Ezra Klein

The GOP doesn't oppose Richard Cordray. It opposes his whole agency.

Mike Konczal — Sat, 25 May 2013 18:34:14 GMT

Harry Reid could go nuclear this summer.

Reid is looking to take dramatic action to get Richard Cordray confirmed as head of the Consumer Financial Protection Bureau (CFPB). And according to reports this week, he's likely to push for a major battle over the filibuster this summer once immigration reform is finished, but before the fall budget battle heats up. Although the massive increase in the use of the filibuster in recent years is a general problem, it's of particular concern for financial reform. Instead of just disapproving of a candidate, Senate Republicans are explicitly blocking Cordray in order to rewrite important parts of Dodd-Frank they don't like.

The GOP has been quite frank for several years now: their problem isn't with Cordray, or with any specific candidate. They just don't want anybody in the office with the CFPB structured the way it currently is under Dodd-Frank. Just look at the arguments conservatives put forward in early February, when 43 Republican senators signed a letter explaining why they would block any candidate for the position. (It's very similar to a letter Republican senators signed in 2011.) The senators state, "We will continue to oppose the consideration of any nominee, regardless of party affiliation, to be the CFPB director until key structural changes [are made.]"

Conservatives are in a double bind when it comes to the CFPB. Their argument is that the CFPB "would wield nearly unprecedented powers" and lack "normal, democratic checks." The CFPB, by their account, represents a major power grab on a scale never before attempted in the history of the regulatory state.

That is clearly wrong. The CFPB is structured to look like all the other banking regulators. Indeed, it is consciously modeled as a consumer-focused version of the Office of the Comptroller of the Currency (OCC). And as we'll see, the powers that Republicans are arguing are unprecedented are actually the same powers and structures the other banking regulators have.This isn't to say the CFPB isn't a serious banking regulator. It is not a committee set up to go study something and make recommendations or an advisory panel that will disband before doing anything. Already it's bringing accountability to the financial sector on behalf of consumers: It's gone after illegal or deceptive practices at American Express, Discover, and Capital One and is bringing extensive new regulations to the housing market. It is, as they say, a big deal, and it is now the law of the land.

However, the law of the land also requires it to have an executive to be fully operational. As the Congressional Research Service summarized, "Until a CFPB Director is appointed, [Dodd-Frank] provides the Secretary the authority to exercise some, but not all of the Bureau's authorities."With the Senate stonewalling, President Obama recess-appointed Cordray. The constitutionality of this action was brought into question when the U.S. Court of Appeals in Washington, D.C. rejected a recess appointment to the National Labor Relations Board made at the same time.

The status of the CFPB's actions, authorities and regulations is a source of profound regulatory uncertainty. So why is the GOP blocking Cordray so aggressively? The Republican senators argue that there are three major changes they need to see before they'd let a nominee through. None of them are really things that make the CFPB less accountable or more likely to deliver worse rules than any other regulator.

Two, three many directors

The first reform the GOP wants is the establishment of "a bipartisan board of directors to oversee the Consumer Financial Protection Bureau." So instead of one director, Cordray, it would have several.

But as it stands, the OCC also has a single director. So did the Office of Thrift Supervision (OTS). Some other agencies have boards, like the FDIC, but it isn't clear which model is better than the other, and either way, the GOP hasn't made the case for why a board is so essential that it is worth shutting down the CFPB. A single director can be more accountable than a group of people likely to defer blame to each other.

The underlying claim here is that the CFPB is somehow unaccountable. But it's actually more accountable than other regulators. For one thing, as Georgetown University law professor Adam Levitin noted in testimony, the CFPB is subject to a veto of its actions by other financial regulators, a feature that does not apply to any other regulator. But in general it's a regulator: it follows the Administrative Procedures Act, gets public comments and is subject to judicial review.

Money troubles

The second change the GOP wants is to "subject the Bureau to the annual appropriation process, similar to other federal regulators."

However, other federal regulators have their own independent budgets and are not subject to the annual appropriation process. The OCC, the FDIC and the defunct OTS use fees and other charges on the financial institutions they regulate, for instance. The CFPB has a statutory budgetary cap of 12 percent of the Federal Reserve's budget.

The Congress that voted Dodd-Frank into law made a conscious decision to fund the CFPB this way, for fear that the normal appropriations process would leave it underfunded. This is normal in financial regulation and appropriate for the CFPB.

Safe and sound

The third and final change the GOP wants is to "establish a safety-and-soundness check for the prudential regulators." This means it thinks the CFPB could destabilize the financial sector. It's not clear how this would work.

There is already a safety-and-soundness check at the OCC, which, through the Financial Stability Oversight Council, can vote on vetoing CFPB actions. It's not clear why this is important to Republicans. A cynical reading would be that since profit-making is one way to achieve the safety and soundness of banks that the CFPB regulates, anything that might get in the way of banks ripping off their customers would hurt safety and soundness. And, indeed, big fines and settlements for illegal practices do, in theory, mean more capital that they'll have to raise, or lower earnings for shareholders. But aren't such fines and settlements how we provide accountability to the financial sector?

Consumer financial protection used to be the orphan mission of 10 different agencies. (See if you can say the entire alphabet soup in one breath. Ready? The OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC, and DOJ.) Since everyone had it as a subordinate mission of their other goals, in practice it meant that nobody was doing it. The dedicated mission of the CFPB is to provide accountability on behalf of consumers, and the GOP's goal is apparently to divert it from that mission.

Rather than doing their job and providing advice and consent on appropriate candidates, Republicans in the Senate are nullifying a law they don't like. There's no basis for arguing that the CFPB is anything but a regulatory agency like any other. The fact that the GOP senators wants this or that part of Dodd-Frank replaced doesn't give them the right to prevent Dodd-Frank from going forward.

Republicans had a chance to contribute to the Dodd-Frank law; chances are they could have gotten major changes for just a few Republican votes. Instead they went all-in, hoping to prevent a more liberal bill from passing at all. They failed, and then they failed to set up 2013 as a year in which repealing Dodd-Frank would be possible. The nomination process is meant to vet candidates, not give losing parties a second bite at an apple they rejected the first time. Here's hoping Reid can make sure it stays that way.

Maryland already sets hospitals' prices. Now it wants to cap their spending.

Lena H. Sun, Sarah Kliff — Sat, 25 May 2013 15:34:12 GMT

In a world of constantly rising health-care costs, Maryland has long stood alone. Through a novel system that gave regulators unusual leverage to set prices, the state delivered care at a price that grew more slowly than elsewhere in the country — even at some of the nation's most renowned hospitals.

But after saving an estimated $45 billion for consumers over four decades, the system is in danger of running aground. Hospital expenses have risen so relentlessly in recent years that the original price controls now appear unsustainable.

In its place, Maryland officials are pressing for an expansion of the state's authority over its hospitals. The new system would not only set prices for the procedures they perform but also cap the growth in their overall spending.

The proposal has ignited a debate in Annapolis and beyond over how far the government should go in reining in sky-rocketing health-care bills. Advocates for the plan say it is the most effective way to curb costs and that it could serve as a model for the rest of the country.

"Maryland wants to really hold health-care costs accountable," said John McDonough, a health policy professor at Harvard University. "So far, no state has ever done that."

But critics say the near-collapse of the state's old system proves the perils of heavy-handed regulations.

"Hospital rate-setting clearly didn't succeed at meaningfully slowing costs down," said Joe Antos, who served eight years on the Maryland board that set rates.

The debate is being closely watched as health officials around the country are struggling to implement the Obama administration's new health-care law. Many states are seeking ways to keep costs down as millions of uninsured Americans are added to the rolls of the insured.

"Should Maryland demonstrate meaningful initial cost savings, we believe other state and national efforts . . . will gain momentum," George Huang, a senior analyst at Wells Fargo Securities, wrote in an April analysis of the Maryland proposal.

Maryland's existing system was once hailed for eliminating an unwieldy element of the health-care system: the haggling between medical providers and insurance companies.

In other states, each time a hospital provides a service, it has to negotiate how much money it receives from an insurer. The time-consuming and often contentious process results in widely varying prices for the same procedures.

Hospitals pushed for the highest possible payouts partly because they say they do not receive enough from Medicare, the federal program that reimburses medical providers for their care of the elderly.

Maryland put an end to the wrangling. It established a state commission that directly set rates for procedures at all of its 46 hospitals. Over time, hospitals and insurers embraced the system because they knew exactly what to expect.

Medicare had to reimburse Maryland's hospitals at a higher rate than it did in other states. But federal officials went along with it because, at the time, they wanted to experiment with other models of health care.

In the late 1970s, the U.S. government agreed to a provision that gave Maryland the unique authority to set its own prices — even for Medicare. Analysts estimate that recently the state's hospitals have been receiving an extra $1 billion in Medicare reimbursements each year.

A handful of other states, including New York and New Jersey, tried to implement a similar system in the late 1970s and early 1980s. But unlike Maryland, they did not get the higher reimbursements written into federal law and gave up on the program.

"Maryland made a very strategic, savvy move," said McDonough, the Harvard professor. "Had they not locked in those higher payments [from Medicare], there wouldn't be value in the program."

The system led Maryland hospitals to charge patients and their insurance companies much lower prices than those in other states. New Medicare data released this month on hospitals' sticker prices for the 100 most-common procedures showed that, in each case, Maryland's hospitals submitted the lowest charges in 2011.

In 1976, a year before rate-setting was put in place, the average cost of a Maryland hospital admission was 26 percent above the national average, according to a widely cited study by the former head of the rate-setting commission. By 2007, it was 2 percent below the national average.

But when it came to payments from Medicare, Maryland's reimbursements were well above the national average. For 11 of the 100 common procedures, Maryland hospitals were paid more than hospitals in other states. And for 79 procedures, the state ranked among the top five.

While hospitals nationwide received, on average, $6,011 to treat a case of bronchitis from Medicare, Maryland hospitals were reimbursed $8,375.

Over the past several years, Maryland's system began to unravel. Hospitals saw their expenses soar, and the cost controls proved too inflexible to handle the rise.

Part of the problem with the old system is that it gave hospitals an incentive to admit as many people as possible. The more patients who walked through the door, the more the hospitals would get paid.

So Maryland officials came up with a new approach. On top of setting rates for individual procedures, they are proposing a cap on the growth of the total amount the hospital system spends per person in the state. The plan also allows hospitals to charge higher prices if they adopt preventive-care methods that improve patient health and reduce repeat visits, said Maryland's health secretary, Joshua Sharfstein.

"We think this new approach allows us to better tackle overall costs and create a strong incentive for better health," he said.

Under the proposal, total hospital spending would be tied to long-term economic growth in the state. That way, when the economy is in recession, costs would grow more slowly, while in boom times, they would be allowed to rise quicker, officials said.

Maryland Republicans have for years objected to the state's central role in rate-setting for procedures. In 2011, Senate Minority Leader E.J. Pipkin, an Eastern Shore Republican, urged the federal government to rescind the state's authority.

He said he was stunned by the scope of the state's new proposal and added that the legislature should have been consulted.

"My question is, what does this do for patient care?" Pipkin said. "The state is trying to impose a solution on a problem, but it is a dramatic change to the system of health-care reimbursement in Maryland, and it's not being property vetted."

Hospitals say the plan, if approved, could be onerous, hurting the financial health of the $15 billion hospital industry that employs nearly 100,000 people in Maryland.

John M. Colmers, who chairs Maryland's Health Services Cost Review Commission and was a key architect of the proposal, acknowledged that the proposal might be "a challenge" for hospitals. Colmers is also a top vice president at Johns Hopkins Medicine in Baltimore.

Insurers, meanwhile, have approached the new plan with cautious optimism.

"It's probably very sensible to consider doing something like this," said Chet Burrell, chief executive of BlueCross BlueShield CareFirst, the state's largest health plan.

Maryland officials say that they are in intense discussions with federal officials and that the plan could still be refined. They have also reached out to hospital and insurance executives to solicit additional input. State officials hope to get approval from federal officials over the next several months so they can put the new system in place by January.

"At its core, this proposal would put a lid on total hospital spending for all the people in the state, and that's what makes it such a big deal," said Carmela Coyle, head of the Maryland Hospital Association. "It's never been done before. It's never been tried before."

'This is a massive effort to attract cheap labor.' Why Sen. Bernie Sanders is skeptical of guest workers.

Dylan Matthews — Sat, 25 May 2013 13:02:46 GMT

Sen. Bernard "Bernie" Sanders (I-Vt.) is the junior U.S. senator from Vermont. We spoke on the phone Friday afternoon about his views on the comprehensive immigration reform legislation that is pending in the Senate. A lightly edited transcript follows.

Dylan Matthews: In 2007, you had some concerns about the immigration bill being weighed by the Senate, and voted against it. Now that the new Gang of Eight bill is out of committee, what do you make of it?

Sen. Bernie Sanders: Thanks for calling. Let me just say this. I'm a strong supporter of immigration reform, and of the need to provide a pathway to citizenship for 11 million undocumented immigrants. I very strongly support the DREAM Act, and will continue to strongly support it. I very strongly believe, as someone who knows what's going on in the dairy industry in Vermont, that there's no question we need to create a status for immigrant workers in agriculture, and I think the committee is making good progress there.

My concerns are in regards to where we stand in terms of guest workers programs, made worse by amendments offered by Senator Hatch. What I do not support is, under the guise of immigrant reform, a process pushed by large corporations which results in more unemployment and lower wages for American workers.

As you well know, we remain in the midst of a severe recession. Real unemployment, once you consider people who've given up looking for work, is close to 14 percent, and in some parts of the country is even higher. For minorities it's very high, and we've got to address that. You have massively high unemployment for young people, yet we're talking about expanding visas so that young people from abroad can serve as life guards, become ski instructors, become front desk people, when young people in this country desperately need jobs to pay for a college education.

I am aware that there may well be certain high-skilled jobs in specific areas in high skilled technical industries that American companies are finding it hard to fill. I find it hard to understand that, when nine million people in this country have degrees in science, technology, engineering, and mathematics fields, only about three million have jobs in these areas.

Furthermore, as someone who was led to believe that what economics was about was supply and demand, if you need workers in a certain area, you need to raise wages. I have a hard time understanding the notion that there's a severe need for more workers from abroad when wages for these jobs rose only 4.5 percent between 2000 and 2011. You see stagnant wages for high skilled workers, when these companies tell you that they desperately need high skilled workers. Why not raise wages to attract those workers?

The bottom line is that I feel, very much, that a lot of the initiative behind these guest workers programs, a very large expansion of guest worker programs — H2B visas would go up to as many as 195,000, H1B to as many as 205,000 a year — is coming from large corporations who want cheap labor from abroad. Absolutely, there is a need for foreign labor. I recognize that in agriculture and certain areas in the high tech industry, you need foreign labor. But this is a massive effort to attract cheap labor, a great disservice to American workers.

What do you make of the W visa program for low-skilled workers that came out of a deal by the AFL-CIO and the Chamber of Commerce?

I want to take a harder look at that. But again, look, when you have very high unemployment rates for low-skilled workers in this country, for kids who graduate high school, I'm very dubious about the need to bring foreign unskilled labor into this country. These are kids, young high school graduates, and the unemployment rate is just extremely high. I do not understand why they cannot hire those people and need foreign labor.

There are areas when you do need foreign labor. Here in Vermont, while I wish it were the case that kids would go into dairy, they do not. That's true in many areas, all over the country. I think there are clear examples, but they have been multiplied many times over by large corporations at the expense of the American workers. I'm very dubious of whether you need hundreds of thousands to come in right now when unemployment is so high.

The bill does create an agency to monitor labor market demand and make sure there are Americans who could be doing these jobs. What do you make of that?

Of course that's a step in the right direction. It's a very important issue. I am sympathetic to an employer who says, "Look, I have reached out, I have done everything I can in my community to find an American worker. I've done this and that, and I cannot find people who want to do that work."

Is that true in some businesses? I think it is. What we must demand is that the employer make a thorough search. What I am not sympathetic to is employers who do not reach out in any serious way.

