Matt Yglesias

Don’t Look To The White House For Tax Reform

Lori Montgomery observes that Barack Obama’s promise not to raise taxes on anyone in the bottom 98 percent of the income distribution means you can’t do efficiency increasing tax reform:

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.

I’ve noted this before, but I think it’s a real conceptual problem with this overall approach to tax politics. This is because the pledge prevents even reforms that make the tax code more progressive. In general, if you eliminate a tax credit and offset the revenue gain with a higher personal exemption, that will make most middle class households better off financially while also making the tax code more growth-friendly. That’s good policy. But it’s still the case that some middle class households would be better off with the old code.

That said, I don’t think the specifics of the pledge are a huge deal in this case. That’s because thinking of tax reform as a White House initiative is a mistake. If the President goes and leads the charge for tax reform, what happens is that tax reform passing becomes “a victory for the White House” and we start getting stories about “President Obama’s goal of overhauling the tax code.” And a proposal like that will be dead on arrival. Fundamental tax reform has a chance if and only if there’s a bipartisan group of hardworking members of the House and Senate who sincerely want to reach consensus on a tax reform proposal. The role of the White House in a scenario like this is to be quietly encouraging, while making sure it doesn’t become the tax that Republican who works on tax reform is immediately branded a traitor.

In general, people are eager to overrate the merits of intensive presidential involvement in difficult congressional fights.

The Trouble With Tax Reform

Max Baucus and Chuck Grassley at the Senate Finance Committee are holding hearings on tax reform, and there’s a lot of interesting material you can read here from the witnesses.

But there’s a big semi-conceptual issue with tax reform, which is quite similar to the trouble with fiscal stimulus. The issue is that for any plausible level of revenue, it would be easy to devise a tax code that raises that revenue, but does so in a more efficient way than our current tax code. That’s because our current tax code is very inefficient. It has relatively high individual and (especially) corporate income tax rates, but also provides tons of loopholes and deductions. The combination of the two creates a lot of distortions—money and effort flowing into activities rewarded by the tax code—and slowly but surely undermine growth over the years.

The challenge of tax reform is conventionally described in terms of diffuse benefits and concentrated interests. And it’s true, of course, that every bad idea in the tax code has its beneficiaries. And the worse the idea, the more tenaciously the beneficiaries will fight for it. But all of politics is more-or-less like that. The deeper problem with tax reform is that you need some kind of consensus about how much money you’re trying to raise. Absent such a consensus, we’re basically doomed to an inefficient tax code. What’s really needed, I think, is not so much reform of the tax code as some kind of meta-reform of the process that would separate votes on tax code structure from votes on overall revenue targets.

State and Local Taxation

“Who Pays?” (PDF) from the Institute on Taxation and Economic Policy offers an interesting look at regressive state/local taxation:

Several points:

— Questions about whether things should be done at the state or federal level aren’t just about abstract constitutional views; state revenue sources are regressive.

— There is no reason that consumption tax revenue needs to be raised as a regressive retail sales tax. You can instead do a income tax with a progressive rate structure in which taxable income is defined as “income minus savings.”

— Property taxes are regressive, but much less regressive than sales taxes. Consequently, measures to cap property taxes are a kind of fake assistance to the middle class that actually helps the top 20 percent.

— Conservative intellectuals like to complain about the federal deduction for state and local taxes, but conservative politicians will never eliminate it since this is a form of tax break for rich people.

That’s all I’ve got.

Taxes and Population Growth Revisited

Last month I criticized Greg Mankiw and Michael Barone for attributing rapid population growth in many conservative-leaning states to their low income tax rates rather than to there construction-friendly regulatory regimes. Thinking harder on the question, I think there may actually be some growth/tax correlation running in the opposite direction.

Consider that the tax base of a given state not only needs to pay for current levels of public services, but also pensions and health care for retired state employees. Consequently, a faster-growing population will actually reduce the per capita tax burden of these retiree payments, allowing for lower taxes or higher levels of present-day services.

At any rate, consider that another small reason that liberals should rally behind Paul Krugman’s call for our states to become more density-friendly. I, personally, find Blue America to be a pleasant place and I think we should permit more people to live in it.

