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Today’s Economist: Bruce Bartlett: Dynamic Scoring Once Again

April 2, 2013 by Leave a Comment

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

On March 22, the United States Senate adopted an amendment to S. Con. Res. 8, the concurrent budget resolution for fiscal year 2014, that would require the Congressional Budget Office and the Joint Committee on Taxation to produce estimates of the revenue effect of tax changes that incorporate their macroeconomic effects (Sec. 416).

Today’s Economist

Perspectives from expert contributors.

While seemingly innocuous, this amendment opens the door to “dynamic scoring,” which Republicans have long supported to make it easier to enact tax cuts and harder to enact tax increases. Tellingly, they reject the idea of dynamic scoring on the spending side of the budget.

The origins of the debate on dynamic scoring go back to the 1970s, when my former boss, Representative Jack Kemp, Republican of New York, used the “Laffer curve” to assert that an across-the-board cut in income tax rates of 30 percent would not lose any revenue. That is because the stimulative effect of the tax cut on the gross domestic product, employment, investment and so on would be so great and instantaneous that the tax base would expand more than the tax cut, he said.

The Laffer curve is named for the economist Arthur Laffer, who, according to legend, drew it on a napkin to show that there were always two tax rates that raised the same dollar amount of tax revenue – a high rate on a small tax base and a low rate on a large tax base. There is nothing controversial about this proposition, which economists from the time of Adam Smith have acknowledged.

The problem has always been estimating the curve empirically and calculating the impact of any particular tax cut at a given moment under a certain set of conditions. There is also the question of the appropriate time period over which to estimate revenue effects.

Generally speaking, supporters of dynamic scoring don’t offer any kind of serious economic analysis; they simply assert, as if it were self-evident, that the nation is always on the high side of the Laffer curve and that any tax cut will therefore pay for itself.

Pressed for evidence supporting this contention, supporters of dynamic scoring will point to the impact of cuts in the capital gains tax. But this is a very poor example because capital gains are a very special form of income.

Unlike wages, interest, dividends and rent, which are taxed when earned, capital gains are not. Gains that are not realized through the sale of an asset remain untaxed. Thus the stock of potentially taxable capital gains is much larger than the amount of gains that may arise in any given year.

A cut in the capital gains tax may unlock some of these gains, which may have arisen over decades, thus leading to a temporary surge in revenue. But it is important to recognize that the economy is not expanding when capital gains revenue rises, because the economic activity that gave rise to the gains occurred in the past. Comparing the revenue effect of a cut in the capital gains tax to the effect of an across-the-board tax cut on all forms of income is grossly inappropriate.

Another problem with dynamic scoring is that proponents often assert that if nominal federal revenue ever rises to the level before a tax cut, this proves that it paid for itself. Supporters of the tax cuts during the George W. Bush administration often state that since the aggregate dollar amount of federal revenue was higher in 2006 than it was in 2000, this is proof that the Bush tax cuts paid for themselves. (Revenue was well below its 2000 level from 2001 to 2005.)

This assertion is so ridiculous it hardly needs rebuttal, but since one still hears it, let me say that inflation raises nominal revenue and the economy generally grows over time whether taxes are cut or not. To observe that the nominal dollar amount of revenue is higher many years after a tax cut occurred tells us absolutely nothing about the revenue effects of that tax cut.

A better method would be to look at federal revenue as a share of gross domestic product. On this basis, the Bush tax cuts are still reducing federal revenue, which has yet to come close to where it was in 2000.

An even better method would be to look at projections of future revenue at the time a tax cut is made and compare the path of revenue with and without the tax cut, incorporating the effects on the economy. In 2003, the Heritage Foundation did just such an estimate – exactly what advocates of dynamic scoring propose.

The Heritage analysis shows that the 2003 Bush tax cut would immediately begin to expand the economy, offsetting some of the static revenue loss, which is the estimated revenue loss, assuming no change in the macroeconomy. In 2003, 8.8 percent of the static revenue loss would be recouped, rising to 14.6 percent in 2004, 28.5 percent in 2005, 47.5 percent in 2006, 73.7 percent in 2007 and 90 percent by 2011.

According to Heritage’s “dynamic” forecast, federal revenue should have reached $3.5 trillion in 2012 with the Bush tax cuts in place. In fact, they were only $2.5 trillion. Of course, Heritage was also wrong about the growth path of revenue without the tax cut. Economic growth over the last 10 years was far worse than anyone expected with or without the tax cut in 2003.

