For the most part, I agreed with President Biden’s address to the nation about the threat posed by the radical right. I think it was a political mistake, however, to draw an equivalence between the radical right and all MAGA Republicans. It reminded me of Hillary Clinton’s blunder of labeling her opponents as a “basket of deplorables.”
What really upsets me is the hypocrisy of Biden labeling MAGA Republicans as a threat to the nation while his party actively promotes MAGA candidates, like Don Buldoc in New Hampshire. It appears the MAGA Republican won in the New Hampshire primary, by a narrow margin, over a more mainstream Republican.
Democrats support MAGA Republicans in primaries because they believe that MAGA Republicans will be easier to defeat in the general election. This is a cynical effort that puts party interests before the interests of the nation. This is the same thing that Democrats, rightly, accuse mainstream Republicans of, for not openly denouncing Trump.
Hypocrites to the left of us, cowards to the right and here we all are, stuck in the middle with poor choices in the general elections.
Sen. Ron Johnson (R) is running to retain his seat in the U.S. Senate. Unfortunately, he is far to the right on issues like abortion and climate change and he supports Trump’s outrageous claims about the 2020 election. He is also endorsed by Donald Trump.
A Far Left Challenger
Given all of the above, the Centrist Independent Voter would probably endorse Johnson’s opponent. Sadly, Mandela Barnes (D) is a self-described Progressive and a member of the Working Families Party. His positions on most issues are on the far left of the political spectrum.
Wisconsin is an excellent example of what happens when the base of both parties get to choose who we can vote for in the general election. I cannot in good conscience recommend endorsing either of them.
The Alternative
There is a third party, write-in candidate, Scott Aubart, from the American Independent Party. Aubart does not have a serious chance of winning, so voting for him is really a protest vote. I do not normally recommend protest votes, feeling that it is better to choose the lesser of two evils. I will, therefore, stop short of endorsing Aubart. You should check out his website. He is hard to pin down in terms of political philosophy. He claims to be centrist. He appears to be pro-abortion rights and pro-gun rights (with some interesting reservations in both areas). He is no libertarian, he recommends larger government in the areas of health care and education. He is interesting.
The Best Outcome
If the margin of victory for the winner in this race is far less than the vote for the third party candidate, it might make it clear to both parties that they need to turn toward the center. That would be a good thing.
In my opinion, there was a fair amount of truth in President Biden’s speech to the nation last night. I agree that the single greatest threat to American democracy, at the moment, comes from Donald Trump and his loyalists, what Biden calls the MAGA Republicans.
For that reason, the Centrist Independent Voter will be endorsing a number of Democrats who would be far too left or populist for our taste, in normal times. But as Biden says, “these are not normal times.” Generally speaking, we will be endorsing the opponent of any candidate who owes his place on the ballot to a Trump endorsement.
Where Biden Missed Opportunities
It takes no courage to call out extremism in your opponent’s political party. It takes courage to call out extremism in your own political party. Liz Cheney (R) and Adam Kinzinger (R) deserve praise for having done so in the Republican Party.
If Biden had called out the extremists within his own party, he would have earned our praise. There were many opportunities to do this.
Political Violence
Biden mentions that political violence is never justified. I could not agree more. But the only example he points to is January 6th. He could have mentioned the riots that accompanied many of the Black Lives Matter protests. He could have condemned the violence and vandalism that accompanied protests against the World Trade Organization, the International Monetary Fund, and the World Bank a few years earlier. But these were examples of the use of political violence by the left. I am glad that Biden condemned all political violence. However, to gain credibility with independents and mainstream Republicans, he should have admitted that we face the threat of political violence across the political spectrum.
Am I Expecting Too Much?
You might say that if Biden were to admit to faults on the left he would have hurt his party in the upcoming mid-term elections. Fair enough. But let’s not get sanctimonious and demand that mainstream Republicans openly condemn Donald Trump, in the middle of election season. I expect politicians to be self-serving. I am delighted when they are not. Biden’s speech, while correct on many counts, was self-serving.
Inflation
Another missed opportunity for Biden to call out extremism in his own party was his silence on inflation. We mention elsewhere that, in the end, inflation is a monetary phenomenon. However, in the face of accommodating monetary policy, aggressive government spending (fiscal policy) will increase inflation. Biden claims the employment benefits of the Covid relief spending without admitting its role in sparking inflation.
This would have been an excellent opportunity to reject the Modern Monetary Theorists in the Democratic Party. This crowd, which includes many in the Progressive Caucus, believe in a cornucopia theory of economics in which there is no price to be paid for ever expanding government spending.
Biden’s silence on the issue was to be expected from a self-serving politician. A simple admission that there should be limits on government spending would have given him real credibility among independents.
Democratic Party Support for MAGA Republicans
Perhaps the biggest missed opportunity in Biden’s speech was his failure to condemn cynical attempts by his own party to promote the candidacy of MAGA Republicans in the primaries. The Democratic Party, and associated PACs, did so because they believe that MAGA candidates will be easier to defeat in the general election. How can Democrats think that independents will take the threat from the far right seriously when the Democratic Party works to support these far right candidates in the primaries? How can Biden give this speech, arguing that MAGA Republicans are a grave threat to the nation, while his own party funds efforts to get them elected? The only conclusion I can draw is that he and his party are just self-serving politicians.