What If They Gave a Pitchfork, And Nobody Noticed

Ryan Avent marvels that “It’s striking how little inchoate public rage has actually boiled to the surface in the rich world” and elaborates:

In America, the language of the angriest is very similar to that of the plutocrats themselves. Indeed, the complaint that today’s elite lack the noblesse oblige of the aristocrats of old, and are therefore risking public anger, seems to badly misread American public opinion. The middle class doesn’t want hand-outs from condescending rich people. They want moralistic language and complaints about deficits.

Kevin Drum endorses this, but I think it’s really mistaken. The only problem here is that populist rage in America doesn’t happen to line up with the policy objectives of the mainstream Democratic Party.

Every poll I’ve seen shows strong support for higher taxes on rich people and lower taxes on non-rich people. That’s straight-up redistributive politics relative to the status quo and it’s what the public wants. Democrats flirted with making this part of their agenda, but ultimately blinked. And it just wasn’t the centerpiece of their agenda in 111th Congress which, instead, was focused on stabilizing the short-term economy, expanding the welfare state, trying to grapple with climate change, improving US immigration policy, and reducing the level of discrimination against gays and lesbians. Personally, I think all those things were important. But from the point of view of an insured employed middle aged middle class heterosexual legal resident of the United States its not an agenda that has a lot to do with his family. By contrast, a drive to permanently push his tax rate lower than where it was under George W Bush while pushing rich peoples taxes higher than they were under Bill Clinton would be a juicy populist agenda. And it polls well. But it wasn’t on offer because leading politicians didn’t—and don’t—want to offer it.

But people sure seem plenty mad to me.

The Welfare State For the Rich

Pew has a cool new tax expenditures database tool that I recommend you examine. As a preview, here’s the exploration of the scope and importance of these measures:

I recommend Jacob Hacker’s The Divided Welfare State for a good high-powered look at some of the implications of this. But the quick version is offered by Ezra Klein who says “What’s interesting about tax expenditures, I think, is that they’re basically the welfare state for the middle class, cleverly arranged such that they don’t look like the welfare state for the middle class.

I would say that what’s even more interesting about these tax expenditures is that they actually do much more to benefit the rich than to benefit the middle class. Major tax deductions like the one for employer-provided health care or for home mortgage interest payments are, yes, big-time benefits for middle class Americans. But since the income tax code has a progressive rate structure, the really big wins from these cuts go to the folks with the highest incomes. This is one reason why I’m not in love with the politics of “we’ll only raise taxes on rich people.” There are many tax measures that would have a progressive distributional impact in the aggregate that would nevertheless involve some non-rich people paying somewhat higher taxes.

At any rate, the whole setup is . . . clever. A program like Social Security essentially yokes the interests of poor Americans to those of the middle class. A program like the health care tax break instead yokes the interests of the middle class to the interests of the rich.

Taxing the New Elite

Chrystia Freeland’s profile slash condemnation of “the new global elite” is a ton of fun. This is the only part I have much to say about in terms of substantive policy journalism:

What is more striking is the degree to which even former Obama supporters in the financial industry have turned against the president and his party. A Wall Street investor who is a passionate Democrat recounted to me his bitter exchange with a Democratic leader in Congress who is involved in the tax-reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation, the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”

What’s telling here is the dissonance. On the one hand, the princes of Wall Street are upset at the idea of needing to pay higher taxes (“screw you!”) while on the other hand they insist it won’t make a difference (“the government won’t get a single penny more from me in taxes.”) That doesn’t really make a ton of sense.

What it comes down to is that people do, in fact, have the ability to shelter their money from taxation by donating it to charity. The prince in question wants to persuade the Democrat that there’s no point in raising his taxes (“the government won’t get a single penny”) because the cash will all flow to charity instead. But the prince’s preference is to keep the low taxes and use his money to finance lavish consumption rather than charitable endeavors. Hence, screw you. In the prince’s mental model of congress, members are just greedy bastards seeking to collect as much revenue as possible. But the wise member recognizes that he should by no means be indifferent between the option of the prince buying himself a private jet and the prince financing the expansion of a charter school network or the renovation of an art museum. The consumption of the super-wealthy has an extremely low marginal value, and almost anything else is a socially superior use of resources.