In principle we should want the revenue effects of tax changes to be calculated as accurately as possible, including their impact on the macroeconomy.

But this is a very time-consuming process, and the vast bulk of tax changes have no effect on the macroeconomy one way or another.

In practice, dynamic scoring is just another way for Republicans to enact tax cuts and block tax increases. It is not about honest revenue-estimating; it’s about using smoke and mirrors to institutionalize Republican ideology into the budget process. Why six Democrats joined the Senate Republicans in this move remains to be seen.

Article source: http://economix.blogs.nytimes.com/2013/04/02/dynamic-scoring-once-again/?partner=rss&emc=rss

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Media Decoder Blog: In Universal-EMI Deal, Indie Labels Await Scraps From the Table

July 20, 2012 by Leave a Comment

Who gets the castoffs from the biggest record company on the planet?

That is the question gripping the music industry as the Universal Music Group negotiates with European regulators over its $1.9 billion takeover of EMI Music, a deal that would give Universal — already the dominant music company, with hundreds of acts from Justin Bieber to Plácido Domingo — a market share of at least 40 percent.

After tough scrutiny from the European Commission, Universal now seems willing to sell large chunks of EMI as concessions to regulators — as much as half the company could be put up for sale, by one analyst’s estimate. And in one scenario now playing itself out with consequences at all levels of the industry, the biggest beneficiary of this process might be independent labels.

This week it emerged that Lucian Grainge, the chairman of Universal, had made a bold offer to independent labels and executives, giving them the opportunity to buy about $300 million worth of European rights to EMI’s music, according to a report in The Financial Times that was corroborated by recipients and others who had seen the letter. Those assets include the catalogs of Virgin, Mute, Chrysalis and other labels, as well as some of EMI’s vast holdings of classical music and jazz.

The letter came as a surprise given what has been a unified stance by the indies against the deal. Impala, an organization in Brussels that represents thousands of small labels, has been one of its loudest critics. And last month Martin Mills, founder of the Beggars Group, one of the largest and most successful independents — its artists include Adele — minced no words when he spoke against it at a United States Senate hearing.

But the responses to Universal’s offer revealed that not everyone in the independent world opposes the merger — at least, that is, as long as there might be something to be gained from it.

Daniel Miller, who founded the influential label Mute in 1978 and sold it to EMI in 2002, said Mr. Grainge’s letter was aimed at entrepreneurs like him who had sold their babies to EMI but now had a chance to get them back. And he said he was interested in buying.

“Universal is already the biggest music company in the world — that’s not going to change,” Mr. Miller said in an interview on Thursday. “This is an opportunity to strengthen the independent sector. In my personal view, it would be good for Mute, it would be good for our artists, and good for the whole independent distribution network.”

Another respected independent figure who now appears to favor the deal is Patrick Zelnik, the head of the French label Naïve and an Impala board member. He is teaming with Richard Branson on a possible bid for Virgin. Mr. Branson — who founded the label in 1972 and sold it to EMI 20 years ago — called Virgin a “sleeping beauty” that “has been mismanaged in the last 10 years.”

The shocked industry response to Mr. Zelnik’s announcement suggests what might be a strategy by Universal to divide and conquer — by offering deals that can benefit certain small labels, it would seem, Universal has been able to make allies of some former foes. Impala, for example, once unanimous in its opposition, now shows a rift.

But Universal has not been fully successful in damaging the opposition. On Monday, a majority of Impala’s board voted in favor the merger — but the group’s official stance remains unchanged, since the vote came short of a two-thirds requirement to overturn its earlier vote. And it wasn’t long before more indies rallied to the opposition. Merlin, a group that negotiates licensing deals on behalf of thousands of independents, gave its support — unanimously, it noted.

And some indie figures are firm in their opposition to the merger, regardless of the possibility of picking up Universal’s crumbs. In an interview on Thursday, Mr. Mills said he was not interested in buying any of EMI, and still believed that regulators in Europe and the United States should block the deal outright.

“My position is that no remedies are great enough to cure the damage to the market of having a behemoth of this size,” Mr. Mills said. “However, if it is going to go through anyway, it’s better to have remedies than to have nothing.”

The most novel answer to the question of who should get divested EMI assets came in the form of a letter to The Financial Times on Thursday from three musicians who represent the Featured Artists’ Coalition in London. The three co-heads of the group — Ed O’Brien of Radiohead, Nick Mason of Pink Floyd and the 1960s British pop star Sandie Shaw — said that the copyrights for songs should be offered to the artists who created them.