Even a veiled condemnation of these efforts would have given him a real boost among independents.
Bottom Line
Yes, extremist Trump supporters, like those who participated in the January 6 attack on the Capitol, are a grave threat to the nation. We should all do what we can to make sure that they do not acquire political power. However, extremism has many faces. The President, and Democrats in general, would be more credible in calling out extremism if they were willing to admit it exists within their own ranks.
Doing Something is Not Always Better than Doing Nothing
I came across an opinion piece in the Wall Street Journal this weekend that reminded me about why a carbon tax is not only the best solution, but it may be the only solution. Specifically, the author of the piece, Holman W. Jenkins, pointed out that subsidies for electric vehicles will lower the demand for oil and therefore oil prices. Lower oil prices mean that the owners of gasoline powered vehicles, in the U.S. and elsewhere, will drive those cars more and that purchasers of new gas powered vehicles will buy larger and less fuel efficient vehicles. In the short run this effect may be small, but in the long run it may wipe out much of the benefit of subsidizing electric vehicles. It is unlikely that the subsidies will entirely wipe out the carbon benefits, but these subsidies are not free. It is easy to imagine that the net benefit could be negative.
The Centrist Independent Voter makes the same point in the Energy Policy section as a reason for opposing Corporate Average Fuel Economy (CAFE) Standards. CAFE standards, by forcing some cars to be more efficient, lower the demand for gasoline and therefore gas prices, which encourages drivers to drive more. This problem is well documented.
Taxing carbon does not have this shortcoming. Carbon taxes raise the cost of all fossil fuels, which not only provides an incentive for buying electric vehicles, it also encourages consumers to drive less and buy smaller cars.
Why Not a Carbon Tax?
The most common argument against a carbon tax is that it will only discourage fossil fuel use in the U.S., make American manufacturers less competitive, and encourage fossil fuel use in other countries like China and India.
Those are good arguments, but the solution is to match the tax with a comparable tariff on the carbon content of imported goods. A few countries in Europe are experimenting with just such a tax and tariff scheme. Imports from countries that impose the same tax and tariff scheme on themselves would be exempt from the tariff. When you think about it, why would any country allow its exports to be taxed by a foreign government when it could avoid the tariff and capture the tax revenues for itself by imposing its own carbon tax? It is easy to see how such a scheme could rapidly result in a virtuous cycle leading to a nearly universal global carbon tax.
Another argument against a carbon tax is that it is a political impossibility. To this I have to ask, what is the politically palatable action that will actually solve the problem? The carbon tax has something for everyone. It would actually work to address climate change and it would produce a revenue stream that could be used to reduce the deficit. It works, politically, precisely because it asks everyone to bear at least some of the cost of dealing with the problem.
Is Climate Change an Existential Problem?
If you think climate change is an existential problem, I would think that you might be willing to accept that the most, perhaps the only, effective way to deal with it is a carbon tax. Progressives seem to shy away from this solution because they like to pretend that the problem can be solved by taxing the rich to subsidize low-carbon technologies. As the analysis above suggests, these subsidies may not be capable of solving the problem.
What should be done with the revenues collected from a carbon tax? The left would like to see them redistributed. That could be done and it would be better than not having a carbon tax at all. However, if the left expects to get centrists and moderate Republicans to buy into a carbon tax, it might help if the revenues were used to offset the deficit.
In addition, it would be helpful if the left would get out of the way with respect to the use of nuclear power. In the presence of a significant carbon tax, nuclear power could be scaled up far more quickly than solar and wind power. Are there risks? Sure, but I thought we were talking about an existential problem.
Is the Cancellation of Student Debt Good Public Policy?
I have not actually heard a reasonable attempt to rationalize student debt cancellation as good public policy. If you know of one, please post it in the comment section.
The pause in student debt payments during the early stages of the pandemic could be justified as fiscal stimulus (needed at the time) or as part of a broad array of policies to cushion the individual financial impacts of the pandemic. What the White House announced yesterday is different.
More than anything, debt cancellation is now a political payoff to a special interest group that supported Biden, and the Democratic Party generally, in 2020. As a political payoff, it is no worse and no better than any other political payoff to a special interest group. It is no worse than Sen. Kyrsten Sinema getting rid of the carried interest provisions in the “Inflation Reduction Act,” in return for financial support from the private equity industry. It is no worse than Sen. Joe Manchin defending the coal industry. It is no worse than many of the special tax breaks added by Republicans to the 2017 tax act.
I am not saying that all of the things mentioned above are necessarily bad public policy. Some are, some are not. What I am saying is that they are not why these things happened. They happened as a quid-pro-quo for political support.
When viewed that way, the cancellation of student debt is just the payment of a political debt. It’s not good or bad, it’s just part of the grease that makes the political system work. It is hard to get angry about it when viewed this way, unless you believe the political system can be entirely altruistic.