Hence the case for progressive taxation, especially if it can be made progressive taxation of consumption. If what the super-rich come away from is a lot of buildings with their names on it, that’s fine by me. The problem is when it all goes toward positional competition and conspicuous consumption.

How Rich Is Mark Zuckerberg?

The answer keeps shifting:

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. [...] In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Once again we’re watching regulatory arbitrage in action as Facebook seeks loopholes around the rule that prevents it from having more than 499 investors without opening its books. But this is also, I think, a reason to believe it would be better to levy a consumption tax with a highly progressive rate structure instead of our current income tax with a modestly progressive rate structure. One can count how much money Mark Zuckerberg is spending in any given year and more or less what he’s spending it on. The ups-and-downs of his notional fortune, by contrast, are pretty unstable and depend in part on things like whether or not Goldman Sachs wants to buy Facebook shares at an inflated value in order to capture a potentially valuable middleman role for itself. This means it would be technically and economically feasible to levy very very high marginal rates on extremely extravagant consumption in a way that’s just unworkable with investment income.

In bonus rich people news, apparently upper class have less empathy than normal people.

Guest Workers

I’m not a huge fan of the idea of “guest workers.” Given the public’s limited tolerance for immigration, I’d rather just push for as many full-fledged normal immigrants as possible. But different countries have different political cultures, and circumstances change, so it’s always worth thinking about. And I don’t think these arguments from David Frum are very persuasive.

He starts with a study showing that guest worker programs are a highly effective form of foreign aid:

He retorts:

1) The chart underscores the point, familiar from the economic literature, that the largest share of the economic gains from immigration accrue to the immigrants themselves. Which is nice for them, but raises again the question: What’s the benefit to the citizens of the host society?

2) In the U.S. context, guestworker programs bump up against a legal constraint: The 14th amendment, which confers citizenship on children born on national territory. Once that happens, they are not guests any more.

3) Theoretically, the US could repeal birthright citizenship. But that would be to invite the growth of a permanent subordinated caste of non-citizen visitors, like the Athenian metics – not exactly a source of social stability.

Taking this backwards, I agree that repealing birthright citizenship would be a mistake for the United States. But of course many developed countries have different traditions and different rules in this regard, so the finding that guest worker programs are highly effective foreign aid is extremely relevant to those places.

On two, birthright citizenship is hardly an insurmountable objection to a seasonal migrant labor program. Humans have a nine month gestation time, so you could simply ban pregnant women from programs oriented to genuinely seasonal work. You also need to have some kind of baseline in mind. How effective has declining to implement a guest worker program been? For most of America’s history, there were no formal controls on the southern border so this wasn’t an issue. But starting in the mid-sixties, it became difficult to cross the border legally. That didn’t eliminate the demand for seasonal labor, instead it meant we had a large quantity of unauthorized seasonal migration. People didn’t like that, and we began investing in enhanced border security. That, in turn, has tended to replace unauthorized seasonal migration with longer term unauthorized migration. You can’t compare the complications of a real world guest worker program to a magical world of perfect, costless border control. You have to compare it to a real world scenario.

On (1) of course the majority of the financial gains of a program to allow people to temporarily migrate in order to do work will alight to the person actually doing the work. He’s also bearing almost all the gross costs! Host citizens get some benefit at low cost, that’s the case. It’s also possible to adjust this at the margin through the tax code. You, for example, could charge payroll tax on guest worker salaries and not give them Social Security benefits.

CBPP On Film Subsidies

I wrote about the bad idea of targeted tax subsidies for movie production, and it turns out that the Center on Budget and Policy Priorities did an informative overview of the situation recently:

Today, 43 states offer them, compared to only a handful in 2002. Over the course of state fiscal year 2010 (FY2010), states committed about $1.5 billion to subsidizing film and TV production (see Appendix Table 1) — money that they otherwise could have spent on public services like education, health care, public safety, and infrastructure.

The median state gives producers a subsidy worth 25 cents for every dollar of subsidized production expense. The most lucrative tax subsidies are Alaska’s and Michigan’s, 44 cents and 42 cents on the dollar, respectively. Moreover, special rules allow film companies to claim a very large credit even if they lose money— as many do.