What you're talking about now is an effort to try to monitor what the employment situation is. A couple of years ago, I believe it was Exxon Mobil that said they could not find American welders. I don't believe it. I think in some instances, the complaints of the corporate world may well be true. In many instances, they're not, because they're not aggressive in reaching out to workers, or paying the wages they demand. Again, if there's such a crisis, why haven't wages gone up?

One counterargument to that view which I've heard is that, while high-skilled wages haven't risen that much in absolute terms, this is in a context where the average American worker, as you're well aware, is seeing wages stagnate, if not fall. So in relative terms, wages for these workers are going up.

Again, if there is this great crisis which I am hearing about, that the American economy absolutely depends on having more high-tech workers, then the law of supply and demand is that when you need something, you pay for it, right? Didn't you learn that in elementary school?

What matters is that there's a variety of reasons that the middle class in this country is disappearing. Real wages of millions of workers have gone down. For corporations to say, "Here's what's going on in other areas," doesn't answer the question. If you want high-skilled workers, you need to wage raises. But if you want cheap labor, you bring in workers from abroad.

I know in committee your colleague Senator Leahy (D-Vt.) was concerned about making sure Vermont's border with Canada was still readily crossable. Are you happy with the way the bill turned out there?

Where I am now — I'm an hour away from the Canadian border. At Burlington Airport, 25 to 50 percent of the cars are from Quebec. We have a very strong relationship with Canada. Many people in Vermont come from a French Canadian background, there's lot of commerce between them and the state, and we don't want to see impediments to that. We want strong security, we understand that, but we do not want impediments to commerce. We've made progress on that.

What do you make of the exclusion of visa eligibility for binational LGBT couples?

That concerns me as well. I would have preferred to see that.

The best sentences we read today

Brad Plumer — Fri, 24 May 2013 23:02:25 GMT

-- "A multimillionaire president nominated a billionaire who raised hundreds of thousands of dollars for his campaigns, and he sent her to be confirmed by the millionaires' club that is the U.S. Senate."

-- "Whatever Obama's preferences are, he has killed exponentially more people than he has detained and prosecuted."

-- "I started ordering Long Island Iced Teas because, secretly, I've always believed it to be a more interesting drink than people credit."

-- "Hearing a foreign language is like seeing a postcard from some other land, even when you are actually in that other land."

-- "While contestants take their seats onstage, an emcee recites rules. Competitors have 20 seconds to eat as many chilies as they can. Peppers must be chewed at least three times, to ensure the release of the pain-causing ingredient; the highest concentration of capsaicin is in the lining of the pepper—its placenta—and the seeds."

-- "If we are cursed to forget much of what we read, there are still charms in the moments of reading a particular book in a particular place." (I'm not sure that sentence does it justice, but this essay on reading and forgetting is really great.)

These 31 charts will destroy your faith in humanity

Brad Plumer — Fri, 24 May 2013 19:31:35 GMT

Earlier this week, Rob Wile of Business Insider posted his graph-heavy opus: "31 Charts That Will Restore Your Faith In Humanity."

Naturally, we here at Wonkblog were all eager to see the results. But we'd quibble a bit with Wile's interpretations of the data. His charts all struck us as horrible news. So we're re-analyzing them here with the proper, gloom-heavy spin:

1) Inter-state wars are on the rise since 2002. Zoom in on that pink line:

2) Dictatorships still exist:

Systemic Peace

3) We haven't eradicated human slavery:

4) People around the world are becoming just as lazy as the French:

5) Look at all the frivolous crap we're spending money on:

6) Pretty much everyone in the United States can now read Fifty Shades of Grey :

7) More 77-year-olds are dying than ever before:

8) We vanquished infectious disease only to find more horrible ways to die:

9) We're making progress on cancer treatments, but ugly charts with blue backgrounds remain a depressing fact of modern life:

10) There were 31,672 deaths from guns in the United States in 2010:

Pew

11) We're still shooting each other all the time:

Pew

12) A fifth of the world lived in absolute poverty in 2000:

13) Again with the charts with the blue background. Stop it:

14) The nation's supply of cool kids who smoke is reaching a perilous low:

15) Annoying babies are everywhere:

16) If these trends continue indefinitely, we'll soon be spending 100 percent of GDP on malaria research:

The Economist

17) This chart has so many squiggly lines you have to wonder if it's hiding something:

18) We're wasting tons of water on showers:

19) Rising fluoridation of the U.S. water supply is turning us all into Communists:

20) Electrification rates have stagnated since the 1960s:

21) Some of us are still using wood for energy. Wood!

22) Pittsburgh is reverting to 1900-era conditions:

23) The number of nerds keeps growing:

24) Lady nerds, even:

25) People have more opportunities to get bored than ever before:

26) It's getting cheaper and cheaper to generate toxic e-waste:

FCC

27) Robots are going to kill us all any day now:

28) More and more people are encountering the hell of modern air travel:

29) This chart doesn't include fatalities from flying cars because — oh right — those still don't exist:

30) Again, no flying cars. We were promised flying cars. And jetpacks:

31) BONUS CHART: People actually have to work more hours than they did back in 1895 just to afford a simple sterling silver teaspoon:

Don't believe the optimists. Everything is terrible.

Everything you know about employers and Obamacare is wrong

Ezra Klein — Fri, 24 May 2013 19:28:15 GMT

Health Reform Watch, Sarah Kliff's regular look at how the Affordable Care Act is changing the American health-care system, is being written by Ezra Klein today. Sarah, unfortunately, is doing some firsthand reporting on America's dental system. You can reach Sarah with questions, comments and suggestions here. Check back every Monday, Wednesday and Friday afternoon for the latest edition, and read previous columns here.

For all the speculating in Washington about how the Affordable Care Act will work — much of it, I admit, from me — there's been too little attention given to the best evidence we have on the subject: How the extremely similar reforms in Massachusetts have worked.

Take employers. There's real concern that companies will see the Affordable Care Act as an opportunity to drop health insurance for their employees and let taxpayers pick up the tab. For those with more than 50 full-time workers, that'll mean paying a $2,000 to $3,000 penalty for each one, but that's a whole lot cheaper than paying for health insurance.

The Massachusetts reforms, if anything, were even friendlier to this sort of dumping. The penalty for employers was a paltry $295 per worker. Compared to the average cost of an employer-provided health plan in the Northeast — $17,099, according to the Kaiser Family Foundation's 2012 Employer Health Benefits Survey — that's a pittance. It seemed almost irrational for employers to keep offering coverage.

"The benefits we were giving guys who left employer-sponsored insurance were way more generous than what the federal plan gives them," says MIT's Jonathan Gruber, a health economist who helped design the Massachusetts reforms. "And we didn't have much of an employer penalty. I predicted employers would drop coverage."

But they didn't. To Gruber — and everyone else's — surprise, employers expanded coverage. "In the seven years since Massachusetts enacted its law," says a new report from PricewaterhouseCoopers, "the number of people covered by insurance through the workplace increased by about 1 percentage point, running counter to the rest of the nation, which saw employer-based insurance decline by 5.7 percentage points."

The report argues that people simply misunderstand why employers offer health-care benefits. They're not doing it as a favor to employees. And they're not doing it because anyone is making them. After all, prior to the Massachusetts reforms, employers could stop covering their employees without penalty. That's true now in every other state in the nation, too. And yet 61 percent of firms offer health-care coverage. If anything, the Massachusetts and national reforms are making it pricier, not cheaper, for them to drop insurance.

Employers offer health insurance because employees demand it. If you're an employer who doesn't offer insurance and your competitors do, you'll lose out on the most talented workers. An employer who stopped offering health benefits would see his best employees immediately start looking for other jobs. That was true before the Massachusetts health reforms. And it turned out to be even truer after them.

PricewaterhouseCoopers found that Massachusetts's individual mandate had two unexpected effects. First, it led to a lot of employees signing up for employer-based coverage they'd previously rejected. "About a quarter of the uninsured are offered employer-sponsored insurance and don't take it," Gruber says. "If the mandate will affect anyone, it will affect those guys."

Second, it led some workers to march into their boss's office and ask for insurance. The study notes that "the percentage of small employers offering coverage in Massachusetts rose from 45 percent to 59 percent between 2005 2011," even though insurance premiums actually rose for small employers.

The Massachusetts experience might not prove an apt guide to the national experience. Though the Massachusetts reforms are architecturally similar to the Affordable Care Act, they didn't have to contend with a political party working relentlessly to undermine their implementation. Moreover, Massachusetts is a relatively rich and liberal state that already had a fairly high rate of health insurance.

That said, there are a couple other reasons to expect that employers won't be eager to drop coverage. First, because employer-provided health benefits are not taxed, employers can pay their workers more by paying them partly in health-care benefits. Let's say an employer decides to stop offering health benefits but, in a bid to keep employees happy, promises to give them the cash value of their coverage. The employer would have to spend more on the wages than it spends on the benefits, as the wages are taxed. For the record, I think this is a very stupid way to construct our tax code, but that's how it works.

Second, the fraction of employers actually affected by the health law's mandate is very small. "You've got 5.7 million firms in the U.S.," says Wharton's Mark Duggan, who served as the top health economist at White House's Council of Economic Advisers from 2009 to 2010. "Only 210,000 have more than 50 employees. So 96 percent of firms aren't affected. Then if you look among those firms with 50 or more employees, something on the order of 95 percent offer health insurance. So it's basically 10,000 or so employers who have more than 50 employees and don't offer coverage." Those companies probably employ around one percent of American workers.

Which is all to say that, for most companies, the Affordable Care Act won't bring much change at all, and so there's little reason to expect their behavior will change, either. And if it does change, it might not change in the direction we expect. "What happened in Massachusetts is not what I predicted," Gruber says. "But it happened."

KLEIN NOTES: Top health policy reads from around the Web

No sticker shock here — just affordable insurance premiums. "Predictions of an Obamacare apocalypse seem a little less credible today, thanks to California. On Thursday, officials in that state offered the first detailed glimpse of what consumers buying health benefits on their own can expect to pay next year. And from the looks of things, these consumers will be getting a pretty good deal." Jon Cohn in the New Republic.

How to vaccinate an aging society. "From 2000 to 2025, the over-60 demographic segment will double from 600 million to almost 1.2 billion. By 2050, it will nearly double again, surpassing two billion and accounting for an incredible 22% of the total global population. A society this 'old' has never before existed, and it is a social, ethical, and economic imperative to keep older adults healthy and engaged. It is timely for the global public health community to re-align its thinking, policies and activities to this new demographic reality." Michael Hodin, Javier Garau, and Alexandre Kalachec at Health Affairs.

The secret history of Max Baucus's "Train Wreck" quote. "What would cause the "train wreck"? Insufficient awareness of how the law worked. Not the law itself. Neither at that hearing nor in the month since has the (always pretty mush-mushed) Baucus said the law itself would be a disaster if implemented. But that's how Republicans used the quote." Dave Weigel in Slate.

Two ways immigration reform could succeed and three ways it could fail

Dylan Matthews — Fri, 24 May 2013 18:04:21 GMT

Earlier this week, the Senate immigration bill passed the Judiciary Committee easily, by a 13-5 vote, with three Republican supporters. And odds are looking good on the Senate floor. If Democrats stay unified in favor of the bill (a big if), and if those three Republicans and the two members of the Gang of Eight who are not on the committee back it on the floor, that's 60 votes in favor, enough to break a filibuster. Supporters are hoping to have more like 70 yes votes, a surprising possibility.

But even if the bill passes the Senate, it has a long way to go before it might hit President Obama's desk. The reform bill the Senate took up in 2006 passed with 62 votes, only to go nowhere in the House. So, how is the Gang of Eight deal going to pass? And what could sink it? Here are two plausible routes to success and three ways the bill could fall short.

Ways to pass

Gang of Eight Two: Lower House Boogaloo

"I actually don't think the House is going to take up the Senate bill," Marshall Fitz, director of immigration policy at the Center for American Progress and a major player in the 2006 and 2007 efforts, says. "There's no way." That seems to be the consensus of observers who worked on that fight, not to mention House leadership, which issued a statement rejecting the possibility of simply passing the Senate bill. If something gets to the president, the House is going to have to pass its own bill first.

Perhaps the House's most natural option would be to pass a bill put together by its own bipartisan Gang of Eight. Reps. Xavier Becerra (D-Calif.), John Carter (R-Tex.), Mario Diaz-Balart (R-Fla.), Luis Gutierrez (D-Ill.), Sam Johnson (R-Tex), Raul Labrador (R-Idaho), Zoe Lofgren (D-Calif.), and John Yarmuth (D-Ky.) reached a deal on a bill for comprehensive reform. The measure includes a path to citizenship after 15 years (the Senate bill's path takes 13 years). The bill leaves out the issue of guest workers entirely, and takes a hard line on immigrant eligibility for Obamacare (the Senate bill allows newly legalized immigrants with provisional status onto exchanges but bars them from subsidies).

That group is hoping to have legislation by June. If that bill passes the House, it and the Senate bill would go to conference committee, where differences between the two would have to be worked out before it goes to a final vote in both Houses. Clarissa Mart nez-De-Castro, director for civic engagement and immigration at the National Council of La Raza, thinks this path could work. "There have been statements from [House Speaker John] Boehner that they think that a bipartisan proposal in the House is a way to go, and they want to see the Group of Eight continue to make progress," she says. " It's possible to see how the bipartisan bill could get there."

Small bill, big conference

The other way to do it would be for the House to pass a more limited bill, including less measures that have less GOP opposition than those included in either chamber's Gang of Eight's bills. Rep. Bob Goodlatte (R-Va.), the chair of the House Judiciary Committee who opposes a path to citizenship, wants to pass two bills expanding agricultural guest worker programs and requiring employers to use E-Verify, an electronic verification system for determining workers' legal status.

Fitz thinks that's the likeliest way for the bill to get to conference committee. "If I was in Vegas, this is what I'd be betting my money on," he says. "I don't have a lot, so I wouldn't be losing all that much They'll do high skilled and E-Verify and border security, and they'll do agriculture, and they may even try to do DREAM. That would be a stretch, but they'll do those pieces, and they'll be able to pass all of those with strong Republican support, and that'll be the package they send into a conference. What will come out is a conference report with a legalization component, and that component will be enough to get most of the Republicans to vote against it."

That's where this plan gets tricky. For that legalization-inclusive conference report to get past the House, Boehner (R-Ohio) and the rest of the leadership will have to violate the Hastert rule, which requires that any bill going to the floor have the support of a "majority of the majority" — that is, a majority of House Republicans. To pass a bill with almost all Democrats and a minority of Republicans in favor, Boehner would have to break that rule. But that's easier than trying to pass a legalization bill twice, and breaking the Hastert rule twice in the process. "I don't see how they have a vote on the House floor for legalization that gets a majority of the majority," Fitz says. "And if they're not going to do that, then why would they want to force that vote twice?"

Andrea LaRue, a partner at NVG who served as an aide to former Senate majority leader Tom Daschle and represented the United Farm Workers in the 2006-07 debate, thinks it's too early for that kind of talk. "I just think that's premature, I really do," she says. "I think a lot of people think the Hastert rule may need to be put to the side, but I think we have to consider all the options that Boehner has, and what momentum there is in the House. Success breeds success."

She also argues that this isn't necessarily in total tension with the House Gang of Eight path. "Whether their product is actually formally moved through the legislative process or becomes the yardstick, either way it's going to influence the ultimate conference process," she says. Fitz agrees, saying components of the House bill that get sent to conference committee "may be drawn from their bill."

Ways to fail

Pulling the triggers

The one change to the bill that observers agree could kill it is anything that strengthens the "triggers" it cites, tying legalization to progress on border security and employer verification. As its summary explains clearly, the bill bars the legalization component from taking effect until "the Secretary of Homeland Security submits a written certification to the President and the Congress, based on analysis by and in consultation with the Comptroller General, that each of the following measures has been achieved:

the Comprehensive Southern Border Security Strategy has been submitted to Congress and is substantially deployed and substantially operational;
the Southern Border Fencing Strategy has been submitted to Congress, implemented, and is substantially completed;
the Secretary has implemented a mandatory employment verification system to be used by all employers to prevent unauthorized workers from obtaining employment in the United States; and
the Secretary is using an electronic exit system at air and sea ports of entry that operates by collecting machine-readable visa or passport information from air and vessel carriers.