Does it Lower the Cost of Higher Education?
Some might counter that the cost of higher education is too high and this lowers the cost of higher education. Student debt cancellation lowers the cost of higher education in the same way that cancelling auto loan debt for cars purchased in the last 2 years lowers the cost of cars. A lucky few have more cash, but the cars still cost the same. Cancellation does nothing to make higher education less expensive going forward. By the same token, the claim that it will cause colleges to charge more is weak, since there is little reason to expect the debt cancellation to be repeated.
The debt cancellation is a form of fiscal stimulus. Unfortunately, stimulus expenditures are the last thing we need at this time. In defense of the cancellation, it is only mildly stimulative and therefore only mildly inflationary. To understand why, one needs to reflect on the income effects of the debt cancellation. Cancelling $10,000 of debt to be paid over 10 years only increases disposable income by about $1,000 each year. Theoretically, the impact might be slightly higher since the cancellation affects future income/wealth and therefore has a small additional impact on current consumption. More importantly, if the student owes a really large amount of debt, their annual payments may not be affected at all under the income-driven repayment plans. In those cases, the cancellation of debt just reduces the size of the debt to be forgiven in 10 to 25 years, from the date they borrowed the funds, depending on which plan they are participating in. Even that effect is potentially smaller if the debt forgiveness is a taxable event. All of that being said, student debt cancellation should have a negligible impact on inflation.
Of course, in the long run, debt cancellation will increase the size of the deficit. This could be offset by higher taxes. It is unlikely that the Biden administration will propose specific tax increases to accomplish this. To do so would make it obvious that this is simply a wealth transfer from one group of people to another.
The Bottom Line
Student debt cancellation is a payoff. If it is effective at keeping the target group aligned with the Democratic Party, and if it does not alienate others in the coalition, then it is good politics for Democrats. That is a big if.
The Centrist Independent Voter has already endorsed Tim Ryan (D) against J.D. Vance (R) in the Ohio race for the U.S. Senate. If you would like to see our reasoning on that decision visit the blog post on the question or our full list of endorsements in the 2022 General Election.
Candidate Quality and Senate Control
Mitch McConnell was right. The U.S. Senate will probably not flip to Republican control in 2022. He was also right about the reason: poor candidate quality on the Republican side. Republicans will not control the Senate after 2022 for the same reason that they lost control of the Senate in 2020: Donald Trump.
It is almost certain that Trump’s interference in the elections in Georgia, and his efforts to discourage Republicans from voting in the runoffs that followed, cost the Republicans at least one Senate seat. It now appears that Donald Trump is about to reprise his role as spoiler in 2022, by successfully endorsing candidates in the primaries who will be unelectable in the general election.
Centrist Independent Endorsements for the U.S. Senate General Election Races
Georgia
Georgia is perhaps the most obvious case of Trump endorsing a weak candidate and discouraging potentially strong candidates from entering the Senate primary race.
Rev. Raphael Warnock is a progressive Democrat. He is endorsed by the Working Families Party (think Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez). It is unlikely that, in normal times, Warnock would receive the endorsement of the Centrist Independent Voter. These are not normal times. Making sure that Donald Trump loses his control over the Republican Party, and potentially the country, is far more important than keeping a Progressive Democrat out of the Senate.
As mentioned above, Donald Trump endorsed Herschel Walker in the Republican primary in Georgia and actively discouraged other potentially more viable candidates from running. Apart from opposing Walker because he is a Trump acolyte, we also find Walker to be unqualified for the U.S. Senate. His answers on the campaign trail seem bizarre and uninformed. I have nothing against famous football players, but there is nothing about that job that qualifies you for the U.S. Senate.
You might say that there is nothing about being a minister that qualifies you for the U.S. Senate either. It is not my favorite background for a member of the Senate. Nevertheless, ministers are public speakers and they have presumably spent many years wrestling with philosophical and ethical questions. While Warnock is hardly a centrist, he has at least spent a lot of time thinking about public policy positions and articulating positions on those issues.
We, therefore, endorse Sen. Raphael Warnock to be re-elected to the U.S. Senate from Georgia.
Pennsylvania
It was by no means a foregone conclusion that we would be endorsing the Democrat for the U.S. Senate seat in Pennsylvania. Donald Trump, by endorsing Dr. Mehmet Oz, made the endorsement of John Fetterman inevitable. Fetterman is no centrist. He is a populist Democrat. That would normally disqualify him from endorsement by the Centrist Independent Voter.
However, making sure that Donald Trump loses his control over the Republican Party, and potentially the country, is far more important than keeping a populist Democrat out of the Senate.
Apart from Trump’s endorsement, we have other concerns about Dr. Oz.
The second concern is about his allegiance to the United States. Oz has dual citizenship with Turkey. He has served in the Turkish military. He defends this on the basis of his desire to be able to easily visit and care for his aging mother. Maybe there is nothing more to it than that. There is nothing inherently wrong with maintaining dual citizenship. As many as 40% of Americans may be eligible for dual citizenship and millions of Americans maintain dual citizenship. However, very few of these people have the need to handle sensitive national security information.