This is terrible economics and certainly not “free market” economics of any kind. But I’d bet you dollars to doughnuts that a great many of the legislators and governors who backed these subsidies think of themselves as small government conservatives, since they’ve got it into their heads that taxes are bad and thus anything that reduces tax revenues must be good.

Film Subsidies

Ryan Kearney reports on the questionable practice of offering tax incentives for movies to film in particular locations:

But if you live in D.C. proper, as I do, you might stop laughing when you learn that your District stewards gave $1.4 million in taxpayer dollars to How Do You Know, which filmed in Adams Morgan last year. That’s about one percent of the film’s budget — a pittance for Columbia Pictures, which produced the movie, but a significant sum to District agencies facing major budget cuts. D.C.’s film office would argue that the money was necessary to ensure that How Do You Know filmed here. Opponents would argue that the screenplay was set in D.C. — Wilson plays a Nats reliever, Rudd an executive facing securities fraud — so where else would they shoot?

I think that’s actually a fairly weak objection. Bones is set in Washington, DC but the producers manage to put it together with very few authentic DC location shots. This aggravates me to an extent, but doesn’t imperil the success of the show in any serious way.

The real question here is why would you think a target tax subsidy for the movie industry is a smart economic development strategy. Let’s say you start with a certain quantity of public services and a balanced budget. Your money’s coming in from property tax, sales tax, income tax, and a few licensing fees. Now it’s definitely true that a tax break for folks who film movies in your city might spur some additional business activity in your city. But you’ll have to pay for it with either higher taxes or else fewer services. Won’t the higher tax rates just offset the positive impact of the targeted tax break? And if you’re willing to live with fewer services in exchange for lower taxes, wouldn’t it be more beneficially to cut rates across the board?

Conservatives Can Be Persuaded to Embrace Taxes—But Only If Poor People Pay Them

Via Harold Pollack, we learn that George Will and incoming House Ways & Means Committee Chairman Dave Camp are eager to tackle the problem of poor people having too much money:

Many conservatives, including Camp, believe that although most Americans should be paying lower taxes, more Americans should be paying taxes. The fact that 46.7 million earners pay no income tax creates moral hazard — incentives for perverse behavior: Free-riding people have scant incentive to restrain the growth of government they are not paying for with income taxes.

“I believe,” Camp says, “you’ve got to have some responsibility for the government you have.” People have co-payments under Medicare, and everyone should similarly have some “skin in the game” under the income tax system.

As usual, this is based on the clever magic trick of pretending that poor people don’t pay state and local taxes. But whatever the merits of the position, it’s tactical important to keep in mind that this is the position. Lurking behind conservative rhetoric about the evils of government spending, is the reality of conservative hostility to taxes. And lurking behind conservative rhetoric about the evils of taxes is the reality of conservative hostility to taxing rich people. Which means that Republicans are likely to insist that any revenue-enhancing deficit-control package rely heavily on regressive measures. I think it’s important for climate hawks to be a player in this drama.

Many of us don’t share the right-wing’s view that poor people are the real lucky duckies in American society and thus have been somewhat reluctant to argue straightahead for carbon taxes unless they’re offset in a way that makes the vulnerable whole again. And that’s the right posture to have in an ideal world. But given that you can’t always get what you want, it’s important for us to insist that if new regressive taxes are put into place that taxes on greenhouse gas emissions be right square in the middle of the table. If the political system is prepared to impose a new regressive tax, that’s got to be a carbon tax or something similar.

Tax and Spend

I’m a tax enthusiast, in part thanks to the work of Lane Kenworthy. But taxes are unpopular. So unpopular, in fact, that a combination of political opportunism and psychic revulsion from advocating for tax hikes leads progressives to spend a lot of time dreaming up ways to achieve beloved ends that don’t involve tax hikes. But so here’s a good Kenworthy post about how whatever happens with inequality, you help the poor by raising taxes and handing money over to poor people:

In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.

Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.