But perhaps some skeptics pass amendments strengthening the triggers so that, say, the secretary of Homeland Security doesn't have to certify the above measures, but the responsibility instead passes to House and Senate committees, or the comptroller general or some other party . Or perhaps a hard numerical threshold, like a 90 percent capture rate at the border, is added.

All of these possibilities trouble advocates. "We're pretty concerned that any hardening of the triggers, trying to connect the triggers to specific benchmarks like the 90 percent or 100 percent effectiveness rate or whatever," Fitz says, "if that becomes tied to the legalization, that will be a bridge too far." He thinks supporters of reform will be able to beat such a move, but it's a concern.

"There will be things that make this roadmap to citizenship harder which we have to be very careful about," Mart nez-De-Castro says. "They seem to tinker with something very small, but this path is long and arduous as it is."

LaRue agrees that triggers will be a concern, but she says they'll mainly be brought up by people already opposed to the bill. "When the word is just being used to say citizenship is a mirage, I think that's pretty easy to poke a hole in. If there weren't any triggers, if the systems in the bill were weak, I'd feel differently about this," she says. "But I think if the word trigger is going to become synonymous with no, the backlash will be really big."

The three B's

The three other issues that could pose problems for the bill are summed up well by what Fitz calls "the three Bs": border security, benefits and biometrics. "There's obviously going to be amendments to try to increase security at the border," Mart nez-De-Castro says. Fitz expects amendments calling for more border fencing, double-layered fences and so forth. While some compromises are possible, the bill is already very aggressive on the issue. "We don't think that they have any more room to give on border stuff because of how much has been done and that most of what they want to talk about doing now, and the resources they want to throw at the border, really are not a serious effort to strengthen border security but a political effort from people offering it to block the bill," he says.

As the disputes in the House Gang of Eight on health benefits show, eligibility for federal benefit programs could be an issue. An amendment to prevent newly legalized immigrants from receiving the Earned Income Tax Credit failed in committee, but Sen. Chuck Schumer (Ill.), a leading Democrat in the Senate Gang of Eight, has suggested he's open to that change. "[Sens. Jeff] Sessions and [Orrin] Hatch we'll see on the benefits stuff," Fitz predicts. Hatch (R-Utah), who backed the bill in committee but hasn't committed to supporting it on the floor, will likely offer amendments barring newly legalized immigrants from collecting Social Security for work done when in the country illegally and restricting the ability of HHS to provide welfare benefits to immigrants.

And then there's biometrics. Republicans in the Senate, notably Sessions, have promoted a biometric entry/exit system at U.S. airports. "I do see the visa exit system question resurfacing," Fitz says. During markup, "Sessions was red in the face and incensed about some DHS report on biometrics that's something he's going to be coming back to, and there's obviously a lot of support on it from both sides of the aisle."

Democratic defection

"This year, I think every single Democrat is in play," Fitz says, at least in the Senate. And maybe this time is different. But in 2006 and 2007, there were sizable Democratic defections. In 2006, four Democratic Senators voted no. In the first go-around in 2007, 13 defected, and the second attempt saw 15 bolt.

Of the 2006 Democratic "no" votes, only one is still in office: Sen. Debbie Stabenow (Mich.). She also voted no both times in 2007. The next three most likely "no"s are Sens. Jay Rockefeller (W.Va.), who didn't vote in 2006 but opposed both attempts in 2007, and Claire McCaskill (Mo.) and Jon Tester (Mont.), who weren't in the Senate in 2006 but voted no both times in 2007.

There are six other Democratic, or Democratic-caucusing, senators still in office who opposed at least one of the 2007 bills: Sens. Max Baucus (Mont.), Barbara Boxer (Calif.), Sherrod Brown (Ohio), Tom Harkin (Iowa), Mary Landrieu (D-LA), Mark Pryor (Ariz.), along with the independent Bernie Sanders (Vt.).

Some of these senators opposed the bills from the left, arguing that the guest worker provisions would undermine low-income Americans' employment opportunities. That camp includes Boxer, Brown, Harkin, and Sanders. They're all likely "yes" votes this time around, with Brown, Harkin and Boxer signaling support already.

But others seemed skeptical of the entire idea of a legalization bill. Baucus, Landrieu, McCaskill, Pryor, Rockefeller and Tester all voted for an amendment in 2007 that would have stripped any legalization component out of the bill. Some of them appear to be on board this time around. Despite Rockefeller saying the 2007 bill "allows 12 million people who are here illegally to jump to the front of the line," sources close to the senator tell The Post that he supports reform efforts this time around. Landrieu's office passed along this statement, suggesting she's open to the bill:

There's broad understanding now that we must address immigration reform for the economic strength of our country. I hope we can move forward on reform that includes smart border security measures; provides a strenuous, but fair path forward for undocumented immigrants currently living in the U.S; and addresses the needs of our industries, particularly agriculture, hospitality, and high-tech which have specific needs.

As we seek to provide visas to highly-skilled workers and entrepreneurs from around the world to spur economic growth in the U.S., I am also focused on providing a 'visa to the middle class' for our domestic workforce that is in great need of greater access to STEM education and other training to enhance their competitiveness. I am confident we will have time for thorough and vigorous debate on this important legislation.

Finally, as the Chair of the Homeland Security Appropriations Subcommittee, I will be particularly involved in how these enhancements are paid for. There is already great pressure on our budget and I'm glad to see that this bill brings in additional revenues through penalties and fees to help pay for necessary reforms.

McCaskill is also expressing more openness to reform. Her office issued the following statement on her behalf:

I'm continuing to look at the bill to make sure it will penalize law-breakers and stress holding employers accountable for violating the law by knowingly hiring undocumented immigrants, but I believe the bill does work to address these priorities. I think this bill is a good compromise—with great bipartisan support, and I think between John McCain, Marco Rubio and the other Republicans that are working on this bill, we're going to end up with a bipartisan bill that most Senators are comfortable supporting.

Others aren't turning around quite as fast. A spokesperson for Baucus says, "Senator Baucus is reviewing the bill and talking to Montanans to get their feedback." A spokesperson for Sen. Joe Manchin (W.Va.), a conservative Democrat who was not in office during the 2006-07 battles, says he's undecided, and that border security is his main concern.

As it stands, it looks like even previously skeptical senators are coming around. But a unified caucus is far from a sure thing.

We're delaying Wonkblog book club a week. Sorry!

Wonkblog Slackers — Fri, 24 May 2013 17:57:10 GMT

Some of the Wonkbloggers haven't, uh, quite finished their reading. So we're delaying until next Friday our discussion of Ira Katznelson's "Fear Itself: The New Deal and the Origins of Our Time." But we haven't forgotten about this, we swear!

Here's the amended schedule:

Friday, May 31. Part 2, "Southern Cage." pp. 131-224.

Friday, June 7. Part 3, "Emergency." pp. 225-364.

Friday, June 21. Part 4, "Democracy's Price" and Epilogue. 365-486.

And feel free to harass the writers around here to do their homework!

Josh Barro didn't leave conservatism. Conservatism left Josh Barro.

Ezra Klein — Fri, 24 May 2013 17:26:11 GMT

I know Josh Barro. Josh Barro is a friend of mine. Josh Barro does not climb trees and throw coconuts at you, as the Atlantic's graphic alleges. But he really, really, really likes talking about state pension systems. That part is true. And, these days, he doesn't come across as much of a Republican. That part is also true.

But is that his fault? Or the Republican Party's?

Over the last few years, the Republican Party has been retreating from policy ground they once held and salting the earth after them. This has coincided with, and perhaps even been driven by, the Democratic Party pushing into policy positions they once rejected as overly conservative. The result is that the range of policies you can hold and still be a Republican is much narrower than it was in, say, 2005. That's left a lot of once-Republican wonks without an obvious political home.

Health care is the most obvious example. The basic architecture of the Affordable Care Act is, as has been pointed out ad nauseum, a Republican idea. It was first proposed in a 1993 plan that had 20 Senate Republicans as co-sponsors. It was passed and implemented by Gov. Mitt Romney in Massachusetts. It was supported by Newt Gingrich. Through much of this time, Democrats viewed it with skepticism: They wanted something closer to single payer, and it seemed borderline offensive to insist that Americans buy products from for-profit insurers. But key Democrats dropped those objections in order to actually pass health reform.

Republicans could've pocketed the Democratic concession as a win. They could've celebrated the triumph of their ideas and the Democratic abandonment of single payer. They could've used the Affordable Care Act as a vehicle to push some of their other health policy initiatives, like medical malpractice reform, capping the employer tax exclusion, and spreading health savings accounts.

Instead, they abandoned every idea even vaguely related to the Affordable Care Act. In fact, they pretty much abandoned all ideas related to universal coverage, or even big expansions of coverage. They decided some of them were downright unconstitutional. Today, House Majority Leader Eric Cantor can't even get high-risk pools past his members. The health policy space on the right is radically narrower than it was a decade ago. If you're a Republican who hasn't been willing to change your positions on those issues, you're a heretic today.

Health care isn't the only example. Remember this?

There was a time when Republicans were leading the way on ideas to fight climate change. The first cap-and-trade bill to reduce carbon emissions was introduced into the Senate by Sen. John McCain. The McCain/Palin ticket included a cap-and-trade plank. Some Republicans, like Tennessee Sen. Bob Corker, supported a carbon tax.

There's no serious support in today's Republican Party for doing anything about climate change. Even Utah Gov. Jon Huntsman, who made headlines during the election for saying he believed in global warming, didn't want to do anything about it. Today's Republican Party doesn't want a cap-and-trade plan or a carbon tax or even money for renewable energy research. Whereas a decade ago a policy wonk who worried about the future of the earth could comfortably fit in the GOP, today, anyone who wants to do anything serious about climate change has been written out of the party.

It doesn't end with health care and climate change. Back in 2008, President George W. Bush pushed for and signed the Economic Stimulus Act of 2008. In 2009, there were a variety of Republican stimulus plans. Back then, Republicans could believe in deficit-financed stimulus during an economic downturn. Today, that would get you driven out of the party as a Keynesian spy.

And while it's not exactly a new position, the GOP's intense commitment to the anti-tax pledge is a real problem for policy wonks with even a passing understanding of what's driving deficits. In my experience, most Republican policy types will tell you, behind closed doors, that the anti-tax dogma is strategic and the Republican Party is just smartly negotiating for the most possible entitlement cuts. They know the taxes are needed eventually. This requires basically believing every elected official in the Republican Party is a liar.

As the Republican Party's range of acceptable policies has narrowed, the Democratic Party's range has expanded. Stimulus based entirely on tax cuts? It's not their preference, but they'll take it. Market-based approaches to environmental regulation? Sure, why not. Capping the employer-based exclusion for health care? Of course. Hundreds of billions of dollars in entitlement cuts to help reduce the deficit? Uh-huh.

If you imagine a policy spectrum that that goes from 1-10 in which 1 is the most liberal policy, 10 is the most conservative policy, and 5 is that middle zone that used to hold both moderate Democrats and Republicans, the basic shape of American politics today is that the Obama administration can and will get Democrats to agree to anything ranging from 1 to 7.5 and Republicans will reject anything that's not an 8, 9, or 10. The result, as I've written before, is that President Obama's record makes him look like a moderate Republicans from the late-90s.

A lot could be written on why the Republican Party has been so quick to abandon these positions. I'll leave that for another time. The point here is that it's happened, and it's left a lot of policy wonks who could've easily fit into the Republican Party a decade ago in a tough position.

The choices for Republican policy wonks are stark. You can take the approach of Reihan Salam and Ross Douthat and Ramesh Ponnuru and evince a continual disappointment that the Republican Party doesn't embrace more new ideas and be constantly on the lookout for glimmers of hope that never quite seem to herald the coming of dawn. Or you can take the approach of Barro, or David Frum, and hammer the Republican Party for ceding so much important ground. Either way, the underlying problem is that today's Republican Party, from a policy perspective, occupies a much narrower space than even 2005 s Republican Party. The change has been quick and severe.

This, by the way, is why I'm down on the terms "liberal" and "conservative" or "left" and "right" in today's Washington. Too often, the terms are used as shorthand for "person who mostly agrees with Democrats" and "person who mostly agrees with Republicans." If Gingrich or Romney in 2005 could be counted as a liberal today, something has gone wrong in the way we're labeling the political spectrum.

These 12 technologies will drive our economic future

Neil Irwin — Fri, 24 May 2013 16:04:00 GMT

Most of the writing you see about the economy speaks to narrow questions: What will growth be this year? When will the unemployment rate get back to normal? And so on. But the things that will determine standards of living a generation from now have almost nothing to do with this month's jobs report or the Federal Reserve's latest policy meeting. Those determinants, instead, depend on companies' innovations — in particular, whether those innovations turn out to have major economic consequences.

Researchers at the McKinsey Global Institute, the in-house think tank of the giant consulting firm, have a new study in which they have taken their best shot at predicting exactly that. They have scoured the range of potential disruptive technologies and done their best to estimate how transformative each might be for the U.S. economy. Their results are hardly definitive — we can't know what the future holds — but represent a serious effort by some smart people to quantify what appear to be some major forces shaping our technological future. And the results have some important implications for how we think about innovation.

First, the researchers, led by James Manyika, narrowed their focus to technologies that are already advancing rapidly (no pure pie-in-the-sky stuff), have broad potential impact (not something that would just affect one or two industries) and could have significant economic impact (the total numbers are large). Not making the cut were technologies that are unlikely to be available between now and 2025 (fusion power, for example) and those that are coming to fruition but are niche products (like private space flight).

Here's the list the McKinsey researchers came up with, along with their (very rough) estimates of how much economic potential they hold. They are defining that economic impact broadly to include benefits that won't show up in economic statistics like GDP (consumer surplus is the value people derive from an innovation that they do not pay for).

As the chart shows, the McKinsey folks believe that the most economically significant technologies over the next decade-plus will be those already well underway in their development -- the mobile Internet, largely in place in the advanced world and rapidly growing in emerging markets; the automation of knowledge work, things such as computerized voices that can handle many customer service calls; the "Internet of things," such as embedding sensors in physical objects to monitor the flow of products through a factory; and cloud computing. Each of these areas of innovation, in the McKinsey telling, will be worth north of $1 trillion to the world economy by 2025, even on the low side of their range. (Find detailed definitions of each category here, and click on the full study to read the researchers' methodology and rationale for these estimates).

But what is most interesting about their analysis is that some of the sexiest areas of innovation, including some we have minor obsessions with here in this blog, are seen as less likely to have a massive economic impact between now and 2025. Driverless cars, 3D printing, renewable energy -- each of these is going to have a much smaller economic footprint, the report says.

This disconnect, between how much hype and attention a disruptive technology receives and how much it will affect the real world in dollar terms, can be seen in the chart below. The upper left quadrant of this chart encompasses innovations that receive outsized discussion in the media relative to their expected economic importance.

Indeed, maybe the single biggest takeaway from the study is this: The things that will have the greatest impact on the economy in the medium term aren't the ones that seem to most excite the imagination and public interest. Instead, the potentially powerful innovations are mostly those that have been evolving for many years in new ways.

That's what Federal Reserve chairman Ben Bernanke was talking about in a commencement speech last weekend about long-term economic potential, when he said: "Some would say that we are still in the early days of the IT revolution. After all, computing speeds and memory have increased many times over in the 30-plus years since the first personal computers came on the market, and fields like biotechnology are also advancing rapidly. Moreover, even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface."

Things like cloud computing and mobile Internet connectivity are not brand-new inventions; in various forms they have existed for years. But the innovations that will flow from them --and resulting economic benefits -- are only beginning. Think of it this way: Car services have existed for the better part of a century. Cellphones have been around for decades now. We've had global positioning systems for cars for about a decade. But it is only in the last couple of years that the entrepreneurs at Uber figured out how to combine those technologies into a quite good car service.

In any field -- manufacturing, agriculture, you name it -- businesses are doing the same work trying to mix all these technologies in ways that create big payoffs. The real economic benefits of innovation, at least over the near term, come not from the flashy, mind-blowing ideas, but from clever combinations of technologies that are just maturing with those that have been around for ages.