You might say that Turkey is an ally. Yes, they are a member of NATO, but they often take positions and actions that are inconsistent with U.S. interests. Consider Turkey’s attitude toward the Kurds during the fight against ISIS and their initial opposition to Sweden and Finland joining NATO. Even the best of allies will occasionally be at odds with U.S. national interests.
Dual citizenship, even with an ally, raises some legitimate concerns, considering that Senators are granted access to sensitive national security information as a matter of course. Oz has said he would forego any security clearances that might pose a problem, but Senators don’t need security clearances to have access to sensitive information. At the moment, there are no U.S. Senators holding dual citizenship.
In addition, I think you may all remember that in 2016 Donald Trump pledged to put his assets in a blind trust. That was an obviously meaningless pledge, since even if he did it, he would still know what actions hurt or help his business interests unless the trust was directed to sell them. In addition, we know that he never honored that pledge. What guarantee would we have that Oz, Trump’s acolyte, would honor his pledge.
You will notice that I did not mention Oz’s dubious claim to be a Pennsylvania resident. I suspect there are many Pennsylvanians who care about this issue. I am not concerned. There are many cases of U.S. Senators with dubious connections to the states they represented.
To be clear, the Centrist Independent Voter endorses John Fetterman for the U.S. Senate seat from Pennsylvania.
First, let’s all admit the “Inflation Reduction Act” of 2022 (IRA) has virtually nothing to do with controlling inflation. Whatever its merits or failures are, they are not about controlling inflation. The name of the act is shameless marketing. The non-partisan Congressional Budget Office estimated the Act’s effect on future prices to be between +0.1% and -0.1%. Some news sources have been referring to the IRA, more accurately, as the climate, health care, and tax act or something similar. Although a number of economists support this legislation, I am unaware of any serious economist who believes that the IRA will have a meaningful impact on inflation. However, for simplicity I will refer to it as the “IRA,” but don’t be fooled.
Climate Legislation
The IRA has a number of subsidies, tax credits, and regulatory incentives to encourage faster adoption of electric and hydrogen cars. It has incentives for rapid development of solar, wind, and nuclear power. It also provides for subsidized loans to encourage consumers to buy various kinds of equipment to reduce their use of energy and/or carbon emissions. Finally, it includes subsidies to make existing energy production, including fossil energy, cleaner.
The Bargain with Manchin
In order to get this package of incentives past Sen. Joe Manchin (D) of West Virginia, Sen. Chuck Schumer (D-NY), the Democratic Majority Leader in the Senate, had to facilitate additional fossil fuel production through promises about federal lease sales and facilitating future build out of energy infrastructure. The fulfillment of these promises is dependent upon separate legislation that could not be passed as part of the reconciliation process. This energy infrastructure legislation faces threats from both the right and the left.
If Sen. Manchin’s quid-pro-quo for supporting the IRA, a separate bill facilitating faster build out of energy infrastructure is passed, that would be a good thing. If it fails because of resistance from progressive environmentalists, we should expect to see a new Republican senator from West Virginia in a few years. If it fails because of mean-spirited resistance from Republican senators, maybe we will end up with two Democratic senators from West Virginia.
Are the Climate Provisions Good Public Policy?
None of the climate change legislation in the IRA is especially bad and some of it may be good, but all of it is suboptimal when compared to a carbon tax and tariff system. Such a system would not only be more efficient in reducing green house gas emissions, it would also have provided a new source of government revenue. If the government did not turn around and spend those additional funds on new programs but simply used them to reduce the deficit, this approach might actually reduce inflation. (But that is a more complicated issue best addressed elsewhere.)
Are the IRA’s climate provisions better than nothing? The climate change provisions, while suboptimal, will encourage the deployment of electric vehicles and electric vehicle infrastructure. These climate change provisions will also encourage the development of solar, wind, and nuclear energy production which will all certainly play a part in addressing climate change in the long run.
We can only hope that, in the not too far distant future, these kinds of credit and subsidy approaches will be replaced by a broad based carbon tax and tariff approach. If this happens, the capital investments encouraged by the IRA will not have been wasted. Unfortunately, the costs of these investments will be born disproportionately by the general taxpayer rather than carbon consumers. In addition, uncountable other activities that would have contributed to reducing carbon emissions under a broad based tax and tariff plan will have been passed over by focusing on a few governmentally favored solutions.
Health Care Legislation
Extending Subsidies Under the Affordable Care Act
The IRA would extend, for three years, the Affordable Care Act subsidies that were included in the 2021 American Rescue Plan. Subsidies are wealth transfers. They are not anti-inflationary. The right level of subsidy for health care insurance is a legitimate area for debate. I would be more inclined to support larger subsidies for ACA premiums, if they were matched with higher deductibles and co-pays. For more on this question visit the Centrist Independent Voter’s policy position on Health Care.
