The Longest Shutdown Ever – with No End in Sight

Plus, Ocasio-Cortez’s 70% tax rate bombshell

White House Prepares for Shutdown to Drag On for Weeks

Trump: No national emergency declaration ‘right now’

Three weeks, zero progress. Congress adjourned for the weekend without any movement toward a negotiated resolution to the partial government shutdown, which is now guaranteed to become the longest in history, surpassing the 21-day closure that started in December 1995.

And the White House appears to be preparing for the shutdown to drag on for weeks longer.

Presidential aides preparing for Trump’s State of the Union address on January 29 are drafting some sections under the assumption that the shutdown won’t be resolved by then, The Wall Street Journal reports. And the White House Office of Management and Budget is preparing for the shutdown to continue through February.

Trump hinted Thursday that the shutdown may last awhile, tweeting that he’ll skip a planned trip to the World Economic Forum in Davos, Switzerland because of the impasse. The president had been scheduled to leave for Davos on January 21.

As the shutdown stretches into record territory with no sign of serious talks to end it, the pain inflicted is becoming increasingly evident:

Meanwhile, President Trump continued to press his case for building a wall, tweeting that “our Country cannot be safe” without it. Unmoved, Democrats continue to argue that the wall would be ineffective and a waste of money — and that Trump has failed to bring anything to the table. “His version of a negotiation is, ‘Do everything I want,’” House Speaker Nany Pelosi said, according to The Washington Post.

Trump Says He Won’t Declare National Emergency Yet

With both sides dug in, speculation continued about whether Trump will declare a national emergency, directing the military to build his wall without congressional approval. Rep. Mark Meadows (R-NC), a Trump ally and leader of the right-wing House Freedom Caucus, on Thursday called such a declaration “inevitable.” He said he expected Trump would make that move in a matter of “days, not weeks,” according to the Post.

But Trump on Friday afternoon backed off his recent threats to declare an emergency. "What we're not looking to do right now is national emergency," he said at a White House event. “I’m not going to do it so fast.”

White House officials reportedly have been considering diverting unused money from the Army Corps of Engineers budget — specifically, $13.9 billion in emergency hurricane and wildfire relief funds allocated last year for use in Puerto Rico, Florida, Texas and California — and from the military construction budget.

But as the idea of a national emergency declaration began to build momentum, Republicans and conservatives have pushed back sharply, warning that, even if it could be used to fund wall construction, it could set a dangerous precedent — one that a future Democratic president could use to push liberal priorities on, say, climate change or health care.

Quotes of the Week

“It’s as though the writers of Groundhog Day, Towering Inferno, and VEEP got together over a drink, and this is what they came up with” – An anonymous senior House Republican aide, quoted by The Atlantic, on the shutdown

“The buck stops with everybody.” – President Trump, on Thursday, responding to a reporter who asked if "the buck stops with you over this shutdown."

Why Craft Brewers Are Crying in Their Beer

It may be small beer compared to the problems faced by unemployed federal workers and the growing cost for the overall economy, but the ongoing government shutdown is putting a serious crimp in the craft brewing industry. Small-batch brewers tend to produce new products on a regular basis, The Wall Street Journal’s Ruth Simon says, but each new formulation and product label needs to be approved by the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau, which is currently closed. So it looks like you’ll have to wait awhile to try the new version of Hemperor HPA from Colorado’s New Belgium Brewing, a hoppy brew that will include hemp seeds once the shutdown is over.

Leading Economist Says Government Debt Might Not Be So Bad After All

Renowned macroeconomist Olivier Blanchard says that policymakers may need to fundamentally revise their views on the long-term cost of government debt.

Delivering the presidential address at last week’s meeting of the American Economic Association, Blanchard said that his recent research reached “strong, and, I expect, surprising, conclusions” that suggest that the fiscal cost of issuing government debt may be close to zero when interest rates are low. The overall cost to the economy appears to be relatively modest as well, the economist said, and as a result, the recent increase in the national debt may be far less worrisome than many critics have assumed.

“What do I want you to go away with? Not the notion that debt is good but that debt might not be so bad,” Blanchard said.

The big picture: Blanchard, a senior fellow at the Peterson Institute for International Economics and an emeritus professor at MIT, found that as long as interest rates are below the growth rate of nominal GDP — a situation that he says is “more the historical norm than the exception” — additional public debt can be issued without raising taxes. Governments can simply roll over debt as it comes due, as the U.S. has done for years, with economic growth producing enough additional wealth to cover the ongoing expense.

Given this conclusion, public debt should be seen as an important policy tool, although one that still come with risks. “You can use it, if you use it wisely,” Blanchard said. And he made it clear that he was not arguing for higher debt, but rather “a richer discussion of debt policy and appropriate debt rules than is currently the case.”

Fiscal doves rejoice: Economists on the left hailed the analysis. Paul Krugman said the paper suggests "debt looks like a hugely overblown issue, and the way debt displaced unemployment at the heart of public debate in 2010-2011 just keeps looking worse." And Jared Bernstein, former chief economist for Vice President Biden, wrote that Blanchard’s paper “injects some extremely important facts into discussions about fiscal policy that have long been characterized by assertions, biases and fearmongering. If we learn and apply the lessons I take from this paper, we can stop making mistakes that have been terribly costly to the well-being of millions of people.”

But the path ahead is still unclear: At the same time, critics worried about the debt said that, as Blanchard himself made clear, the analysis does not provide a green light for the unlimited borrowing. Former Treasury economist Ernie Tedeschi said that what really matters is how public debt is used: “There’s a material difference between financing one-time or time-limited high ROI policies like infrastructure with debt, and financing ongoing / perpetual consumption transfers with debt.”