Now insofar as skyrocketing Anglo-American income inequality is a symptom of a dysfunctional financial sector, healing finance should boost growth over the long haul and make lots of people better off. But lots of inequality (i.e., superstars like JK Rowling and LeBron James leveraging global communications technology to get super-rich) has nothing to do with finance and also little to do with the fate of the poor. What’s relevant is that you need to have the gumption to take money away from people whose consumption has a low marginal value, and give it to people whose consumption has a high marginal value. And you want to try to do it in a way that doesn’t strangle growth. The Nordic countries are living out there on the frontiers of political thinking, and manage to tax almost 50% of GDP on a sustainable basis. But it’s all too rare that I see American progressives explicitly calling for a Nordic-style tax code.

Lucky for you, as a Christmas gift to the audience I’ll be unveiling my thoughts on ideal taxation over the holiday season.

Taxing Estates

I think if I read another snatch of writing where a progressive puzzles over why the estate tax is unpopular, I’m going to shoot myself. More informative, I think, would be self-examination. Why are liberals eager to tax estates. My own effort to think this problem over has actually made me less eager.

The estate tax is basically a wealth tax with a highly progressive rate structure. But instead of taking a tiny share of very wealthy households’ wealth on an annual basis, it takes 0% of a given household’s wealth on the vast majority of years and then a healthy chunk during whatever year the head of the household happens to die. There’s no particular economic reason to structure a wealth tax this way. It was done, I assume, for some pragmatic reason of implementation and enforcement or else because it was “estate tax” was more politically sellable than “wealth tax.” So that’s fine, but it’s not like the merits of this policy are some kind of holy writ handed down on tablets.

Now that’s not to say the case for estate tax cuts is strong. A debt-financed temporary estate tax cut is lousy stimulus. A fully offset temporary estate tax cut would almost certainly reduce aggregate demand. And a debt-financed permanent estate tax cut doesn’t boost long-term growth by boosting savings and investment—100 percent of the revenue loss is offset by increased bargaining. This is all just transferring wealth to rich people. So the case for a lower estate tax would have to be the case that nobody is making—permanent estate tax reduction fully offset by some kind of tax hike or spending cut. And you’d have to evaluate any such proposal on the merits depending on what it is.

Stuck in the Middle With Rich Lowry

National Review editor Rich Lowry has an interesting column on income inequality with a strange ending:

At the moment, American politics offers two separate, distinct ways not to address these issues: Either the brain-dead populism of the Left that blames it all on trade and the decline of unions, or the brain-dead populism of the Right that extols the working class without taking serious note of its agony. We’ll have to do better: There’s a crisis in the middle.

That’s a pretty broad middle ground there that includes, among others, Barack Obama and really the vast majority of mainstream liberals. It’s interesting that Lowry’s article contains no mention, for example, of taxes—hardly an obscure political issue. Redistributive taxation seems to me to suggest itself as the most straightforward attack on inequality, and if you want to do the redistribution specifically as wage subsidies so as to not undercut bourgeois virtue I have no problem with that.

Who Pays When “The Rich” Are Taxed?

Paul Waldmann produces a very interesting chart which illustrates that not only have the top marginal headline tax rates declined over time, the income cutoff for paying them has fallen:

This is a difficult to justify response to a world in which there’s more dispersion of incomes at the very high end than their used to be. More tax brackets would be a welcome development. Indeed, thanks to the widespread available of computers these days it should be possible to entirely dispense with the idea of “brackets” and express the rate as a continuous function of taxable income or consumption or whatever it is you want to use as the tax base.

Looking Forward to a Laundry List

I think William Galston is absolutely correct to emphasize that after whatever tax deal does or doesn’t get done during the lame duck session, there’s an urgent need to get out of the back and forth over “Bush tax cuts” and on to more fundamental reform of the tax code. But I think this tactical advice is mistaken:

This is one of many reasons why the 2011 State of the Union address may well be the most important speech of Obama’s presidency. If he is able to chart a new course toward growth and fiscal sanity and back it with specifics–starting but not ending with tax reform–he will improve not only his own prospects, but the nation’s as well. If he does not–if the speech devolves into the kind of routine laundry list that Winston Churchill once dubbed a “themeless pudding”–the chances of gridlock and drift will rise, and so will the prospects of a return to unified Republican governance in 2013.