“To sell them to other corporations, whether large or small, is just a perpetuation of an old business model, which has seen the recorded music business halve in value over 10 years,” the artists wrote.

“We do not need to repeat the mistakes of the past,” they added.

Ben Sisario writes about the music industry. Follow @sisario on Twitter.

Article source: http://mediadecoder.blogs.nytimes.com/2012/07/19/in-universal-emi-deal-indie-labels-await-scraps-from-the-table/?partner=rss&emc=rss

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S.E.C. Investigates S.& P. Over Mortgage Securities

September 27, 2011 by Leave a Comment

The company said in its filing that it received a so-called Wells notice from the Securities and Exchange Commission on Thursday and it was cooperating with the S.E.C. in the investigation.

If the investigation leads to a case against S. P., it would be the first federal case against a ratings company for its work evaluating the mortgage securities that toppled the nation’s financial system. Delphinus was included as an example of an egregiously bad deal in a report issued in April by the United States Senate Permanent Subcommittee on Investigations.

The S.E.C. may decide to issue a civil injunctive action against S. P. and may demand monetary fines or disgorgement of fees, the company said.

The mere existence of an investigation does not mean that there will be a law enforcement action. There have been few cases against major institutions in the financial crisis.

“The Wells notice is neither a formal allegation nor a finding of wrongdoing,” McGraw-Hill said in a statement.

S. P. has been under scrutiny for months by the commission as part of its broader look at the mortgage securities that cost banks and investors hundreds of billions of dollars in losses when the housing market collapsed.

The S.E.C. has brought cases against banks — notably Goldman Sachs — over the marketing of such mortgage deals, but has yet to bring one involving the overwhelmingly positive mortgage ratings issued by firms like Standard Poor’s, Moody’s Investors Service or Fitch Ratings.

S. P. is also at the center of a Justice Department investigation into whether the company put business interests ahead of its duty to accurately rate deals, according to people briefed on that investigation. Standard Poor’s has been criticized by prominent lawmakers since it downgraded its assessment of the long-term credit of the United States in August, and McGraw-Hill recently announced plans to separate the company into two parts in response to a shareholder uprising.

Spokesmen for Standard Poor’s and the S.E.C. declined to comment.

Companies have been quicker to disclose that they received Wells notices since last year, when Goldman was criticized for not having disclosed the one it received related to the S.E.C.’s mortgage security investigation.

Delphinus was just one of many ill-fated mortgage securities called collateralized debt obligations, or C.D.O.’s, that represented bundles of mortgage bonds which were themselves bundles of home loans. The securities were supposed to be diversified so that if some homeowners stopped paying their bills, others loans inside the securities would be unlikely to default at the same time. But many of those securities turned out to be full of poorly underwritten mortgages that defaulted at the same time.

In the past, when the S.E.C. has looked into mortgage cases, it has focused its investigations on one deal per company. Its case against Goldman, for instance, was centered on only one deal called Abacus, even though there were nearly 20 other similar deals at Goldman. It was unclear if Delphinus, which was arranged by a unit of Mizuho Financial Group, would be the only one the S.E.C. pursued to see if S. P. violated federal securities laws.

There was so much demand for the Delphinus 2007-1 deal in July 2007 that Mizuho Securities increased its size from $1.2 billion to $1.6 billion, according to a Mizuho news release. The bank’s head of structured credit for the Americas said in that release that investors wanted “better quality collateral.” A spokesman for Mizuho declined to comment.

Standard Poor’s and other rating agencies were not generally the architects of deals like Delphinus, but the AAA ratings they placed on parts of those deals were critical to the banks’ abilities to sell them to investors. S. P. and other agencies made record profits placing ratings on mortgage securities like Delphinus, but they did not provide any sort of promises to investors that their ratings were accurate.

If investigators at the S.E.C. or the Justice Department find that analysts at S. P. intentionally gave inaccurate ratings, it could be a violation of the law.

The Senate subcommittee report in April said that in 2006, S. P. made $561 million in revenue in its structured finance group, where mortgage bonds were rated, and that the firm charged from $30,000 to $750,000 to rate each deal. In the three years before the crisis, S. P. rated 5,500 mortgage bonds and 835 C.D.O.’s, many of them AAA, despite being aware of increasing risks, the report said.