U.S. infrastructure spending has plummeted since 2008

Brad Plumer — Fri, 24 May 2013 15:39:09 GMT

Not surprisingly, the collapse of a bridge along Interstate 5 in Washington state yesterday has revived the long-standing debate over whether Congress should spend more to repair the nation's aging roads and bridges.

It's worth being very clear upfront that the I-5 bridge in question wasn't considered "structurally deficient" in any way — the bridge collapse is being blamed on a truck bumping an overhead girder. All we do know is that the bridge was sort of old. (Fortunately, no one died or was seriously injured.)

Here's the AP: "The bridge was built in 1955 and has a sufficiency rating of 57.4 out of 100. That is well below the statewide average rating of 80 but 759 bridges in the state have a lower sufficiency score." The bridge was also classified as "functionally obsolete," but that doesn't mean it was unsafe, just that it was built according to earlier standards.

That said, infrastructure spending is in the news again, so here are a few ways to think about the topic. Joe Wiesenthal created this chart to show that U.S. public construction spending as a percentage of GDP has dropped to its lowest point in 20 years, after a big uptick before the recession:

Now, that's a chart of all public construction spending, from highways to water projects to public hospitals to schools. So what if we just look at highways and roads? We get this chart:

There's still been a big drop-off in recent years, although that also came after a big build-up in the late 2000s. (Sadly, the data series doesn't extend back before 2002, so it's tough to see what this looks like historically.)

How did this happen? States and local governments are the biggest part of the story here. They've historically provided the vast majority of spending for roads, highways and bridges, and they've been pulling back on spending since 2008 as a result of the economic downturn and requirements to balance their budgets. California's transportation spending declined by 31 percent from 2007 to 2009, for instance. Texas's fell by 8 percent.

At the same time, Congress hasn't filled in the gap. There was a one-time $46 billion infusion of transportation spending in the stimulus bill. But that wasn't enough to offset the drop at the state and local level. Meanwhile, the most recent highway bill out of Congress kept federal spending at current levels rather than increasing it.

The big question is whether Congress should be spending more — and if so, how much? We've seen various reports arguing that America's infrastructure is in dire need of an upgrade. The American Society of Civil Engineers gave the nation's bridges a C+ in its 2013 report card, and said that full repairs would cost $20 billion per year over the next decade, a 60 percent boost in spending. These estimates don't always take a full account of costs and benefits, but the I-5 collapse will no doubt give these groups more ammo.

Another consideration, meanwhile, is that Congress can borrow money for remarkably low rates right now. And experts say it's typically cheaper to fix roads and bridges early on rather than wait until they get truly decrepit. That suggests now could be an apt time to invest in repairs, rather than putting them off until later.

Scandals usually lead to reform. Maybe not this time.

Ezra Klein — Fri, 24 May 2013 15:07:15 GMT

Put aside the politics, and the question of who-knew-what-when. There are two policy problems highlighted by the controversies at the Internal Revenue Service and the Department of Justice. The first is the growth of 501(c)(4) groups into vehicles for anonymous and unlimited political spending. The second is the Obama administration's overzealous prosecution of leaks.

Unfortunately, for those who would like to see these policy problems resolved, the wrong party is angry about them and the wrong party is complacent.

Republicans support unlimited, anonymous political spending by 501(c)(4) groups. Likewise, they support vigorous prosecution of national security leaks. But trumping such policy beliefs, for the moment, is an overriding political imperative: Republicans want a scandal to take down the White House, or at least to damage Obama's standing.

Democrats, by contrast, loathe the growth of partisan 501(c)(4) groups. They're also more skeptical of claims that national security concerns override the news media's right to report. But rather than use the IRS scandal as an opportunity to reform the rules for political groups, or to propose legislation to protect journalists from the Justice Department's overreach, there's a real chance Democrats might rally around the White House and try to move past these scandals as quickly as possible.

As a result, we have a party eager to exploit scandal and one that has plausible (if dormant) solutions to the underlying problems. They're just not the same party.

Bad Decisions

Take 501(c)(4)s. There's little evidence that the IRS agents in Cincinnati saw themselves as foot soldiers in a political war. Rather, it looks like the war — in the form of groups seeking tax-exempt status for their political activities under Section 501(c)(4) of the tax code — came to their sleepy backwater. Overwhelmed, the staff began making bad decisions and applying ill-conceived filters that politicized the process.

The Supreme Court's Citizens United decision enabled 501(c)(4) groups to be commandeered for unlimited political spending. Republican consultant Karl Rove, unions and other big players tested IRS rules restricting how politically engaged 501(c)(4) groups could be. They found they were able to use the groups almost exclusively for political purposes without inviting IRS scrutiny. Soon, the IRS's Determinations Unit in Cincinnati, which processes 501(c)(4) applications, was inundated.

The emergence of so many 501(c)(4)s devoted to politics led to news reports suggesting — correctly — that the IRS wasn't enforcing the rules restricting the groups' political engagement. According to the IRS inspector general's report, the news stories prompted agents in the Determinations Unit to begin filtering 501(c)(4) applications for political agendas. Those filters tilted — unfairly but not necessarily malevolently — against conservative groups using politically tinged words such as "tea party."

For that, heads should roll at the Cincinnati office. The consequences for politicizing the agency's reviews should be severe, even if the politicization turns out to have been inadvertent. Incompetence that leads to a national scandal and a severe drop of trust in your institution should be a firing offense.

The IRS is no longer targeting groups, but the underlying problem remains; as Sen. Max Baucus of Montana put it, "a Mack truck is being driven through the 501(c)(4) loophole." Political groups are still streaming into a tax-exempt designation that was never intended for them, leaving the IRS to make subjective judgments about which groups are too political to warrant that status and which are not.

Disclose Act

Although the dangers are obvious, the odds of reform are slim. Republicans like the status quo. In 2012, Democratic Sen. Sheldon Whitehouse of Rhode Island sponsored the Disclose Act, which would have required such groups to disclose donors who had contributed more than $10,000 and to list their top five donors in their campaign ads. By eliminating anonymity for donors, the legislation would have made these groups less attractive vehicles for partisan politics. The Disclose Act was killed by Republican filibuster.

Republicans want to prosecute the IRS scandal, but they've offered no remedies for the murky campaign finance rules at the root of it. Why? Because they're not actually upset about the underlying problem; those rules helped Republicans raise hundreds of millions in 2012.

A similar sticking point emerges in the Justice Department's aggressive pursuit of national security leaks. Before the outcry over the Obama administration's leak investigations, Republicans complained that the administration wasn't pursuing national security leaks vigorously enough. Last June, Republican Sens. John McCain, Saxby Chambliss, John Cornyn and Roger Wicker demanded the appointment of a special prosecutor to investigate leaks because, they said, Attorney General Eric Holder wasn't aggressive enough. "Any other administration, in my memory, Democrat or Republican, would have been absolutely apoplectic looking for the culprits, trying to find out who were the people that actually committed these criminal leaks," Wicker said.

Republicans have been consistent on this point. During the George W. Bush administration, congressional Democrats (and a handful of Republicans) proposed shield laws to protect journalists from leak investigations. The Bush administration fought back. Attorney General Michael Mukasey and Director of National Intelligence Michael McConnell wrote that such proposals were "both unwise and unnecessary." The Bush Justice Department even produced a Web site (now defunct) to campaign against a shield. (A shield law died in the Senate, another victim of a Republican-led filibuster.)

Shield Law

The Obama White House has supported a limited shield law that includes a large national security exemption. Such a measure probably would have done little in this case. Perhaps the law could be strengthened if Republicans wanted to make an issue of it, but there's little chance of that. And the partisan incentives here are unlikely to make congressional Democrats double down. Already, a Pew Research Center poll found that self-identified Democrats who are following the issue think the Obama administration acted appropriately. It is difficult to believe they would hold that position if a Republican was president.

None of this detracts from the gravity of the charge that the Obama administration is overzealous in pursuing leaks. It simply makes it less likely that the party seeking to profit politically from that situation will also offer a corrective policy.

Republicans are right to be outraged by scandals, but it would help if they were also outraged by the policy failures that produced the scandals. Democrats, meanwhile, have previously proposed policies that might have curtailed the IRS fiasco and the Justice Department's overreach. But they will be tempted to bury such proposals in their haste to get beyond a patch of bad news. In Washington, scandals are often the strongest impetus for reform. Not this time.

Obama's six-point plan to wind down the 'war on terror'

Timothy B. Lee — Fri, 24 May 2013 14:33:21 GMT

Like all presidential speeches, President Obama's Thursday address at the National Defense University was suffused with soaring rhetoric. But it was also a substantive and analytical speech, laying out the president's conceptual framework for counterterrorism operations and announcing a number of new policy initiatives. Here, stripped of rhetorical flourishes, is what Obama has planned for his second term on the national security front:

1. Afghanistan: Obama reiterated his support for ending the war in Afghanistan by 2014. In the next year and a half, Obama said, his administration will "complete our transition to Afghan responsibility for security. Our troops will come home. Our combat mission will come to an end. And we will work with the Afghan government to train security forces."

2. Drone strikes: Obama defended drone strikes, which he said cause fewer risks and less collateral damage than conventional military operations. "Our operation in Pakistan against Osama bin Laden cannot be the norm," he said, because such operations put American lives at risk and damage relations with the host country.

Obama said that, outside Afghanistan, "we only target al Qaeda and its associated forces. America does not take strikes when we have the ability to capture individual terrorists." Drone strikes are "bound by consultations with partners and respect for state sovereignty." And the administration will only strike when there is a "near-certainty that no civilians will be killed or injured."

Obama announced that he was declassifying information about the deaths of four American citizens—one a target, the others collateral damage—in drone strikes. Obama also said he has been "briefing all strikes outside of Iraq and Afghanistan to the appropriate committees of Congress." And Obama said he "looks forward to actively engaging Congress" to discuss options for increasing oversight of drone strikes.

3. Foreign engagement: Obama defended foreign aid, which "amounts to less than one percent of the budget" and is "fundamental to our national security." He also stressed the need to "have diplomats serving in dangerous places" to build strong relationships with foreign nations. "I am implementing every recommendation of the Accountability Review Board, which found unacceptable failures in Benghazi," Obama said. "I have called on Congress to fully fund these efforts to bolster security, harden facilities, improve intelligence and facilitate a quicker response time from our military if a crisis emerges."

4. Leak prosecutions: Obama argued that "we must enforce consequences for those who break the law and breach their commitment to protect classified information." However, he said, "journalists should not be at legal risk for doing their jobs." Obama called on Congress to pass a media shield law to protect the right of journalists to keep their sources confidential. Obama said he has asked Attorney General Eric Holder to "review existing Department of Justice guidelines governing investigations that involve reporters, and will convene a group of media organizations to hear their concerns as part of that review." Holder is due to report back to Obama by July 12.

5. AUMF: Congress passed an Authorization for the Use of Military Force shortly after the attacks of Sept. 11, 2001. And presidents have cited it as the authority for overseas military actions ever since. Obama argued that the need for the AUMF was drawing to a close. "I intend to engage Congress about the existing Authorization to Use Military Force, or AUMF, to determine how we can continue to fight terrorists without keeping America on a perpetual war-time footing," Obama said.

6. Guantanamo prisoners: During his 2008 campaign, Obama pledged to close the prisoner camp at Guantanmo Bay, Cuba, originally opened under President George W. Bush. But due in part to congressional opposition, that goal wasn't achieved. The issue became more urgent a few weeks ago when Guantanamo prisoners started a hunger strike to protest their indefinite detention.

"Today, I once again call on Congress to lift the restrictions on detainee transfers from GTMO," Obama said. "I have asked the Department of Defense to designate a site in the United States where we can hold military commissions. I am appointing a new, senior envoy at the State Department and Defense Department whose sole responsibility will be to achieve the transfer of detainees to third countries."

Obama is "lifting the moratorium on detainee transfers to Yemen, so we can review them on a case-by-case basis." Those who have been cleared for release will be released "to the greatest extent possible." Others will be tried in American courts. "And we will insist that judicial review be available for every detainee."

Mr. Money Mustache answers his doubters

Kelly Johnson — Fri, 24 May 2013 14:22:07 GMT

Five ways to protect journalists and their anonymous sources

Timothy B. Lee — Fri, 24 May 2013 14:17:13 GMT

In a speech Thursday at National Defense University, President Obama discussed the Justice Department's prosecution of leakers, emphasizing the need to "strike the right balance between our security and our open society." Many observers believe that current laws do too little to protect the rights of journalists to gather information about national security — and the right of government employees to disclose classified information if they believe doing so is in the public interest. Recent developments have underscored the legal dangers that whistleblowers and the journalists they confide in currently face.

But what can we do about it? Here are five ways to shore up the freedom of journalists to gather and report news that the government might want to keep secret.

Pass a media shield law: A media shield law would protect journalists from being forced to identify confidential sources to law enforcement. It would also protect the confidentiality of journalists' communications by restricting the government's ability to obtain records from telecommunications providers.

Two shield laws are being considered in Congress. The House version is sponsored by Rep Ted Poe (R-Tex.). Similar legislation passed the House in 2007 and 2009. The White House has signaled its support for an alternative sponsored by Sen. Chuck Schumer. It was considered by the Senate in 2009 but never passed the full Senate.

According to the American Civil Liberties Union's Gabe Rottman, the most important difference between them is how broad an exception they provide for national security. The House version has a relatively narrow exception that only applies when there's an imminent threat of a terrorist attack.

In contrast, Rottman says, "the administration in 2009 requested a really broad national security exception" for the Senate version. In Rottman's view, Schumer's bill is "better than nothing" because it would at least require some judicial oversight. But he warns that the exception is so broad that it wouldn't have prevented the government from obtaining the AP's calling records.

Reform the Espionage Act: A strong media shield law would protect the confidentiality of reporters' communications, but it wouldn't stop the government from prosecuting leakers directly if they could be identified through other means. And aggressive prosecution of leakers could cause (or may already be causing) government sources to clam up.

If Congress wanted to reverse that chilling effect, it could revise the Espionage Act, the 1917 law the administration has used to pursue leakers. "The Espionage Act is meant to deal with espionage," not people who leak information to the government, Rottman says. In principle, Rottman supports reforming the act to make clear that it is not to be used against journalists or whistleblowers.

But "trying to revise the Espionage Act is almost like opening a Pandora's box," he says. While some members of Congress are sympathetic to press freedom, others are extremely hostile toward leakers. So once an overhaul of the Espionage Act is on the table, Congress could change it in ways that makes it more, rather than less, hostile to press freedom.

Fix the overclassification problem: Another approach would be to get the government to be more judicious about declaring information to be secret in the first place. Among recent leak cases, Rotman says, have been "a bunch that are clear cases of whistleblowing."

Rottman favors stricter rules for what can be classified, as well as "presumptive declassification in certain instances." He also argued that it should be easier for defendants in leak cases to argue in court that the information they are charged with leaking shouldn't have been classified in the first place.

But Rottman conceded that dealing with overclassification is a "hard problem." Governments are greatly tempted to suppress embarrassing information by claiming that its release will harm national security. And because the information is secret, it's hard for third parties to monitor classification decisions and discover cases where the classification power has been abused.

Promote cooperation between the government and journalists: Bruce Brown, executive director of the Reporters Committee for Freedom of the Press, advocates greater cooperation between the government and the press. In his view, if the executive branch were more willing to share details of their security concerns with journalists, the latter would be willing to accommodate U.S. concerns.

Take the recent case in which the government obtained the phone records of more than 100 Associated Press reporters as part of a leak investigation. Brown suggests that "the government may not have gone far enough in its efforts to engage with the AP in fully disclosing what was at stake" in that case, he said — specifically that the "terrorist" in the story was actually a U.S. agent.

Brown believes that if the government were more forthcoming about its security concerns, news organizations would be more accommodating about holding information that might damage national security. That might eliminate the perceived need to prosecute leakers after the fact.

Build better technologies for anonymous leaking: A final idea sidesteps the policy arena altogether: Build technologies that allow untraceable leaking. The government can't convict a leaker if it can't identify him.