It sounds silly to call for less presidential leadership, but I think the evidence suggests that what’s needed here is actually a very vague and generic endorsement of the concept of tax reform plus some themeless pudding. Frances Lee’s important book Beyond Ideology: Politics, Principles, and Partisanship in the U. S. Senate argues persuasively that what happens when a president tries to “lead” on an issue like this is that a dynamic of partisan polarization kicks in. What you really need to get tax reform is for some hard-working members of congress from both parties to take the initiative in hammering out a framework and building support on the Hill. If such a thing happens, the White House should of course try to play a constructive role. But jumping all over the issue and a creating a dynamic where tax reform becomes “a key priority for the Obama administration” that opportunists on the right want to kill for the sake of a political win would not be a constructive intervention.

Did “Class Warfare” Doom John Kerry?

A selection from Noam Scheiber’s reporting on the evolution of the tax debate:

Within the administration, the split over whether to mount a tax-cut offensive broke down largely along wonk-operative lines. The wonks spent the last year mystified that the White House was ducking the fight when the substantive merits were so one-sided. The operatives brooded that the politics could abruptly turn against them, despite polling showing little public appetite for the upper-income cuts. “They view it through the class warfare stuff—Kerry in 2004, Gore in 2000,” says one administration official. “They worry that they’ll get painted as lefties, tax-raisers.”

The thesis here seems to be that “class warfare stuff” hurt John Kerry and Al Gore badly in 2000 and 2004. But where’s the evidence? True, Kerry and Gore both lost. But surely that doesn’t mean every single tactical decision they made went wrong. What’s more, not only did Al Gore win the popular vote in 2000 but when you consider the Ralph Nader factor it’s clear that Gore did a good job of getting the median voter to vote for him. What’s more, Kerry overperformed the fundamentals as measured by the Hibbs “bread and peace” model. On top of that, though Barack Obama’s 2008 platform differed from Kerry and Gore in a number of ways opposition to the Bush tax cuts was not one of those ways. So everything about this analysis seems arbitrary and suspect.

Which Payroll Tax to Cut

Greg Mankiw says a temporary reduction in the employer side of the payroll tax may have been the better policy:

An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

Maybe I’m missing something, but I don’t really see this. In terms of a hypothetical future job, the relevant issue here is the real incidence of the payroll tax, which I believe is the same for the employer-side and employee-side taxes. In either case, a given quantity of salary budget now buys you more labor.

The legal incidence, however, is relevant for existing jobs. An employer-side tax cut would increase the profitability of existing firms. An employee-side tax cut, conversely, will increase the real disposable income of currently employed workers. Currently, though, profits are quite high. Firms, however, are shying away from investing their profits in expanded operations between demand is so low. Increasing disposable income of the currently employed should raise demand and give firms some additional incentives to seek expansion opportunities.

It seems to me that the case for an employer-side cut would have been stronger 30 months ago. Heading into the recession some kind of deal that offered employer-side payroll tax cuts to firms that avoided layoffs would have had an important job-preserving impact. It would, in effect, have offered an appealing alternative to layoffs as a means of temporarily reducing labor costs. That would be in many ways similar to the kurzarbeit scheme that seems to have worked well in Germany. Today, though, we’re more or less past the point where mass layoffs are our concern. Instead the issue is that there’s not enough demand to inspire firms to start soaking up the huge excess in labor supply. An employee-side cut seems to me to be the right way to do that.

Triangle

Incidentally, like this tax deal or don’t like this tax deal, I think this counts as a good example of the “triangles are two dimensional” principle. The President struck a deal that the left doesn’t like and that the right doesn’t like, but that also isn’t simply equidistant between the leftwing option (hold firm and let all tax cuts expire unless the GOP caves on tax cuts for the rich) or the rightwing option (hold firm and blame Obama for the expiration of all tax cuts). Instead, reversing a lot of his recent rhetoric, Obama has positioned himself as the guy maximally devoted to securing as much short-term fiscal expansion as is politically feasible.

Now of course some people don’t like it and it’s possible that future legislative standoffs will end disastrously. But unlike the pay freeze gambit this is how triangulation is actually supposed to work. Lifting us off a binary debate over more income tax cuts or less income tax cuts and onto a package that includes lots of other stimulative measures.