Allowing Medicare to “Negotiate” Drug Prices
For those of you who think that the IRA fights inflation by controlling health care costs, please remember subsidies and price controls do not lower prices. Subsidies and price controls simply hide costs or shift them to other consumers or to the taxpayer.
Giving the government the ability to “negotiate” prices with drug companies is really just a kind of price control. In this case, the government’s ability to “negotiate” arises because it can forbid drug companies from charging more than the government’s offered price for the drugs. Without that, the government’s offer to pay, say $100/dose, might be met with “fine pay what you want, but we (the drug companies) are going to charge the patient $500.” The government “negotiation” only works because it can prevent the drug company from charging the patient any more than the government offer.
This is not to say that giving Medicare the ability to negotiate prices with pharmaceutical companies is a bad thing. Within limits, it might be a good thing. But follow the process through. (I am ignoring co-pays here for simplicity.) Let’s assume that Medicare says that it will only pay $100 for a given drug and the drug company is forbidden from selling the drug to Medicare patients for any more than $100. The drug company has a number of choices, it can: 1) accept that price and produce as much as is demanded at that price; or 2) it can accept that price, but limit the amount of the drug that it produces, creating shortages and possibly black markets; or 3) it can simply refuse to sell the drug to Medicare patients at all.
The challenge for the government is to figure out the price that will induce the drug company to provide the amount demanded at that price. This is not always an easy thing to do, but it can be done. The challenge for the drug company in these negotiations will be to persuade the government that, absent a higher price, the company will choose option 2 or 3 above.
The drug company also has a choice to make about investments in research on future drugs. Drugs that are likely to face enormous demand, if successful, may well be developed normally even in the face of possible limits on prices imposed by Medicare. But research on drugs with more limited potential demand may simply not receive funding. This has been the case pushed by the pharmaceutical industry, and it has at least a little bit of merit. If the government uses its power under the IRA aggressively, it may lower the price on drugs in the short run, but choke off the supply of many new drugs in the future.
International Equity in Funding Drug Research
For a long time, U.S. consumers have been providing benefits to drug consumers in other countries. The highly profitable market in the U.S. encouraged the development of new drugs and Canadian, European and other consumers benefited by being able to buy those drugs at substantially lower prices. The best policy for Medicare, in the long run, might be to demand “most favored nation status.” That would mean that drug companies could not charge Medicare patients any more than the lowest price that they charge in any other developed country. This will discourage U.S. drug companies from offering drugs at heavily discounted prices outside of the U.S. Most favored nation treatments will, therefore, not result in U.S. consumers paying the current heavily discounted prices that many non-U.S. customers now get. It will result in higher prices outside of the U.S. and lower, but equivalent, prices in the U.S. In this way, the burden of supporting the development of future drugs will be more equitably shared across the developed world.
Capping Out-of-Pocket Drug Costs for Medicare Recipients
Similarly, capping out-of-pocket costs for those on Part D of Medicare does not curb inflation. It simply shifts the costs of these drugs to others. How does that happen? Drug companies confronted with the out-of-pocket cap will simply raise the premium for all those insured under their plans. This is not collusion. It will be driven by the underlying economics in the presence of the cap. The losers will be those people who opted for low cost “catastrophic coverage” plans and were never confronted with the need for expensive drugs. In the face of higher premiums, some people may forego Part D drug plans altogether. Is this good public policy? I don’t know; I much prefer the current situation in which individuals can choose the amount of risk they are willing to take.
The provisions for capping out-of-pocket costs are a wealth transfer plan between various low and middle income people. The only unambiguously bad thing about this plan is that it will probably discourage some people from carrying any Part D drug coverage.
Tax Law Changes
Without the changes in the tax law incorporated in the IRA, it could have been called the Inflation, Climate, and Health Care Act. If the spending on climate and health care incorporated in the IRA had not been accompanied by higher tax revenues, it would have constituted stimulative fiscal policy. Stimulative fiscal policy, in the face of a fixed monetary policy, is inflationary. If one accepts the wisdom of the climate and health care aspects of IRA, one has to conclude that increasing tax revenues was a good idea. But what about the way in which tax revenues were increased? Did those make sense, relative to other alternatives?
The Carried Interest Provision
One thing that was stripped from the bill at the insistence of Sen. Kyrsten Sinema (D-AZ), was the taxation of capital gains as ordinary income in the case of private equity managers. Taxing capital gains at a lower rate than ordinary income makes sense on a number of grounds that I won’t go into here. However, the carried interest compensation that private equity managers receive is much more analogous to ordinary income than it is to a capital gain on an investment. I think leaving the carried interest provision in the act would have improved the IRA.
Minimum Corporate Income Tax
Progressive Democrats love to rail against large corporations that pay no or little taxes in some years. They rarely mention the reasons why these corporations pay low taxes. The reasons for low or no taxes can include massive losses accumulated over years. These corporations may also have lowered their taxes by taking advantage of tax credits and accelerated depreciation supported by the very same progressive Democrats. To fix the offensive optics of large corporations paying low taxes in some years, the IRA provides a “book” based minimum tax system.
