to age 26, free preventative care and most importantly covering children with pre-ex.) There has been no offset to that (ie an individual mandate)."

Are insurers allowed to raise premiums (in general) to cover those costs?

"If you're saying that they're better off from this point forward then techincally you're correct but its not as if they're in good footing."

Sure - I don't think insurance companies are cash cows. Margins are low relative to many other industries.

All I'm saying here is that if their low profit margins can be more or less maintained (which I admit as an if), then higher revenue should increase profit.

Posted by: justin84 | January 14, 2011 12:56 PM | Report abuse

justin,

yes they are allowed to raise rates to cover those costs but as you know Secretary Sebelius and now the Insurance commissioner in CA have turned up the rhetoric (ironic isn't it) against them and pushed the talking points including referring to an average increase of 15% as an increase of up to 59%.

Posted by: visionbrkr | January 14, 2011 1:55 PM | Report abuse

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