Wikileaks pioneered this style of journalism. It had a sophisticated document-submission system that made it difficult for anyone, even Wikileaks personnel, to identify who had submitted materials. The anonymizing network Tor is another example. It allows Internet users to surf the Web in a way that makes them impossible to identify.

Last week, the New Yorker introduced Strongbox, a sophisticated system for anonymous news submissions. If a source never tells a journalist his identity, then there's no way the government can force the journalist to hand over the information.

Wonkbook: Some very good news for Obamacare

Ezra Klein, Evan Soltas — Fri, 24 May 2013 12:33:28 GMT

Welcome to Wonkbook, Ezra Klein and Evan Soltas's morning policy news primer. To subscribe by e-mail, click here. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog.

Obamacare got some very good news on Thursday.

In 2009, the Congressional Budget Office predicted that a medium-level "silver" plan -- which covers 70 percent of a beneficiary's expected health costs -- on the California health exchange would cost $5,200 annually. More recently, a report from the consulting firm Milliman predicted it would carry a $450 monthly premium. Yesterday, we got the real numbers. And they're lower than anyone thought.

As always, Sarah Kliff has the details. The California exchange will have 13 insurance options, and the heavy competition appears to be driving down prices. The most affordable silver-level plan is charging $276-a-month. The second-most affordable plan is charging $294. And all this is before subsidies. Someone making twice the poverty line, say, will only pay $104-a-month.

Sparer plans are even cheaper. A young person buying the cheapest "bronze"-level plan will pay $172 -- and that, again, is before any subsidies.

California is a particularly important test for Obamacare. It's not just the largest state in the nation. It's also one of the states most committed to implementing Obamacare effectively. Under Gov. Arnold Schwarzenegger -- remember how that really happened? -- California was the first state to begin building its insurance exchanges. The state's outreach efforts are unparalleled. Its insurance regulators are working hard to bring in good plans and make sure they're playing fair. If California can't make the law work, perhaps no one can. But if California can make the law work, it shows that others can, too.

And perhaps others will. We're beginning to see competition drive down proposed rates in some exchanges around the country. Remember Maryland, where CareFirst grabbed headlines with a shocking 25 percent proposed increase in rates? More plans have streamed in with lower bids. Kaiser Permanente, for instance, is only increasing its rates next year by 4.3 percent -- a modest increase that will make CareFirst's proposal almost impossible to sustain. My guess is when the exchange actually opens in October, CareFirst will have dropped its price substantially. If they don't, then Kaiser and others will grab all the market share.

The way this competition can drive down rates is already evident in Oregon. There, one insurer came in with monthly premium costs in the $169 range, while other insurers asked to charge more than $400. But then, seeing what their competitors were charging, two insurers came back to the state's regulators and asked if they could refile at lower rates. Otherwise, they wouldn't be competitive in the exchange. The Obama administration was ecstatic to see this: It's exactly what they're hoping will happen across the country.

Of course, California and Oregon are managing Obamacare particularly well. But the state-by-state nature of the Affordable Care Act creates really unusual political dynamics around how the law is perceived in its first year.

Imagine it's the end of 2014. California now boasts a working, near-universal health-care system. Nothing perfect, but clearly a a success after the first year of implementation. Texas, meanwhile, is a bit of a mess. They didn't allow the Medicaid expansion so the state's poorest residents got nothing. They didn't help with the exchanges, or the outreach, so there aren't many choices, and premiums aren't as low one might hope.

Viewed in isolation, Texas's problems would be deadly for the law. But viewed next to California, they might mainly be a problem for the political class in Texas, which has failed to implement a clearly workable law.

Wonkbook's Number of the Day: 115,000. That's how many federal employees will be furloughed today due to sequestration. Three major agencies -- the IRS, the EPA, and HUD -- are closing their doors.

Wonkbook's Quotation of the Day: "Don't ask me how, because if I knew, I would certainly tell you, but the House is going to — the House is going to work its will," said House Speaker John Boehner on immigration reform legislation.

Wonkblog's Graphs of the Day: EPI's interactive unemployment maps.

Wonkbook's Top 5 Stories: 1) is immigration reform fragile?; 2) Lerner out; 3) lobbyists and the fin-reg cookie jar; 4) 'nuclear option' rising; and 5) sequester shuts down three big agencies.

1) Top story: House of [Green] Cards

Does immigration reform have a chance in the House? "With the Senate gearing up for an early June floor debate on immigration legislation, the House's bipartisan group has struggled to wrap up its legislation, mostly because the two parties trying to figure out how to ensure that undocumented immigrants don't take advantage of government health care subsidies Sources familiar with the meeting say progress was made on the health care disagreement. Language will be inserted into the bill that explicitly says that undocumented immigrants can receive subsidized emergency care." Jake Sherman and Seung Min Kim in Politico.

Guess who really, really loves immigration reform? Conservative economists. "In a letter being released Thursday, more than 110 economists urged Hill leadership to enact comprehensive immigration reform, portraying it as a necessity to improve the country's fiscal outlook The effort was spearheaded by the American Action Forum. Signers include the organization's president, former Congressional Budget Office director Douglas Holtz-Eakin; Glenn Hubbard, chairman of the White House Council of Economic Advisers under George W. Bush; former Reagan economist Arthur Laffer; and Edward Prescott, who won the Nobel Prize in economics in 2004." Seung Min Kim in Politico.

A bump in the road to reform. "The eight House lawmakers were forced to backtrack from the "agreement in principle" reached last Thursday after House Democratic leaders objected to a provision dealing with health-care coverage for illegal immigrants living in the U.S., according to aides from both parties. The group continued to meet this week, and its members remained hopeful they would be able to strike a deal that passes muster among all involved. But the week's turmoil angered some members of the bipartisan group and leaves the House further behind the Senate in crafting legislation." Kristina Peterson in The Wall Street Journal.

@markknoller: Boehner says the House will have a "solid" Immigration Bill it can take to conference with the Senate.

Republicans are sending a warning there. "GOP leaders said in a statement that the House "will not simply take up and accept the bill that is emerging in the Senate if it passes. The House will work its will and produce its own legislation." The speaker said he hoped to have a House bill by Aug. 1, before the six-week summer recess, and the conference would begin in the fall, said the person, who spoke on condition of anonymity to disclose private discussions." David Nakamura in The Washington Post.

@ryanavent: So all hail the deficit cutting, growth supporting, public sector shrinking, stock-price boosting, immigrant deporting

Boehner lacks confidence. "House Speaker John Boehner (R-Ohio) promised Thursday that the House would pass its own version of immigration reform. Just don't ask him how "Don't ask me how, because if I knew, I would certainly tell you, but the House is going to — the House is going to work its will," he said. "And I'm confident that we'll have a solid work product that we can go to conference with the Senate."" Rachel Weiner in The Washington Post.

Music recommendations interlude: Repose en paix, Georges. Georges Moustaki, "Le temps de vivre."

Top op-eds

SOLTAS: Abolish corporate taxation. "[Apple's] recommendation [for a streamlined tax] might seem radical. It isn't. Apple might be a visionary in consumer electronics and software, but not when it comes to taxes. The best way to reform corporate taxation isn't to cut the rate but abolish it. A wide consensus of economists and tax experts finds it to be bad policy. Nobody, so far as I could find, thought that corporate taxes were a smart or efficient way for governments to raise revenue. Economic theory provides no strong argument for special taxation of corporate income, at whatever rate." Evan Soltas in Bloomberg.

REINHARDT: How we compensate doctors. "[T]he median compensation of doctors varies considerably among medical specialties in any given year. There is also a wide dispersion of compensation figures about the median for any given specialty, as is shown in Table 1. These data came from the previously cited American Medical Group Association survey." Uwe E. Reinhardt in The New York Times.

KRUGMAN: Japan, economic model. "In a sense, the really remarkable thing about "Abenomics" — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism." Paul Krugman in The New York Times.

ROGOFF: Europe's lost Keynesians. "There is no magic Keynesian bullet for the eurozone's woes. But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising. Commentators are consumed by politics, flailing away at any available target, while the "anti-austerity" masses apparently believe that there are easy cyclical solutions to tough structural problems. The eurozone's difficulties, I have long argued, stem from European financial and monetary integration having gotten too far ahead of actual political, fiscal, and banking union." Kenneth Rogoff in Project Syndicate.

ROBINSON: A mission on climate change. "President Obama should spend his remaining years in office making the United States part of the solution to climate change, not part of the problem Obama can direct government agencies, including the military, to use more renewable energy. He can direct the EPA to regulate emissions of methane, an even more powerful greenhouse gas. He can continue to fund research into solar energy, despite criticism from Congress." Eugene Robinson in The Washington Post.

WADHWA: Canada, home of maple syrup and immigrant innovators? "Senators should be aware of a critical fact, as they debate immigration reform: If we don't want foreign-born talent in the United States, other countries are more than happy to take the talent, and the innovation potential that goes with it, off of our hands. "I'm here to send the message that Canada's open for business—we welcome the entrepreneurs that America is turning away" said Canadian Citizenship, Immigration and Multiculturalism Minister Jason Kenney at Stanford Law School this week." Vivek Wadhwa in The Washington Post.

Mother Earth interlude: Our strange oceans.

2) Lerner out

Lerner out. "Lois Lerner, the Internal Revenue Service's director of exempt organizations, has been placed on administrative leave, according to a source in the agency's Cincinnati office Lerner on Thursday afternoon sent an e-mail to employees in the exempt-organizations division she oversees stating, "Due to the events of recent days, I am on administrative leave starting today. An announcement will be made shortly informing you who will be acting while I am on administrative leave. I know all of you will continue to support EO's mission during these difficult times." She concluded, "I thank you for all your hard work and dedication," adding, "The work you do is important."" Eliana Johnson in National Review Online.

Here's her replacement. "Ken Corbin, who was deputy director of a larger unit of the IRS, will be taking Lerner's place, according to internal communications "Ken is a proven leader during challenging times. He has strong management experience inside the IRS handling a wide range of processing issues and compliance topics as well as taxpayer service areas. Combined with his track record of leading large work groups, these skills make him an ideal choice to help lead the Exempt Organizations area through this difficult period."" Josh Hicks in The Washington Post.

FAQ: What you need to know about Obama's war on leakers. Timothy B. Lee in The Washington Post.

Issa may call Lerner back. "House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) is inclined to recall Internal Revenue Service official Lois G. Lerner to testify before his panel, but will await recommendations from committee lawyers, the nonpartisan House Counsel, other outside legal experts and committee Democrats before making a final decision, he said Thursday" Juliet Eilperin and Ed O'Keefe in The Washington Post.

Well, there goes the whole day interlude: All of the best Tumblrs.

3) Lobbyists and the fin-reg cookie jar

Lobbyists dig into fin-reg. "Bank lobbyists are not leaving it to lawmakers to draft legislation that softens financial regulations. Instead, the lobbyists are helping to write it themselves. One bill that sailed through the House Financial Services Committee this month — over the objections of the Treasury Department — was essentially Citigroup's, according to e-mails reviewed by The New York Times. The bill would exempt broad swathes of trades from new regulation." Eric Lipton and Ben Protess in The New York Times.

New home sales hit record. "The Commerce Department reported Thursday that the median price of a new home hit $271,600 in April, while the average new-home price reached $330,800, both record highs. The price gain for new homes comes amid a spring selling season—typically the most crucial time of year for builders, as families rush to buy new homes before the next school year—that has plodded along at a steady pace. Thursday's new-home sales report showed that builders were on pace in April to sell 454,000 homes this year, up 2.3% from March and up 29% compared to the same month last year." Robbie Whelan in The Wall Street Journal.

Jobless claims fall to 340,000. "Initial jobless claims, a proxy for layoffs, decreased by 23,000 to a seasonally adjusted 340,000 in the week ended May 18, the Labor Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast 345,000 new applications for last week. With the drop, a broader measure of layoffs returned to near five-year lows. The four-week moving average of claims, which smooths week-to-week volatility, decreased by 500 to 339,500 from the previous week's revised 340,000." Jonathan House and Josh Mitchell in The Wall Street Journal.

In bid for clarity, Fed brings opacity. "The Federal Reserve is having some trouble explaining itself That straightforward message, however, has been muddled by a number of other signals sent by the Fed and Mr. Bernanke himself in recent weeks: A policy statement in early May suggested the Fed's next move could be either up or down; minutes released Wednesday of the Fed's most recent policy meeting ended May 1 said some might want to reduce the program as early as June; Mr. Bernanke's prepared congressional testimony Wednesday also implied he was reluctant to move at all." Jon Hilsenrath in The Wall Street Journal.

Yikes, the Japanese stock market cratered overnight. "The Japanese market tanked in epic fashion in Thursday's trading session, with the Nikkei index falling 7.3 percent. The yen appreciated 1.7 percent against the dollar. Here's the one-month stock chart of the Nikkei Here's the thing, though. There wasn't really any news overnight that would justify a swing of that magnitude. Analysts are blaming the drop on some weak Chinese economic data and hints from Fed Chairman Ben Bernanke on Wednesday that someday, eventually, the Fed will taper its own monetary easing. There is no way on earth, though, that those kinds of tidbits would justify the kind of moves that were evident in the Japanese market." Neil Irwin in The Washington Post.

Obama picks candidates for SEC. "Kara M. Stein, a legal counsel and senior policy adviser to Sen. Jack Reed (D-R.I.), would fill a Democratic slot left open by commissioner Elisse B. Walter. Walter can serve until the end of the year or until a replacement is confirmed. Michael S. Piwowar, a chief economist for the Senate banking committee since 2009, would replace commissioner Troy A. Paredes, whose term ends in June. Piwowar spent a four years at the SEC earlier in his career, as an economist and visiting scholar." Dina ElBoghdady in The Washington Post.

The corrosive effect of Apple's tax avoidance. "The shameful thing about Apple Inc.'s ability to structure its business to avoid United States taxes was not that it did it. In fact, as Apple executives tried to point out at the Senate hearing at which their tax strategies were detailed, they could have chosen to pay much less in American taxes than they did. The shameful thing is that we have a tax system that seems to allow multinational companies to choose what they want to pay." Floyd Norris in The New York Times.

But is there a way to do it better? "[A] number of states have come up with a simple way to calculate what firms owe them in taxes: If a company sells its product or services in a given state, it pays a tax proportionate to the sales in that state Here's how it would work. Let's say a company earns 20 percent of its sales in California. The company would pay 20 percent of its worldwide sales to California at the state's corporate tax rate. No need to worry about where the firm has offices or where its employees work — and no chance of the firms shifting their income to other states using elaborate, hard-to-trace methods." Jia Lynn Yang in The Washington Post.

There is no great stagnation interlude: Every parking garage in America needs these lights. Paging Tyler Cowen

4) Seriously, the 'nuclear option' threat is rising

Srinivasan confirmed. "The Senate unanimously confirmed Sri Srinivasan on Thursday to serve on the U.S. Court of Appeals for the District of Columbia Circuit, one of the nation's most influential courts. The 97 to zero vote in favor of Srinivasan, the principal deputy solicitor general, marks the first time since 2006 that the Senate has confirmed a nominee to the D.C. Circuit. President Obama has been hoping to shift the conservative tilt of the court, which is poised to rule on several key elements of his second-term agenda in the months ahead. Srinivasan is the first federal appeals court judge of South Asian descent, and he is a likely front-runner for a Supreme Court nomination if a vacancy arises during Obama's term." Juliet Eilperin in The Washington Post.

But the DEFCON level for the 'nuclear option' keeps rising. "Democratic leaders say the Gang of 14 agreement on judicial nominees that, for years, kept the "nuclear option" from being used to change Senate rules is dead. Senate Democrats are still angry over the Republican blockade of Caitlin Halligan, whom President Obama nominated in September of 2010 to serve on the D.C. Circuit Court of Appeals. She withdrew her nomination in March." Alexander Bolton in The Hill.