And some fiscal hawks are unlikely to be convinced by Blanchard’s sanguine conclusions. Jumping into the debate over Blanchard’s paper, the Committee for a Responsible Federal Budget reiterated its view Friday that the national debt represents a serious threat to the nation’s financial well-being. Linking to its latest analysis, CRFB’s Marc Goldwein tweeted, “Want to increase average income by $6,000 per person per year? Reduce the federal debt.”

Read Blanchard’s prepared remarks here and watch a video of the lecture here.

Ocasio-Cortez’s Tax Bombshell: Is a 70% Top Rate Too High, or Not High Enough?

Political Rorschach test Rep. Alexandria Ocasio-Cortez (D-NY) sparked a lively fiscal debate this week after suggesting in an interview that the top marginal tax rate in the U.S. should be as high as 70 percent.

Speaking to Anderson Cooper on CBS’s “60 Minutes,” the 29-year old lawmaker said that “people are going to have to start paying their fair share in taxes” in order to fund a new progressive agenda aimed at reducing economic inequality and combating climate change.

More specifically, Ocasio-Cortez said that marginal rates at the top of the income spectrum need to be much higher, as they were in the post-war era: “You look at our tax rates back in the '60s and when you have a progressive tax rate system your tax rate, you know, let's say, from zero to $75,000, maybe 10 percent or 15 percent, etc. But once you get to, like, the tippy tops — on your 10-millionth dollar — sometimes you see tax rates as high as 60 or 70 percent.”

The reaction to Ocasio-Cortez’s comments was swift and at times severe, especially on the right. Putting the political hyperventilating aside, however, Ocasio-Cortez’s comments raise some interesting points about tax policy. Here’s a rundown of insights from critics across the political spectrum:

Top marginal tax rates have been quite high in the past: Ocasio-Cortez is right on the history as far as tax rates are concerned. According to the non-artisan Tax Policy Center, the top marginal tax rate was higher than or equal to 70 percent every year from 1936 to 1981, sometimes reaching over 90 percent (review the rates since 1913 here). So Republican complaints that Democrats want to take 70 percent of their incomes are off base, conveniently ignoring the difference between marginal and effective tax rates.

But the key number is the effective rate: High marginal rates don’t necessarily translate into high average rates — or significantly higher revenues for the government. There aren’t many taxpayers who would face Ocasio-Cortez’s top rate, and much of their income would be shielded through deductions and the progressive tax structure itself. Effective tax rates for the wealthy changed surprisingly little over the last few decades, even as the top marginal rate changed by dozens of points. Given the relatively weak fiscal effect of a high top marginal rate, Howard Gleckman of the Tax Policy Center said, “no, Rep. Ocasio-Cortez, we probably can’t pay for a big new ‘green’ agenda simply by raising the top income tax rate to 70 percent on those at the ‘tippy top’ and, no Rep. Scalise, even if we did, the government would not be taking 70 percent of people’s income.”

Most economists agree rates could be higher: Economist Paul Krugman said that Ocasio-Cortez “is fully in line with serious economic research” when it comes to high marginal tax rates. Recent studies suggest that the optimal top marginal tax rate — the rate that brings in the most revenue — is in the 70 percent range, and one study, by economist Christina Romer, found that the optimal level was 83 percent. While Laffer Curve enthusiasts will no doubt tear their hair out upon seeing such high numbers, it seems pretty clear that current U.S. tax rates are well below the optimal level for revenue collection. And the issue may be a political winner, too, since opinion polls show that most Americans support higher tax rates on the rich.

But revenues would likely still fall short: No fan of Ocasio-Cortez’s progressive agenda, the Manhattan Institute’s Brian Riedl estimates that a top marginal tax rate of 70 percent on incomes over $10 million would raise less than $50 billion per year, nowhere near enough to pay for massive projects like a “New Green Deal” or single-payer health care. The Washington Post’s Jeff Stein puts the estimate closer to $70 billion a year, still well short of a transformative amount. Former U.S. Treasury economist Ernie Tedeschi calculated that raising the top rate on the top 1 percent of filers to 70 percent would bring in something like $300 billion a year, assuming capital gains were included — a huge amount to be sure, but still well shy of the levels needed to pay for the progressive political agenda backed by Ocasio-Cortez. “Ocasio-Cortez’s tax plan isn’t radical at all,” says Bloomberg’s Noah Smith. “But those who expect the plan to yield a bounty of tax revenue for a Green New Deal or other major spending programs are likely to be disappointed, because the proposed tax hike by itself wouldn’t raise much revenue.”

It’s the overall tax structure — and the political project behind it — that matters most: On its own, raising the top marginal tax rate is unlikely to pay for the significant political changes Ocasio-Cortez is pursuing. But as Bloomberg’s Smith says, politicians looking to transform the America political economy need to address more than just marginal rates: “a dramatic expansion of federal tax revenue would require much more than what Ocasio-Cortez is proposing. It would require an overhaul of the corporate and capital-gains tax systems, higher rates on a much broader range of high earners, and probably wealth taxes as well. It would require a huge amount of political will and a sustained policy-making effort over a number of years.”

Ultimately, the argument over Ocasio-Cortez’s view on marginal tax rates is an argument over political power — an argument that is in some ways just getting started.

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Your Prize for Making It Through the Week, Part I

“We preemptively apologize for getting it stuck in your head,” The New York Times said. “But ‘Baby Shark,’ a song as infectious as anthrax to which the caretakers of young children likely need no introduction, entered the Billboard Hot 100 chart at No. 32 this week, placing Pinkfong, a South Korean educational brand, alongside the world’s top musical artists.”

Watch it here, or read more about it from The Washington Post, NPR, Quartz or Vox.

Yes, we apologize too.

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