Delphinus, like so many of those deals, soon began to struggle. The deal went into default by January 2008, some six months after it was created, S. P. said in a 2008 client notice.

Analysts who rated the Delphinus deal, however, noticed problems sooner than that. Within weeks of the rating, S. P. analysts e-mailed each other to say that some of the bonds that went in it were not exactly quality collateral. According to e-mails released with the Senate report, analysts saw about 25 of the assets in the deal change within one day of its closing. The creators of the deal put placeholder bonds in, as allowed, but the ones they put in were not of the appropriate quality and “would not have been passing,” one S. P. analyst wrote in the summer of 2007.

The discrepancy those analysts noted was kicked upstairs to superiors, the e-mails show.

Article source: http://feeds.nytimes.com/click.phdo?i=be054729a650252d87a9fbb26e4d2346

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Dissolution of Hacker Group Might Not End Attacks

June 27, 2011 by Leave a Comment

But security experts said on Sunday that the dissolution of the group might not signal an end to the attacks, which have hit dozens of Web sites, including those of prominent targets like the Central Intelligence Agency, the United States Senate, the Arizona state police and Sony.

Indeed, in its farewell message posted on Saturday, the group, also known as LulzSec, urged other hackers to join the “revolution” aimed at governments and corporations that it started recently with Anonymous, a much larger collective of politically minded hackers from which many of the LulzSec members sprung.

“It looks like these sort of ‘hacktivist’ ideas are spreading and gaining popularity,” said Dino A. Dai Zovi, a prominent independent security consultant. He said that LulzSec appeared to be trying to inspire others to join a sprawling, if fragmented, array of local groups, which could feed more attacks.

In recent weeks, LulzSec has become a target itself, as global law enforcement authorities and rival hackers have gone after the group. One man associated with LulzSec, Ryan Cleary, was arrested last week in Britain. Meanwhile, a growing assemblage of rival hackers has been working to unmask the core half-dozen LulzSec members and feed information on them to the authorities.

American officials on Sunday characterized the attacks carried out by LulzSec as “nuisances” rather than real security threats. One government official said that LulzSec had never penetrated government servers or stolen any classified information.

“What we are really worried about is people getting access to our systems, or putting malware on it,” said the official, speaking on condition of anonymity.

The official said that even though it was possible that LulzSec had disbanded, hackers tended to operate in a world of shifting alliances and it would be easy for a new group copying LulzSec’s techniques to appear in the future.

“All it takes is one guy in his basement to do this, not an organized group,” the official said.

On Monday, the Department of Homeland Security plans to introduce a system to help institutions eliminate common programming errors that allow hackers to easily infiltrate databases and steal user names and passwords. The agency’s hope is that the program, which is voluntary, will make it easier for companies and agencies to better secure their corners of the Internet, thus contributing to a safer global network.

Some security experts and hackers were skeptical of LulzSec’s sudden about-face and said they believed the group intended to continue its activities. The latest announcement could be just another ploy for attention, rival hackers said on Twitter and on private online message boards.

Over the last several weeks, LulzSec had said repeatedly on its Twitter feed that it planned to continue attacking governments and financial institutions indefinitely.

Members of LulzSec did not respond to phone calls and e-mails on Sunday.

Whatever happens to LulzSec, the brash and public brand of hacking that it embraced and defined may be here to stay, some experts say. The group’s attacks on prominent targets, accompanied by raucous bragging on social networks and chat rooms, helped it amass more than 280,000 followers on Twitter. It has used that megaphone, as well as chat rooms, to try to recruit more hackers to its ranks.

Some of LulzSec’s activities had a political tinge. For example, it said its theft and public disclosure of Arizona law enforcement records was in response to the state’s tough laws aimed at illegal immigrants. But the group claimed that its hacking was primarily a celebration of the “lulz,” or laughs, and the members seemed to lap up the media attention they generated.

But if LulzSec had continued, it would have faced an increasing risk that its members would be captured, said Chris Wysopal, the chief technology officer of the security firm Veracode.

“By stopping now and regrouping, I think they will live to hack another day,” he said. “If anything, there will be more people hacking in their footsteps.”

Mr. Wysopal added, “Until they’re arrested — if they ever do get arrested — I don’t think anything will slow down.”

Mark Mazzetti contributed reporting.

Article source: http://www.nytimes.com/2011/06/27/technology/27hack.html?partner=rss&emc=rss

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