McConnell: 51 votes will 'blow the Senate up.' "The Republican leader blasted Senate Majority Leader Harry Reid (D-Nev.) for considering the "nuclear option" — changing Senate rules through a majority vote — to prevent a filibuster of Obama's judicial and Cabinet nominees. "He's been trying to get 51 votes on his side to blow the Senate up," McConnell said. "What I fear is that the majority leader is working toward breaking his word to the Senate and the American people and blowing up this institution. He wants to have no debate — 'Do what I say and do it now.'"" Ramsey Cox in The Hill.

And no, Sen. Grassley, this is not 'packing the court.' "Sen. Chuck Grassley (R-Iowa) used a hearing on Srinivasan's nomination to accuse the Obama administration of trying to "pack" the D.C. Circuit. And then repeated the accusation another five times. The only problem, as his colleague Sheldon Whitehouse (D-R.I.) gently pointed out, was that the term does not mean what Grassley thought it meant." Dylan Matthews in The Washington Post.

Obama nominates former campaign aide to head OPM. "President Obama has nominated Katherine Archuleta, a top official in his 2012 campaign, to head the Office of Personnel Management. Archuleta, the second Hispanic nominee for a political appointment during Obama's second term, served as national political director on his reelection team and helped organize the blockbuster Democratic National Convention in Denver during his 2008 run As head of OPM, Archuleta would be tasked with implementing the agency's Pathways program, an initiative that then-Director John Berry launched last summer to speed up the federal hiring process and attract top talent to the public sector." Josh Hicks in The Washington Post.

Irreligious interlude: Where are the atheists?

5) Sequester shuts down major 3 agencies

3 big federal agencies will be closed today due to sequestration. "Three of the largest federal agencies will close to the public on Friday, the first time since the government shutdowns of the 1990s that large corners of the government have ceased operations on a weekday. The mass furlough of 115,000 employees at the Internal Revenue Service, Environmental Protection Agency, Department of Housing and Urban Development and the small Office of Management and Budget — 5 percent of the federal workforce — is happening because of the budget cuts known as sequestration." Lisa Rein in The Washington Post.

Senate GOP fights over budgeting. "Senate Republicans are warring over the budget, creating rifts between the old and new guards, the mainstream and the tea party and Sens. John McCain and Ted Cruz. Republicans typically are a well-oiled message machine, keeping their dirty laundry behind closed doors as they hammer Democrats on issues ranging from taxes to health care With Cruz as the ringleader, a handful of Senate conservatives are refusing to consent to budget negotiations with the House, instead engaging in open combat with more senior Republicans like McCain who are perplexed at their hardball tactics. The fight has given Cruz a new platform as he tries to claim the mantle of conservative provocateur, but it has left the Texas Republican increasingly alienated from many of his colleagues." Manu Raju and Ginger Gibson in Politico.

Reading material interlude: The best sentences Wonkblog read today.

Wonkblog Roundup

Read: Obama's speech on the war on terror.

How community colleges are falling behind. Dylan Matthews.

Poverty is growing twice as fast in the suburbs as in the cities. Brad Plumer.

7 thrilling facts on carbon taxation from the CBO. Brad Plumer.

Meet Farzad Mostashari, the bow-tie bureaucrat convincing doctors to go digital. Sarah Kliff.

Yikes! The Japanese stock market cratered overnight. Neil Irwin.

California Obamacare premiums: No 'rate shock' here. Sarah Kliff.

Everything you need to know about Obama's war on leakers in one FAQ. Timothy B. Lee.

Let's get rid of corporate taxes altogether. Ezra Klein.

Have U.S. states figured out a way to avoid a global race to the bottom on taxes? Jia Lynn Yang.

Sorry, Chuck Grassley. Obama isn't 'packing the court.' Dylan Matthews.

Jon Gruber on one reason to keep taxing corporate income. Ezra Klein.

Et Cetera

The story of the guy who has worked 61 years for the Bureau of Labor Statistics. Joe Davidson in The Washington Post.

Hatch-Rubio bill would revise health-savings account rules. Elise Viebeck in The Hill.

And more on California's announcements on health care. Jonathan Cohn in The New Republic.

Generic ballot tilts towards Democrats, poll says. Rachel Weiner in The Washington Post.

Boy Scouts open membership to gay youths but keep ban on adult leaders. Michelle Boorstein in The Washington Post.

Obama, Christie to tour Jersey shore to monitor post-Sandy recovery. Philip Rucker in The Washington Post.

House approves student-lending bill. Nick Anderson in The Washington Post.

Got tips, additions, or comments? E-mail me.

Wonkbook is produced with help from Michelle Williams.

The best sentences we read today

Brad Plumer — Thu, 23 May 2013 23:02:18 GMT

-- "Former French President Valery Giscard d'Estaing has revealed he was once jumped on by a panda when he dared himself to enter its cage."

-- "You'd think that a fourteenth-century allegorical poem on sin and redemption, written in a medieval Italian vernacular and in accord with the Scholastic theology of that period, would have been turned over, long ago, to the scholars in the back carrels. But no."

-- "Peeper's diagnosis meant that, over her lifetime, she would essentially develop a second skeleton."

-- "How wonderfully paradoxical: What helps us break down the final mysteries about prime numbers may be new mathematical ideas that structure the concept of structurelessness itself."

-- "Put this all together and it means the IRS needs tens of thousands of people who are (a) smart, (b) willing to do really tedious work, (c) for moderate wages, (d) while working for a soul-crushing bureaucracy, and (e) being loathed by all right-thinking people. Does this sound to you like a recipe for disaster? Me too."

Jon Gruber on one reason to keep taxing corporate income

Ezra Klein — Thu, 23 May 2013 19:34:32 GMT

MIT economist Jon Gruber writes in:

Nice piece on the corporate tax. But you don't mention one important issue and to my mind the main argument for the corporate tax: if you don't tax corporate income, then you don't tax the earnings until it is released to shareholders. That is akin to the problem with taxing foreign income -- you give an incentive for companies to hoard the money rather than releasing it. I think that is an important issue. I like the idea of getting rid of the corporate tax, but to my mind that is the biggest barrier.

Kevin Roose mounts a defense of the corporate tax here. I actually agree with most everything Roose says. I can imagine a better tax code that doesn't include a corporate tax. But I don't think that tax code is even vaguely within the realm of possibility.

Sorry, Chuck Grassley. Obama isn't 'packing the court.'

Dylan Matthews — Thu, 23 May 2013 19:08:23 GMT

D.C. Circuit Court of Appeals nominee Sri Srinivasan won unanimous approval Thursday by the Senate. But before he did, his nomination led to one of the more amusing moments on C-SPAN in recent memory.

Sen. Chuck Grassley (R-Iowa) used a hearing on Srinivasan's nomination to accuse the Obama administration of trying to "pack" the D.C. Circuit. And then repeated the accusation another five times.

The only problem, as his colleague Sheldon Whitehouse (D-R.I.) gently pointed out, was that the term does not mean what Grassley thought it meant:

Seven thrilling facts about carbon taxes from the CBO

Brad Plumer — Thu, 23 May 2013 18:40:16 GMT

Sure, Congress isn't exactly on the verge of passing a carbon tax. But the Congressional Budget Office (CBO) keeps releasing detailed analyses of the proposal anyway — just in case it comes up as, say, part of a broader budget deal.

A carbon tax, you may recall, would impose a fee on oil, gas and coal. The idea is that this would help tackle global warming by raising the price of emitting carbon-dioxide. People and businesses would look for more efficient ways to use fossil fuels — or seek out clean alternatives.

But the details are always thorny: How big should the tax be? Should the revenue be rebated to the public? How do you avoid putting a heavy burden on the most vulnerable?

The newest analysis from the CBO delves into all of those questions and more. A few highlights:

1) A carbon tax that starts at $20 per ton would raise $1.2 trillion in the next decade. More precisely: "A price of $20 per metric ton on greenhouse gas emissions in the United States in 2012 and raising that price at a nominal rate of 5.6 percent per year would yield a total of $1.2 trillion in revenues over the 2012 2021 period."

2) That same carbon tax would hike gasoline prices by about 20 cents a gallon: Since the United States is so reliant on fossil fuels, any carbon tax would raise the price of stuff: "The burden imposed by a tax of $20 per ton on CO2 emissions would amount to 1.8 percent of before-tax income for households in the lowest quintile and about 0.7 percent of before-tax income for households in the highest quintile."

That carbon tax would also hike U.S. electricity bills by 16 percent on average, though coal-heavy states would see bigger hikes: "Households in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, West Virginia and Wisconsin would see the biggest rise in electricity prices (27 percent), and households in California would see the smallest rise (7 percent)."

3) A carbon tax would have some ripple effects through the economy. This is laid out in Figure 1:

A carbon tax, the CBO notes, "would be likely to reduce both real wages and profits on investment to some extent, but the relative changes in wages and profits would be uncertain."

4) The biggest question, by far, is what to do with the revenue . Rebate it? Cut other taxes? If carbon-tax revenue is used to cut other taxes — say, payroll taxes or even corporate taxes — that could mitigate the economic impacts considerably, depending on how the tax was designed.

Policymakers could also rebate a portion of the revenues to soften the blow for the poor — just 30 percent of the revenue would suffice here. But the CBO seems to think this would be less economically efficient: "Lawmakers could face a trade-off between using carbon tax revenues to minimize the tax's adverse effects on the economy as a whole and using them to minimize the tax's impact on disproportionately affected groups."

Meanwhile, some energy experts have argued that some revenue should be used to fund new clean-energy infrastructure — so that people have alternatives to, say, gasoline. Either way, this is easily the most contentious carbon-tax question.

5) A carbon tax starting at $20 per ton would cut U.S. emissions an extra 8 percent by 2021. This would get the United States in range of its Copenhagen pledge to cut emissions 17 percent by 2020:

Note, however, that the CBO is modeling a $21 per ton carbon tax. Some economists have argued that the "social cost of carbon" — that is, the damage done by greenhouse gases — is much, much higher. They argue that a carbon tax should be anywhere from 2 to 12 times as big. That would, in theory, drive down emissions even further.

Also note that the carbon taxes being discussed here would only affect emissions from fossil fuels, which would leave out emissions from a host of other sources: agriculture, landfills, deforestation, land-use changes, etc.

6) The more value you place on future generations, the bigger the carbon tax should be. Let's check out Table 1:

The "discount rate" is a number that helps translate future values into present-day terms. It's a way to answer the question: "How much should we spend to cut emissions today to avoid climate-change damage in the future?" (See David Roberts for a longer, lucid discussion.)

We could spend all day arguing about what the discount rate should be. It's part ethics, part economics. But what the CBO is showing here is that the choice of discount rate has a big impact on how a carbon tax should be structured. A lower discount rate of, say, 2.5 percent — which puts a higher value on future generations — implies that the carbon tax should start off at a higher level.

Some economists, like Frank Ackerman of Tufts, have made the case for an even lower discount rate, like 1 percent, which would translate into an even higher initial carbon tax.

7) The CBO wants us to think of carbon tax as a hedge against the possibility of future catastrophe. The report notes that it's hard to say, precisely, how much damage global warming will cause in the future. If we knew that exact number, it'd be a lot easier to figure out how big a tax to place on fossil fuels in order to "pay for" all that damage.

So the CBO looks at things this way: "Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society's willingness to pay to reduce the risk of potentially very expensive damage in the future."

There's a whole lot more in the report — such as how the tax should be administered, or how to deal with industries that might move overseas. But those seven points are the big ones.

Further reading:

--How would a carbon tax work? Let's ask British Columbia.

--The U.S. currently has some of the lowest energy taxes in the developed world.

California Obamacare premiums: No 'rate shock' here

Sarah Kliff — Thu, 23 May 2013 18:31:26 GMT

Health insurers will charge 25-year-olds between $142 and $190 per month for a bare-bones health plan in Los Angeles.

A 40-year-old in San Francisco who wants a top-of-the-line plan would receive a bill between $451 and $525. Downgrade to a less robust option, and premiums fall as low as $221.

These premium rates, released Thursday, help answer one of the biggest questions about Obamacare: How much health insurance will cost. They do so in California, the state with 7.1 million uninsured residents, more than any other place in the country.

Multiple projections expected premiums to be relatively high.

The Congressional Budget Office predicted back in November 2009 that a medium-cost plan on the health exchange known as a "silver plan" would have an annual premium of $5,200. A separate report from actuarial firm Milliman projected that, in California, the average silver plan would have a $450 monthly premium.

Now we have California's rates, and they appear to be significantly less expensive than what forecasters expected.

On average, the most affordable "silver plan" -- which covers 70 percent of the average subscriber's medical costs -- comes with a $276 monthly premium. For the 2.6 million Californians who will receive federal subsidies, the price is a good deal less expensive, the amount noted in green below.

Health premiums will be lower for the youngest Americans. Here's how the costs work out for a 25-year-old purchasing the same health plan.

These premiums really underscore the big role that the tax subsidies play. Available to Americans who earn less than 400 percent of the poverty line ($45,960 for an individual), these federal payments limit an individual's premiums to a specific percent of their income. An individual earning 150 percent of the poverty line, for example, won't be expected to spend more than 4 percent of his or her income on a health plan.

That means that the individual earning $17,235 (150 percent of the poverty line) only ends up paying a fraction of the $230 premium.The federal government picks up the rest of the tab.

For a less robust "bronze" plan, which covers 60 percent of the average beneficiary's costs, the tax credit could actually cover the entire premium for low-income twenty-somethings. That's what you see in the upper-left corner of the chart below, which shows how much it would cost a 21-year-old earning $17,000 to buy the most affordable bronze plan: Nothing.

About 2.6 million Californians are expected to qualify for some level of subsidy support. The amount they receive depends completely on their income level. Still, these credits could end up being a big boon to the Obama administration as it looks to convince low-income Americans to enroll.

READ: President Obama's speech on the future of the war on terror

Ezra Klein — Thu, 23 May 2013 18:19:23 GMT

As prepared for delivery.

It's an honor to return to the National Defense University. Here, at Fort McNair, Americans have served in uniform since 1791 standing guard in the early days of the Republic, and contemplating the future of warfare here in the 21^st century.

For over two centuries, the United States has been bound together by founding documents that defined who we are as Americans, and served as our compass through every type of change. Matters of war and peace are no different. Americans are deeply ambivalent about war, but having fought for our independence, we know that a price must be paid for freedom. From the Civil War, to our struggle against fascism, and through the long, twilight struggle of the Cold War, battlefields have changed, and technology has evolved. But our commitment to Constitutional principles has weathered every war, and every war has come to an end.

With the collapse of the Berlin Wall, a new dawn of democracy took hold abroad, and a decade of peace and prosperity arrived at home. For a moment, it seemed the 21^st century would be a tranquil time. Then, on September 11^th 2001, we were shaken out of complacency. Thousands were taken from us, as clouds of fire, metal and ash descended upon a sun-filled morning. This was a different kind of war. No armies came to our shores, and our military was not the principal target. Instead, a group of terrorists came to kill as many civilians as they could.

And so our nation went to war. We have now been at war for well over a decade. I won't review the full history. What's clear is that we quickly drove al Qaeda out of Afghanistan, but then shifted our focus and began a new war in Iraq. This carried grave consequences for our fight against al Qaeda, our standing in the world, and to this day our interests in a vital region.

Meanwhile, we strengthened our defenses hardening targets, tightening transportation security, and giving law enforcement new tools to prevent terror. Most of these changes were sound. Some caused inconvenience. But some, like expanded surveillance, raised difficult questions about the balance we strike between our interests in security and our values of privacy. And in some cases, I believe we compromised our basic values by using torture to interrogate our enemies, and detaining individuals in a way that ran counter to the rule of law.

After I took office, we stepped up the war against al Qaeda, but also sought to change its course. We relentlessly targeted al Qaeda's leadership. We ended the war in Iraq, and brought nearly 150,000 troops home. We pursued a new strategy in Afghanistan, and increased our training of Afghan forces. We unequivocally banned torture, affirmed our commitment to civilian courts, worked to align our policies with the rule of law, and expanded our consultations with Congress.

Today, Osama bin Laden is dead, and so are most of his top lieutenants. There have been no large-scale attacks on the United States, and our homeland is more secure. Fewer of our troops are in harm's way, and over the next 19 months they will continue to come home. Our alliances are strong, and so is our standing in the world. In sum, we are safer because of our efforts.