To understand this, one must realize that Generally Accepted Accounting Principles (GAAP) differ from the accounting rules used to calculate corporate income taxes. Reported corporate income is calculated using GAAP. Taxes are based using a different set of rules that generally result in lower taxable income because of things like accelerated depreciation and tax credits. I have not read the details of the bill, at this time, but I am guessing that, like the Alternative Minimum Tax for individuals, the Corporate Minimum Tax allows firms to roll forward their Alternative Minimum Tax payments as credits for future years. In large part, this results in front loading tax revenue, increasing it in the near term but lowering it in the future. If one focuses on the first ten years following adoption (as many analysts do), this aspect of the act will overstate the amount of revenues raised.
In response to complaints that the alternative minimum tax would hurt manufacturing, the Democrats allowed “manufacturers” to retain accelerated depreciation. This of course means that corporations must maintain essentially three sets of books. One set based on GAAP for SEC reporting purposes, one based on the regular tax code, and one based on a complicated hybrid of GAAP and tax accounting rules.
This is all incredibly complicated and largely pointless. In fact, the minimum corporate tax undermines the effectiveness of many of the tax credits included in the IRA to help on climate change.
Taxation of Stock Buybacks
The IRA includes a 1% excise tax on stock buybacks. Stock buybacks used to be considered a tax efficient way for corporations to return money to shareholders. It was tax efficient because it returned money to shareholders in the form of capital gains rather than as dividends which were taxed as ordinary income. Now that corporate dividends are typically treated as Qualified Dividends for tax purposes and receive the same treatment as capital gains, this is a moot point. Progressives, like Sen. Elizabeth Warren (D-MA), continue to complain about stock buybacks for reasons that elude me. All this accomplishes is to push corporations to return money to shareholders in the form of dividends. I expect that the Democrats are counting the revenue from this tax as part of their fiscal restraint. In all likelihood, there will be little to no revenue raised by this tax.
Fossil Fuel Taxes
The IRA imposes a number of taxes on fossil fuels. Some of these may make sense, but they are definitely suboptimal when compared to a broad based carbon tax. Some of these taxes are reasonable apart from their climate effects, such as making permanent an excise tax on coal mining that is the chief source of funding for the Black Lung Disability Trust Fund.
Additional Funding for the IRS
The IRA provides some funding to improve the audit capabilities of the IRS. I think this is a good thing, although some of the money will be wasted on ensuring compliance with the new Corporate Alternative Minimum Tax.
Obviously, we need to carefully monitor the IRS to ensure that it does not use its considerable powers to target political enemies. Nevertheless, our tax system is dependent on voluntary compliance and a robust audit capability helps to encourage that voluntary compliance.
Are the Tax Law Changes Good Public Policy?
In terms of taxation, I would have preferred a broad based carbon tax and tariff approach. Absent that, I would have preferred they leave in the carried interest provisions and accomplished the rest of the revenue gain with an across the board increase in all marginal tax rates both personal and corporate.
The best that can be said for the tax policies in the IRA is that these taxes finance the subsidies and tax credits in the act with some kind of tax revenue. That is at least better than the half hearted attempts to claim fiscal neutrality in the original Build Back Better plan.
The Bottom Line
If I had been presented with the IRA and told that I had a choice between it and nothing, I would have supported it. It is sad that it is our only choice.
Invitation for Comments
Finally, I have not had time to read the entire act and this analysis was prepared based on a number of summaries of the act. If the reader is aware of any inaccuracies, please let me know by commenting below. If there are any aspects of the IRA not mentioned here that you would like to address, please do so in the comment area below.
Inflation appears to be at the top of everyone’s mind lately. That is understandable given that current inflation rates are at 40 year highs. It is likely to play a major role in determining the outcome of the 2022 mid-term elections, despite the fact that there is much bi-partisan blame to be parceled out for the current high rates of inflation. There are, also, a lot of silly proposals on the table for combating it, e.g. price controls and gas tax holidays. There are also some ideas that may be reasonable policy suggestions, in their own right, but have nothing to do with inflation, e.g. lowering tariffs, allowing Medicare to negotiate some drug prices, or facilitating more domestic energy production.
Milton Friedman, a Noble prize winning economist famous for his work on monetary theory and policy, said that “inflation is always and everywhere a monetary phenomenon.” Things like supply chain problems, higher oil and gas prices, Russia’s invasion of Ukraine, the rapid snap back from the Covid 19 induced recession, and aggressive fiscal policy did play a role. They helped to kick start the current inflation, but in the absence of accommodating monetary policy they would not have caused persistent inflation.
The Theory
In theory, all of the above would have resulted in some things becoming more expensive. Absent monetary accommodation, these price increases would have been accompanied by declining prices for other goods and services. If those price declines did not materialize, because of “sticky wages and prices” we would have seen a recession until the under-employment of labor and other resources forced a relative price adjustment.
