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December 10, 2010

And Here Comes the Pork

Unfortunately but predictably, bipartisanship has started with the White House and Republicans agreeing to SPEND money on each other's pet priorities. It would be preferable if they would agree to defund anything they don't agree on. We are going to have to forgo a lot of pet priorities to get deficits under control AND to right-size government at all levels.

Since the President has declared himself open to negotiating with hostage takers (let's hope al Qaeda isn't listening), legislators are naturally jumping to take "the compromise" hostage. House Democrats haven't made their demands clear yet; but Harry Reid in the Senate has used the Senate bill to enlarge the deal by including extensions of tax credits for corny ethanol production, the tariff on imported ethanol, and a stimulus grant program packaged as tax credits for renewable energy. This is actually a bipartisan package of pork since many Republicans favor the ethanol provisions (remember Iowa!) while Democrats want the renewable energy incentives.

It may be true as the New York Times headlined that the "Tax Compromise Could Hinge on Energy Provisions." If so, this is a very bad omen going forward. We can't afford to continue the practice of passing bills by larding them up with giveaways to powerful constituencies.

A Brief Look at the Merits of the Bill and the Proposed Addons

  1. Extension of middle class tax cuts: good idea; should've been permanent. Wouldn't have been bad if this were the entire bill.
  2. Extension of tax cuts for the rich: the very rich (which doesn't start at $250,000 of annual income as defined in the tax code) deserve coal in their collective stockings after being bailed out by TARP and the Fed. The rich are or aren't going to invest depending on whether there are investment opportunities, and these investment decisions are not much affected by a small change in the nominal tax rate. But, IMHO, increasing government revenues except by expanding the economy shouldn't be the way of curing the deficit.
  3. Extension of unemployment benefits: certainly more counter-cyclical and stimulating than lower taxes for the rich. Unfortunately there's lots of evidence that extending benefits extends unemployment – and that extended unemployment becomes chronic (see Unemployed, and Likely to Stay That Way). Also the cost adds to the difficulty of creating jobs. Probably should have been less of an extension for the sake of the unemployed.
  4. Accelerated expensing of capital expenditures: tinkering. Businesses will invest when they see a prospect for more demand.
  5. Temporary decrease in social security payroll tax: definitely stimulating but token. Adds to doubt over whether social security deficit will be dealt with.
  6. (addon) extension of credits for corny ethanol: terrible policy. Even Al Gore, who broke a Senate tie in favor of these credits, now admits that they're a failure and counterproductive as energy and environmental policy. This is about Iowa and campaign contributions.
  7. (addon) extension of the tariff on IMPORTED ethanol: if ethanol is a good way to reduce dependence on oil and/or reduce greenhouse gasses, why would we want to keep out Brazilian sugar-based ethanol which we don't have to subsidize? Oh yeah, Iowa and campaign contributions.
  8. (addon) extending stimulus grants for renewable energy projects: the Chinese manufacturers of solar panels should love this (they don't actually use solar photovoltaic panels in China, but they're happy to make them for us). Distorting energy markets is a bad idea. People who used to love corny ethanol (but now hate it) see these credits as the new panacea. Better to let them lapse now than regret them later.

Best would be to get the simplest possible bill out which includes the middleclass tax cuts, realistically it will include more than that. The next Congress should then move forward from the generally excellent recommendations of the deficit commission.

Related posts:

Earmarks Bribe Us with Our Own Money

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Cutting the Deficit – Just Do It!

Election Analysis: It Was TARP that Boiled the Tea

We've Been T*RPed

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