Now make no mistake: our nation is still threatened by terrorists. From Benghazi to Boston, we have been tragically reminded of that truth. We must recognize, however, that the threat has shifted and evolved from the one that came to our shores on 9/11. With a decade of experience to draw from, now is the time to ask ourselves hard questions about the nature of today's threats, and how we should confront them.

These questions matter to every American. For over the last decade, our nation has spent well over a trillion dollars on war, exploding our deficits and constraining our ability to nation build here at home. Our service-members and their families have sacrificed far more on our behalf. Nearly 7,000 Americans have made the ultimate sacrifice. Many more have left a part of themselves on the battlefield, or brought the shadows of battle back home. From our use of drones to the detention of terrorist suspects, the decisions we are making will define the type of nation and world that we leave to our children.

So America is at a crossroads. We must define the nature and scope of this struggle, or else it will define us, mindful of James Madison's warning that "No nation could preserve its freedom in the midst of continual warfare." Neither I, nor any President, can promise the total defeat of terror. We will never erase the evil that lies in the hearts of some human beings, nor stamp out every danger to our open society. What we can do what we must do is dismantle networks that pose a direct danger, and make it less likely for new groups to gain a foothold, all while maintaining the freedoms and ideals that we defend. To define that strategy, we must make decisions based not on fear, but hard-earned wisdom. And that begins with understanding the threat we face.

Today, the core of al Qaeda in Afghanistan and Pakistan is on a path to defeat. Their remaining operatives spend more time thinking about their own safety than plotting against us. They did not direct the attacks in Benghazi or Boston. They have not carried out a successful attack on our homeland since 9/11. Instead, what we've seen is the emergence of various al Qaeda affiliates. From Yemen to Iraq, from Somalia to North Africa, the threat today is more diffuse, with Al Qaeda's affiliate in the Arabian Peninsula AQAP the most active in plotting against our homeland. While none of AQAP's efforts approach the scale of 9/11 they have continued to plot acts of terror, like the attempt to blow up an airplane on Christmas Day in 2009.

Unrest in the Arab World has also allowed extremists to gain a foothold in countries like Libya and Syria. Here, too, there are differences from 9/11. In some cases, we confront state-sponsored networks like Hizbollah that engage in acts of terror to achieve political goals. Others are simply collections of local militias or extremists interested in seizing territory. While we are vigilant for signs that these groups may pose a transnational threat, most are focused on operating in the countries and regions where they are based. That means we will face more localized threats like those we saw in Benghazi, or at the BP oil facility in Algeria, in which local operatives in loose affiliation with regional networks launch periodic attacks against Western diplomats, companies, and other soft targets, or resort to kidnapping and other criminal enterprises to fund their operations.

Finally, we face a real threat from radicalized individuals here in the United States. Whether it's a shooter at a Sikh Temple in Wisconsin; a plane flying into a building in Texas; or the extremists who killed 168 people at the Federal Building in Oklahoma City America has confronted many forms of violent extremism in our time. Deranged or alienated individuals often U.S. citizens or legal residents can do enormous damage, particularly when inspired by larger notions of violent jihad. That pull towards extremism appears to have led to the shooting at Fort Hood, and the bombing of the Boston Marathon.

Lethal yet less capable al Qaeda affiliates. Threats to diplomatic facilities and businesses abroad. Homegrown extremists. This is the future of terrorism. We must take these threats seriously, and do all that we can to confront them. But as we shape our response, we have to recognize that the scale of this threat closely resembles the types of attacks we faced before 9/11. In the 1980s, we lost Americans to terrorism at our Embassy in Beirut; at our Marine Barracks in Lebanon; on a cruise ship at sea; at a disco in Berlin; and on Pan Am Flight 103 over Lockerbie. In the 1990s, we lost Americans to terrorism at the World Trade Center; at our military facilities in Saudi Arabia; and at our Embassy in Kenya. These attacks were all deadly, and we learned that left unchecked, these threats can grow. But if dealt with smartly and proportionally, these threats need not rise to the level that we saw on the eve of 9/11.

Moreover, we must recognize that these threats don't arise in a vacuum. Most, though not all, of the terrorism we face is fueled by a common ideology a belief by some extremists that Islam is in conflict with the United States and the West, and that violence against Western targets, including civilians, is justified in pursuit of a larger cause. Of course, this ideology is based on a lie, for the United States is not at war with Islam; and this ideology is rejected by the vast majority of Muslims, who are the most frequent victims of terrorist acts.

Nevertheless, this ideology persists, and in an age in which ideas and images can travel the globe in an instant, our response to terrorism cannot depend on military or law enforcement alone. We need all elements of national power to win a battle of wills and ideas. So let me discuss the components of such a comprehensive counter-terrorism strategy.

First, we must finish the work of defeating al Qaeda and its associated forces.

In Afghanistan, we will complete our transition to Afghan responsibility for security. Our troops will come home. Our combat mission will come to an end. And we will work with the Afghan government to train security forces, and sustain a counter-terrorism force which ensures that al Qaeda can never again establish a safe-haven to launch attacks against us or our allies.

Beyond Afghanistan, we must define our effort not as a boundless 'global war on terror' but rather as a series of persistent, targeted efforts to dismantle specific networks of violent extremists that threaten America. In many cases, this will involve partnerships with other countries. Thousands of Pakistani soldiers have lost their lives fighting extremists. In Yemen, we are supporting security forces that have reclaimed territory from AQAP. In Somalia, we helped a coalition of African nations push al Shabaab out of its strongholds. In Mali, we are providing military aid to a French-led intervention to push back al Qaeda in the Maghreb, and help the people of Mali reclaim their future.

Much of our best counter-terrorism cooperation results in the gathering and sharing of intelligence; the arrest and prosecution of terrorists. That's how a Somali terrorist apprehended off the coast of Yemen is now in prison in New York. That's how we worked with European allies to disrupt plots from Denmark to Germany to the United Kingdom. That's how intelligence collected with Saudi Arabia helped us stop a cargo plane from being blown up over the Atlantic.

But despite our strong preference for the detention and prosecution of terrorists, sometimes this approach is foreclosed. Al Qaeda and its affiliates try to gain a foothold in some of the most distant and unforgiving places on Earth. They take refuge in remote tribal regions. They hide in caves and walled compounds. They train in empty deserts and rugged mountains.

In some of these places such as parts of Somalia and Yemen the state has only the most tenuous reach into the territory. In other cases, the state lacks the capacity or will to take action. It is also not possible for America to simply deploy a team of Special Forces to capture every terrorist. And even when such an approach may be possible, there are places where it would pose profound risks to our troops and local civilians where a terrorist compound cannot be breached without triggering a firefight with surrounding tribal communities that pose no threat to us, or when putting U.S. boots on the ground may trigger a major international crisis.

To put it another way, our operation in Pakistan against Osama bin Laden cannot be the norm. The risks in that case were immense; the likelihood of capture, although our preference, was remote given the certainty of resistance; the fact that we did not find ourselves confronted with civilian casualties, or embroiled in an extended firefight, was a testament to the meticulous planning and professionalism of our Special Forces but also depended on some luck. And even then, the cost to our relationship with Pakistan and the backlash among the Pakistani public over encroachment on their territory was so severe that we are just now beginning to rebuild this important partnership.

It is in this context that the United States has taken lethal, targeted action against al Qaeda and its associated forces, including with remotely piloted aircraft commonly referred to as drones. As was true in previous armed conflicts, this new technology raises profound questions about who is targeted, and why; about civilian casualties, and the risk of creating new enemies; about the legality of such strikes under U.S. and international law; about accountability and morality.

Let me address these questions. To begin with, our actions are effective. Don't take my word for it. In the intelligence gathered at bin Laden's compound, we found that he wrote, "we could lose the reserves to the enemy's air strikes. We cannot fight air strikes with explosives." Other communications from al Qaeda operatives confirm this as well. Dozens of highly skilled al Qaeda commanders, trainers, bomb makers, and operatives have been taken off the battlefield. Plots have been disrupted that would have targeted international aviation, U.S. transit systems, European cities and our troops in Afghanistan. Simply put, these strikes have saved lives.

Moreover, America's actions are legal. We were attacked on 9/11. Within a week, Congress overwhelmingly authorized the use of force. Under domestic law, and international law, the United States is at war with al Qaeda, the Taliban, and their associated forces. We are at war with an organization that right now would kill as many Americans as they could if we did not stop them first. So this is a just war a war waged proportionally, in last resort, and in self-defense.

And yet as our fight enters a new phase, America's legitimate claim of self-defense cannot be the end of the discussion. To say a military tactic is legal, or even effective, is not to say it is wise or moral in every instance. For the same human progress that gives us the technology to strike half a world away also demands the discipline to constrain that power or risk abusing it. That's why, over the last four years, my Administration has worked vigorously to establish a framework that governs our use of force against terrorists insisting upon clear guidelines, oversight and accountability that is now codified in Presidential Policy Guidance that I signed yesterday.

In the Afghan war theater, we must support our troops until the transition is complete at the end of 2014. That means we will continue to take strikes against high value al Qaeda targets, but also against forces that are massing to support attacks on coalition forces. However, by the end of 2014, we will no longer have the same need for force protection, and the progress we have made against core al Qaeda will reduce the need for unmanned strikes.

Beyond the Afghan theater, we only target al Qaeda and its associated forces. Even then, the use of drones is heavily constrained. America does not take strikes when we have the ability to capture individual terrorists -- our preference is always to detain, interrogate, and prosecute them. America cannot take strikes wherever we choose our actions are bound by consultations with partners, and respect for state sovereignty. America does not take strikes to punish individuals we act against terrorists who pose a continuing and imminent threat to the American people, and when there are no other governments capable of effectively addressing the threat. And before any strike is taken, there must be near-certainty that no civilians will be killed or injured the highest standard we can set.

This last point is critical, because much of the criticism about drone strikes at home and abroad understandably centers on reports of civilian casualties. There is a wide gap between U.S. assessments of such casualties, and non-governmental reports. Nevertheless, it is a hard fact that U.S. strikes have resulted in civilian casualties, a risk that exists in all wars. For the families of those civilians, no words or legal construct can justify their loss. For me, and those in my chain of command, these deaths will haunt us as long as we live, just as we are haunted by the civilian casualties that have occurred through conventional fighting in Afghanistan and Iraq.

But as Commander-in-Chief, I must weigh these heartbreaking tragedies against the alternatives. To do nothing in the face of terrorist networks would invite far more civilian casualties not just in our cities at home and facilities abroad, but also in the very places like Sana'a and Kabul and Mogadishu where terrorists seek a foothold. Let us remember that the terrorists we are after target civilians, and the death toll from their acts of terrorism against Muslims dwarfs any estimate of civilian casualties from drone strikes.

Where foreign governments cannot or will not effectively stop terrorism in their territory, the primary alternative to targeted, lethal action is the use of conventional military options. As I've said, even small Special Operations carry enormous risks. Conventional airpower or missiles are far less precise than drones, and likely to cause more civilian casualties and local outrage. And invasions of these territories lead us to be viewed as occupying armies; unleash a torrent of unintended consequences; are difficult to contain; and ultimately empower those who thrive on violent conflict. So it is false to assert that putting boots on the ground is less likely to result in civilian deaths, or to create enemies in the Muslim world. The result would be more U.S. deaths, more Blackhawks down, more confrontations with local populations, and an inevitable mission creep in support of such raids that could easily escalate into new wars.

So yes, the conflict with al Qaeda, like all armed conflict, invites tragedy. But by narrowly targeting our action against those who want to kill us, and not the people they hide among, we are choosing the course of action least likely to result in the loss of innocent life. Indeed, our efforts must also be measured against the history of putting American troops in distant lands among hostile populations. In Vietnam, hundreds of thousands of civilians died in a war where the boundaries of battle were blurred. In Iraq and Afghanistan, despite the courage and discipline of our troops, thousands of civilians have been killed. So neither conventional military action, nor waiting for attacks to occur, offers moral safe-harbor. Neither does a sole reliance on law enforcement in territories that have no functioning police or security services and indeed, have no functioning law.

This is not to say that the risks are not real. Any U.S. military action in foreign lands risks creating more enemies, and impacts public opinion overseas. Our laws constrain the power of the President, even during wartime, and I have taken an oath to defend the Constitution of the United States. The very precision of drones strikes, and the necessary secrecy involved in such actions can end up shielding our government from the public scrutiny that a troop deployment invites. It can also lead a President and his team to view drone strikes as a cure-all for terrorism.

For this reason, I've insisted on strong oversight of all lethal action. After I took office, my Administration began briefing all strikes outside of Iraq and Afghanistan to the appropriate committees of Congress. Let me repeat that not only did Congress authorize the use of force, it is briefed on every strike that America takes. That includes the one instance when we targeted an American citizen: Anwar Awlaki, the chief of external operations for AQAP.

This week, I authorized the declassification of this action, and the deaths of three other Americans in drone strikes, to facilitate transparency and debate on this issue, and to dismiss some of the more outlandish claims. For the record, I do not believe it would be constitutional for the government to target and kill any U.S. citizen with a drone, or a shotgun without due process. Nor should any President deploy armed drones over U.S. soil.

But when a U.S. citizen goes abroad to wage war against America and is actively plotting to kill U.S. citizens; and when neither the United States, nor our partners are in a position to capture him before he carries out a plot his citizenship should no more serve as a shield than a sniper shooting down on an innocent crowd should be protected from a swat team

That's who Anwar Awlaki was he was continuously trying to kill people. He helped oversee the 2010 plot to detonate explosive devices on two U.S. bound cargo planes. He was involved in planning to blow up an airliner in 2009. When Farouk Abdulmutallab the Christmas Day bomber went to Yemen in 2009, Awlaki hosted him, approved his suicide operation, and helped him tape a martyrdom video to be shown after the attack. His last instructions were to blow up the airplane when it was over American soil.I would have detained and prosecuted Awlaki if we captured him before he carried out a plot. But we couldn't. And as President, I would have been derelict in my duty had I not authorized the strike that took out Awlaki.

Of course, the targeting of any Americans raises constitutional issues that are not present in other strikes which is why my Administration submitted information about Awlaki to the Department of Justice months before Awlaki was killed, and briefed the Congress before this strike as well. But the high threshold that we have set for taking lethal action applies to all potential terrorist targets, regardless of whether or not they are American citizens. This threshold respects the inherent dignity of every human life. Alongside the decision to put our men and women in uniform in harm's way, the decision to use force against individuals or groups even against a sworn enemy of the United States is the hardest thing I do as President. But these decisions must be made, given my responsibility to protect the American people.

Going forward, I have asked my Administration to review proposals to extend oversight of lethal actions outside of warzones that go beyond our reporting to Congress. Each option has virtues in theory, but poses difficulties in practice. For example, the establishment of a special court to evaluate and authorize lethal action has the benefit of bringing a third branch of government into the process, but raises serious constitutional issues about presidential and judicial authority. Another idea that's been suggested the establishment of an independent oversight board in the executive branch avoids those problems, but may introduce a layer of bureaucracy into national-security decision-making, without inspiring additional public confidence in the process. Despite these challenges, I look forward to actively engaging Congress to explore these and other options for increased oversight.

I believe, however, that the use of force must be seen as part of a larger discussion about a comprehensive counter-terrorism strategy. Because for all the focus on the use of force, force alone cannot make us safe. We cannot use force everywhere that a radical ideology takes root; and in the absence of a strategy that reduces the well-spring of extremism, a perpetual war through drones or Special Forces or troop deployments will prove self-defeating, and alter our country in troubling ways.

So the next element of our strategy involves addressing the underlying grievances and conflicts that feed extremism, from North Africa to South Asia. As we've learned this past decade, this is a vast and complex undertaking. We must be humble in our expectation that we can quickly resolve deep rooted problems like poverty and sectarian hatred. Moreover, no two countries are alike, and some will undergo chaotic change before things get better. But our security and values demand that we make the effort.