Evidence Backing the Theory
Those who think this is just theory should take a look at the inflation rates in Switzerland. The inflation rate in Switzerland (3.4%) is about half that of the rest of Europe (8.6%), yet virtually all of the litany of other factors listed above were present for Switzerland. What is different? Switzerland does not use the Euro and Switzerland’s monetary policy is not controlled by the European Central Bank (the European version of the Fed). Also of note is Turkey, which runs its own, extremely loose, monetary policy and has an inflation rate of 78.6%.
The History: The Fed, The Energy Crisis, and Monetary Policy in the 1970’s
In the 1970’s the Federal Reserve Board attempted to avert a recession, in the aftermath of that decade’s oil price shocks, by expanding the money supply. The idea was to produce just enough inflation so that wages and prices for non-energy intensive goods could decline in real terms (but stay constant in nominal terms) while prices in energy intensive industries could increase in real and nominal terms. Done just right this results in mild inflation and no recession. Sadly, the strategy is nearly impossible to execute properly. The problem is that inflation, once started is devilishly difficult to stop. The result was the “stagflation” of the 1970’s, high inflation and low growth. It was not until Paul Volcker really put the screws to the system, in the early 1980’s, and drove interest rates over 20%, that inflation was finally crushed.
What Should the Fed Do Now?
The policy solution is straight forward, if somewhat distasteful. The Fed needs to reduce the rate of growth of the money supply and quickly raise real interest rates with all of the tools it has at its disposal.
Calculation of Real Interest Rates
Real interest rates are the difference between the nominal interest rate and the expected rate of inflation.
The 10 Year Real Interest Rate
In calculating real interest rates it is important to subtract an estimate of inflationary expectations rather than a historical inflation rate, like the CPI, from current interest rates. The problem with using calculated measures of inflation, like the Consumer Price Index (CPI), is that they are backward looking and the current interest rate is forward looking. If we use the current nominal yield on 10 year Treasuries of 2.9% and the Federal Reserve Bank of St. Louis’ estimate of average inflationary expectations over 10 years of 2.34%, the real 10 year interest rate is 0.56% (2.9 minus 2.34), or nearly zero.
However you look at it, real interest rates, despite recent Fed action, are still either extremely low or significantly negative.
What Should the Target Be?
How high should the Fed push real interest rates? Reasonable people can disagree about the target and the speed for getting there. My own preference would be to see real short-term (1 year) interest rates at about 1-2% and long term (10-30 year) real rates of 3-4%. Getting there will require nominal interest rates in the high single digits or possibly higher. I am not sure what the appropriate speed should be to reach this target but I am sure that it is faster than the Fed is currently moving.
Will this Mean a Recession?
Maybe, but the longer we wait before trying to bring inflation down, the deeper and longer lasting the recession will be. We have already waited too long.
I am dismayed by reports that Democrats worked successfully to promote the candidacy of the an extreme right wing candidate in the Maryland Republican primary race for governor. Can it be the case that these folks believe that the only way they can get an odiously left-wing Democrat elected is by having an even more odiously right-wing Republican as their opponent?
The Centrist Independent Voter recommends that Democrats and Republicans cross party lines, where it is permitted, to vote for more centrist candidates. The intent of this strategy is to increase the likelihood that the general election will present voters with acceptable, if not always ideal choices. For more on this issue, visit the strategy discussion on the Candidates page of this web site.
Sadly, what seems to be emerging is the opposite strategy, where Democratic funds and voters are being directed to elect the most extreme candidates in the Republican primaries. The tactic actually has a name, it is called the “Pied Piper” strategy. It was also, reportedly, used by Gov. J.B. Pritzger (D), in Illinois, to promote the candidacy of a weaker, more right-wing Republican candidate in the Republican primary. In Pennsylvania, Democrats helped push state Sen. Doug Mastriano, an avid Trump supporter, to victory in the Republican primary for governor.
In the up-coming August 2nd primary, in Arizona, Democrats are working to support another Trump endorsed candidate, Kari Lake, against the establishment backed candidate Karrin Taylor Robson.
I am unaware of the same tactic being adopted by Republicans. If Republicans are also using this tactic, I find it equally hypocritical. Please let me know, through the comment section below, if you know of other examples of either party promoting extremist opposition candidates.
How can Democratic or Republican loyalists decry the extremism of the other party while working to make the other party’s candidates as extreme as possible?
Apart from the hypocrisy, support for the other party’s most extreme candidate is a dangerous strategy. Candidates fall ill, scandals happen, and the electoral mood shifts. It does not take much imagination to see these weak opposition candidates sometimes winning. Remember, many Democrats, including Hillary Clinton’s staff in a memo to the DNC, cheered Trump and other far right candidates, in 2015, because they thought them unelectable.
How to Discourage this Strategy
This dangerous strategy of promoting your opposition’s most extreme candidate works best in plurality primaries, i.e. ones which do not require a runoff to determine a winner by a majority. The best protection against this strategy is a ranked choice primary, with an instant runoff. The Centrist Independent Voter favors this approach for a number of reasons. To learn more about it visit our policy position on Voting Rights and Reforms.