This means patiently supporting transitions to democracy in places like Egypt, Tunisia and Libya because the peaceful realization of individual aspirations will serve as a rebuke to violent extremists. We must strengthen the opposition in Syria, while isolating extremist elements because the end of a tyrant must not give way to the tyranny of terrorism. We are working to promote peace between Israelis and Palestinians because it is right, and because such a peace could help reshape attitudes in the region. And we must help countries modernize economies, upgrade education, and encourage entrepreneurship because American leadership has always been elevated by our ability to connect with peoples' hopes, and not simply their fears.

Success on these fronts requires sustained engagement, but it will also require resources. I know that foreign aid is one of the least popular expenditures even though it amounts to less than one percent of the federal budget. But foreign assistance cannot be viewed as charity. It is fundamental to our national security, and any sensible long-term strategy to battle extremism. Moreover, foreign assistance is a tiny fraction of what we spend fighting wars that our assistance might ultimately prevent. For what we spent in a month in Iraq at the height of the war, we could be training security forces in Libya, maintaining peace agreements between Israel and its neighbors, feeding the hungry in Yemen, building schools in Pakistan, and creating reservoirs of goodwill that marginalize extremists.

America cannot carry out this work if we do not have diplomats serving in dangerous places. Over the past decade, we have strengthened security at our Embassies, and I am implementing every recommendation of the Accountability Review Board which found unacceptable failures in Benghazi. I have called on Congress to fully fund these efforts to bolster security, harden facilities, improve intelligence, and facilitate a quicker response time from our military if a crisis emerges.

But even after we take these steps, some irreducible risks to our diplomats will remain. This is the price of being the world's most powerful nation, particularly as a wave of change washes over the Arab World. And in balancing the trade-offs between security and active diplomacy, I firmly believe that any retreat from challenging regions will only increase the dangers we face in the long run.

Targeted action against terrorists. Effective partnerships. Diplomatic engagement and assistance. Through such a comprehensive strategy we can significantly reduce the chances of large scale attacks on the homeland and mitigate threats to Americans overseas. As we guard against dangers from abroad, however, we cannot neglect the daunting challenge of terrorism from within our borders.

As I said earlier, this threat is not new. But technology and the Internet increase its frequency and lethality. Today, a person can consume hateful propaganda, commit themselves to a violent agenda, and learn how to kill without leaving their home. To address this threat, two years ago my Administration did a comprehensive review, and engaged with law enforcement. The best way to prevent violent extremism is to work with the Muslim American community which has consistently rejected terrorism to identify signs of radicalization, and partner with law enforcement when an individual is drifting towards violence. And these partnerships can only work when we recognize that Muslims are a fundamental part of the American family. Indeed, the success of American Muslims, and our determination to guard against any encroachments on their civil liberties, is the ultimate rebuke to those who say we are at war with Islam.

Indeed, thwarting homegrown plots presents particular challenges in part because of our proud commitment to civil liberties for all who call America home. That's why, in the years to come, we will have to keep working hard to strike the appropriate balance between our need for security and preserving those freedoms that make us who we are. That means reviewing the authorities of law enforcement, so we can intercept new types of communication, and build in privacy protections to prevent abuse. That means that even after Boston we do not deport someone or throw someone in prison in the absence of evidence. That means putting careful constraints on the tools the government uses to protect sensitive information, such as the State Secrets doctrine. And that means finally having a strong Privacy and Civil Liberties Board to review those issues where our counter-terrorism efforts and our values may come into tension.

The Justice Department's investigation of national security leaks offers a recent example of the challenges involved in striking the right balance between our security and our open society. As Commander-in Chief, I believe we must keep information secret that protects our operations and our people in the field. To do so, we must enforce consequences for those who break the law and breach their commitment to protect classified information. But a free press is also essential for our democracy. I am troubled by the possibility that leak investigations may chill the investigative journalism that holds government accountable.

Journalists should not be at legal risk for doing their jobs. Our focus must be on those who break the law. That is why I have called on Congress to pass a media shield law to guard against government over-reach. I have raised these issues with the Attorney General, who shares my concern. So he has agreed to review existing Department of Justice guidelines governing investigations that involve reporters, and will convene a group of media organizations to hear their concerns as part of that review. And I have directed the Attorney General to report back to me by July 12^th.

All these issues remind us that the choices we make about war can impact in sometimes unintended ways the openness and freedom on which our way of life depends. And that is why I intend to engage Congress about the existing Authorization to Use Military Force, or AUMF, to determine how we can continue to fight terrorists without keeping America on a perpetual war-time footing.

The AUMF is now nearly twelve years old. The Afghan War is coming to an end. Core al Qaeda is a shell of its former self. Groups like AQAP must be dealt with, but in the years to come, not every collection of thugs that labels themselves al Qaeda will pose a credible threat to the United States. Unless we discipline our thinking and our actions, we may be drawn into more wars we don't need to fight, or continue to grant Presidents unbound powers more suited for traditional armed conflicts between nation states. So I look forward to engaging Congress and the American people in efforts to refine, and ultimately repeal, the AUMF's mandate. And I will not sign laws designed to expand this mandate further. Our systematic effort to dismantle terrorist organizations must continue. But this war, like all wars, must end. That's what history advises. That's what our democracy demands.

And that brings me to my final topic: the detention of terrorist suspects.

To repeat, as a matter of policy, the preference of the United States is to capture terrorist suspects. When we do detain a suspect, we interrogate them. And if the suspect can be prosecuted, we decide whether to try him in a civilian court or a Military Commission. During the past decade, the vast majority of those detained by our military were captured on the battlefield. In Iraq, we turned over thousands of prisoners as we ended the war. In Afghanistan, we have transitioned detention facilities to the Afghans, as part of the process of restoring Afghan sovereignty. So we bring law of war detention to an end, and we are committed to prosecuting terrorists whenever we can.

The glaring exception to this time-tested approach is the detention center at Guantanamo Bay. The original premise for opening GTMO that detainees would not be able to challenge their detention was found unconstitutional five years ago. In the meantime, GTMO has become a symbol around the world for an America that flouts the rule of law. Our allies won't cooperate with us if they think a terrorist will end up at GTMO. During a time of budget cuts, we spend $150 million each year to imprison 166 people almost $1 million per prisoner. And the Department of Defense estimates that we must spend another $200 million to keep GTMO open at a time when we are cutting investments in education and research here at home.

As President, I have tried to close GTMO. I transferred 67 detainees to other countries before Congress imposed restrictions to effectively prevent us from either transferring detainees to other countries, or imprisoning them in the United States. These restrictions make no sense. After all, under President Bush, some 530 detainees were transferred from GTMO with Congress's support. When I ran for President the first time, John McCain supported closing GTMO. No person has ever escaped from one of our super-max or military prisons in the United States. Our courts have convicted hundreds of people for terrorism-related offenses, including some who are more dangerous than most GTMO detainees. Given my Administration's relentless pursuit of al Qaeda's leadership, there is no justification beyond politics for Congress to prevent us from closing a facility that should never have been opened.

Today, I once again call on Congress to lift the restrictions on detainee transfers from GTMO. I have asked the Department of Defense to designate a site in the United States where we can hold military commissions. I am appointing a new, senior envoy at the State Department and Defense Department whose sole responsibility will be to achieve the transfer of detainees to third countries. I am lifting the moratorium on detainee transfers to Yemen, so we can review them on a case by case basis. To the greatest extent possible, we will transfer detainees who have been cleared to go to other countries. Where appropriate, we will bring terrorists to justice in our courts and military justice system. And we will insist that judicial review be available for every detainee.

Even after we take these steps, one issue will remain: how to deal with those GTMO detainees who we know have participated in dangerous plots or attacks, but who cannot be prosecuted for example because the evidence against them has been compromised or is inadmissible in a court of law. But once we commit to a process of closing GTMO, I am confident that this legacy problem can be resolved, consistent with our commitment to the rule of law.

I know the politics are hard. But history will cast a harsh judgment on this aspect of our fight against terrorism, and those of us who fail to end it. Imagine a future ten years from now, or twenty years from now when the United States of America is still holding people who have been charged with no crime on a piece of land that is not a part of our country. Look at the current situation, where we are force-feeding detainees who are holding a hunger strike. Is that who we are? Is that something that our Founders foresaw? Is that the America we want to leave to our children?

Our sense of justice is stronger than that. We have prosecuted scores of terrorists in our courts. That includes Umar Farouk Abdulmutallab, who tried to blow up an airplane over Detroit; and Faisal Shahzad, who put a car bomb in Times Square. It is in a court of law that we will try Dzhokhar Tsarnaev, who is accused of bombing the Boston Marathon. Richard Reid, the shoe bomber, is as we speak serving a life sentence in a maximum security prison here, in the United States. In sentencing Reid, Judge William Young told him, "the way we treat you is the measure of our own liberties." He went on to point to the American flag that flew in the courtroom "That flag," he said, "will fly there long after this is all forgotten. That flag still stands for freedom."

America, we have faced down dangers far greater than al Qaeda. By staying true to the values of our founding, and by using our constitutional compass, we have overcome slavery and Civil War; fascism and communism. In just these last few years as President, I have watched the American people bounce back from painful recession, mass shootings, and natural disasters like the recent tornados that devastated Oklahoma. These events were heartbreaking; they shook our communities to the core. But because of the resilience of the American people, these events could not come close to breaking us.

I think of Lauren Manning, the 9/11 survivor who had severe burns over 80 percent of her body, who said, "That's my reality. I put a Band-Aid on it, literally, and I move on."

I think of the New Yorkers who filled Times Square the day after an attempted car bomb as if nothing had happened.

I think of the proud Pakistani parents who, after their daughter was invited to the White House, wrote to us, "we have raised an American Muslim daughter to dream big and never give up because it does pay off."

I think of the wounded warriors rebuilding their lives, and helping other vets to find jobs.

I think of the runner planning to do the 2014 Boston Marathon, who said, "Next year, you are going to have more people than ever. Determination is not something to be messed with."

That's who the American people are. Determined, and not to be messed with.

Now, we need a strategy and a politics that reflects this resilient spirit. Our victory against terrorism won't be measured in a surrender ceremony on a battleship, or a statue being pulled to the ground. Victory will be measured in parents taking their kids to school; immigrants coming to our shores; fans taking in a ballgame; a veteran starting a business; a bustling city street. The quiet determination; that strength of character and bond of fellowship; that refutation of fear that is both our sword and our shield. And long after the current messengers of hate have faded from the world's memory, alongside the brutal despots, deranged madmen, and ruthless demagogues who litter history the flag of the United States will still wave from small-town cemeteries, to national monuments, to distant outposts abroad. And that flag will still stand for freedom.

Let's get rid of corporate taxes altogether

Ezra Klein — Thu, 23 May 2013 17:38:20 GMT

Forget trying to make Apple pay higher taxes. How about if we don't make them pay any taxes at all?

Mitt Romney got roundly mocked for saying, "corporations are people, too," but he had a point. Talk to tax economists for very long and they'll make a variant of the same argument. The question in corporate taxation isn't whether it's paid by people. Of course it is. It's how much of it is paid by shareholders, how much of it is paid by workers, how much of it is paid by customers, etc.

But there's a simpler way to tax those people then by taxing corporations and having corporations pass the costs along to them: You could just tax the people directly. Depending on who you want to pay, you could raise payroll taxes, or raise capital gains and dividend taxes, or raise income taxes. The problem is we'd need to increase those taxes by quite a lot: The corporate income tax is expected to bring in more than $370 billion this year.

My Wonkbook partner Evan Soltas has a nice overview here of the case for getting rid of the corporate tax. The question, then, is what to replace it with. I'd suggest increasing taxes on capital gains and dividend income, capping deductions for the affluent and instituting a progressively structured carbon tax. All these tax sources would be far more efficient than corporate taxes. The carbon tax would help us slow global warming. And it would be easy to maintain about the same level of progressivity that we now have in the tax code.

Jim Pethokoukis had an interesting post today on whether any Republicans readying themselves for 2016 will emerge with big, new ideas that revitalize the party. I'd love to see one of them steal this one.

Have U.S. states figured out a way to avoid a global race to the bottom on taxes?

Jia Lynn Yang — Thu, 23 May 2013 16:59:00 GMT

This week's uproar over Apple's tax strategies merely highlighted something that everyone in the tax world already knows. The U.S. corporate tax system is needlessly complex, dysfunctional and needs to be fixed. Could there be an elegant solution right under our noses?

Apple's Tim Cook and many others have proposed lowering the top U.S. corporate rate, which currently stands at 35 percent. Doing that alone, though, misses a root problem in the current system: the incentive for companies to shift profits toward low-tax countries.

Apple's adventures in Ireland are just a hint of how much big firms have flocked to countries with low tax rates. A Congressional Research report found that in 2008 U.S. multinationals reported 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland — places known more for having low tax rates than being the world's biggest hubs of commercial activity. As a result, countries like the United States are seeing a fraction of the money they're owed based on the 35 percent rate.

Multinationals, meanwhile, are encouraging governments around the world to lower their tax rates even more, with little or no ways to stop firms from continuing to shift income to tax havens. The risk, tax experts warn, is a global "race to the bottom" with countries increasingly undercutting each other on rates. British Prime Minister David Cameron has recently called for a global standard.

"It's exactly like a trade war," said Edward Kleinbard, a professor at the University of Southern California's Gould School of Law. "We've never had any progress in multilateral tax agreements. But that's really what we need right now. We need a cease-fire."

Could the solution be found in a strategy adopted by California and a handful of other U.S. states? Some tax experts think so.

U.S. states, if you think about it, face a very similar situation as countries around the world. Domestic companies sell across state borders, have employees scattered around the country and do business in different states, each with their own unique tax laws.

So a number of states have come up with a simple way to calculate what firms owe them in taxes: If a company sells its product or services in a given state, it pays a tax proportionate to the sales in that state.

Here's how it would work. Let's say a company earns 20 percent of its sales in California. The company would pay 20 percent of its worldwide sales to California at the state's corporate tax rate. No need to worry about where the firm has offices or where its employees work — and no chance of the firms shifting their income to other states using elaborate, hard-to-trace methods.

Just last year, the state of California passed just such a law moving to a sales-based corporate tax system. Bill Parks, a retired finance professor, recently wrote an op-ed in USA Today proposing that the entire country move to a similar approach.

"Adopting California's sales-based corporate tax system would simplify the tax code and level the playing field," he wrote. "Under sales-based apportionment, it is conceivable that a medium-size corporation could file its report on a single sheet of paper attached to its annual Form 10-K filed with the SEC without needing the help of a tax attorney."

In 2007, Kim Clausing, a professor of economics at Reed College, and Reuven Avi-Yonah, a professor at the University of Michigan Law School, produced a paper proposing the U.S. corporate tax system adopt the states' model.

Such a solution, they wrote, would reflect the globalized way that companies actually do business now. Rather than figure out the location of a company's production — which can get complicated when an iPhone is designed in Cupertino and manufactured in China — the taxes would be based on where customers are located.

"Absent tax incentives to shift income away from the United States, U.S. corporate tax revenues would likely increase significantly," they wrote. And, Clausing and Avi-Yonah wrote, the tax rate could be cut "substantially."

The United States, with its army of consumers, would certainly stand to gain.

Clausing and Avi-Yonah estimated that in 2004, the fraction of worldwide sales in this country was 68.2 percent. By comparison, the fraction of worldwide income, as it's calculated now, was just 56 percent. With a sales-based tax system, they calculated that new tax revenues for that year would have been as high as $53 billion.

The United States could move to this system unilaterally, though if the U.S. did and no one followed, there's a risk that companies would be taxed twice. More ideally, they wrote, countries would adopt it together.

A worldwide sales-based system is one way to potentially end the escalating tax trade war. Of course, companies like Apple would face much higher tax bills in the United States and other places where they appeal to consumers. But then they would also save money on their accountants.

The weirdest square mile of ocean on Earth

Brad Plumer — Thu, 23 May 2013 16:44:20 GMT

Jason Kottke passes along this video of the Lembeh Strait, which is known to divers as "the planet's most intriguing and bizarre square mile of ocean floor."

The Seas Strangest Square Mile. from Shark Bay Films on Vimeo.

The first creature on display, the Bobbit worm, is the stuff of nightmares. We then move on to hairy frogfish (yes) and camouflaged cuttlefish. Only somewhat cuddlier.