The U.S. Capital Building and The U.S. Supreme Court
In response to the recent Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, which overturned Roe v. Wade, there have been proposals to eliminate the filibuster rule and also to enlarge the number of justices on the Supreme Court. The Centrist Independent Voter opposes expanding the size of the Supreme Court and getting rid of the filibuster rule in the Senate. Our feeling is that packing the Court would result in an endless cycle of Court expansion as party control shifts over time. Similarly, the end of the filibuster would mean that every time the planets aligned with one party in control of the House, Senate, and the Presidency, major legislation would be enacted or repealed, reversing course on a limitless number of issues.
But what if we had to choose?
Suppose we could either hold onto a stable size for the Court or hold onto the filibuster rule, but not both. What should we choose? In that case, my preference would be to keep the Court stable and move toward simple majority rule in the Senate.
The Role of the Court as a Safety Valve, Securing the Consent of the Governed
The current conservative Court is taking the position that the Court’s previous decision in Roe was constitutionally unjustified. They argue that the decision made by the previous Court was a legislative prerogative, and not up to the Court to decide based on a constitutional right to abortion.
The current Court is not taking a position on the policy issue; it is just saying that it is not up to the Court to decide this issue. I would have preferred that they let the precedent stand, but their argument is not unreasonable. But what if the federal legislature is institutionally unable to reflect popular sentiment? For roughly three quarters of a century, the Court has acted as a safety valve. In Brown v. the Board of Education, Roe v. Wade, Griswold v. Connecticut, Lawrence v. Texas, and in Obergefell v. Hodges, the Court has stepped in to resolve issues on which majority opinion, in most if not all of these cases, would have been frustrated by the filibuster rule. Whatever one thinks about the constitutional reasoning in these cases (and I am not disputing that reasoning), the Court served a useful purpose in securing the consent of the governed by reflecting the popular will. This may not be the proper role for the Supreme Court, but it can be argued that it was a useful one.
The Case Against Expanding the Court
There is nothing in the Constitution that dictates the size of the court. It has varied over time from as few as 6 to as many as 10. Re-establishing a liberal court would require increasing the Court to 13. If this were done we could expect that every time the House, Senate and Presidency were all controlled by the same party the Court would be enlarged again without limit. The notion of a massive Supreme Court, flipping every few years in its interpretation of the Constitution is enough to persuade most people that this would be a bad idea.
The Case for Abandoning the Filibuster Rule
If we reject enlarging the Court and the Court refuses to take on the role of providing a backstop when the legislature seems institutionally incapable of representing the will of the governed, what can be done? The obvious answer seems to be reforming the legislature to make it more responsive to the popular will. The simplest solution appears to be going to strict majority rule in the Senate.
The Case Against Abandoning the Filibuster Rule
The case against abandoning the filibuster rule is similar to the case against enlarging the Court. When the House, the Senate, and the Presidency are all controlled by the same party we could expect to see 180 degree turns in public policy, with old legislation being repealed and new legislation being added, reversing the course of public policy. Given the need for stability in public policy, particularly in areas that require long range planning, this seems like a recipe for disaster. To understand the reluctance of some Democrats for eliminating the filibuster one only has to contemplate a national prohibition on abortion.
How Often Does One Party have Total Control of the Federal Government?
Just how dangerous would it be to end the filibuster rule? Partly this depends on the frequency of single party control over the federal government. Unfortunately, single party control, for brief periods of time, is extremely common. Because so many people just vote the party ticket of the President they are choosing, we often have single party control upon the election of a new President. Split ticket voting in Presidential election years is relatively rare and stable at about 4%. The danger of frequent legislative flip-flops is, therefore, all too real.
So Why is Abandoning the Filibuster Superior to Packing the Court?
Abandoning the filibuster rule is better because it can be beneficial if it is done as a half measure. Packing the Court only changes the outcome if it establishes a new majority. Reducing the required vote for cloture (closing off debate and voting) to 55 Senators rather than the current requirement of 60 could yield benefits without losing the benefits of the filibuster rule altogether. Nothing is sacred about the 60 vote limit. In the past, the rule was reduced from 67 Senators to the current 60. Setting the threshold at 55 could allow some legislation, on which there is a measure of bi-partisan support, to get through the Senate. I am thinking that, with a little electoral luck, narrowly crafted legislative protection for the rights embodied under Roe could meet this test. I also think that stronger legislation on universal background checks, age restrictions on the purchase of assault weapons, and better enforcement of red flag laws might also meet this test. It is also the case that 55 Senators, from one party, might be achieved occasionally but not so often as a simple majority. This all makes for a more responsive legislature, but hedges, at least a little, against frequent policy reversals.
What can be done to make this happen?
The reason why the filibuster persists is that both parties recognize the danger of occasionally handing that kind of power to the other side. I don’t think that is likely to change soon, although the concern would be alleviated by the presence of a large number of moderate Republicans and Democrats in the legislature. Putting aside wishful thinking about a less polarized political environment, our best hope is that both sides will see the advantage of weakening, but not abandoning, the filibuster rule and leaving the Court alone. It allows both sides to believe that they might ultimately prevail and mitigates the outcome if they fail to do so.
