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Archive for the ‘fiscal policies’ Category

This week the Congressional Budget Office released The Budget and Economic Outlook: 2014-2024. From the press coverage, one would have guessed the report was either entitled Obamacare: the Job Killer that is Almost as Bad as Benghazi or Obamacare: Ending the “Job Lock” and Opening the Door to Leisure. In reality, the impact of the Affordable Care Act was only a small part of the report—largely restricted to the appendix—and arguably the least troublesome.

Here are a few highlights. I will quote from the CBO report, since most of the media coverage will only address the shiny objects connected to the Affordable Care Act (for an exception, see Ron Fournier’s piece in National Journal).

Economic Growth

  • “[T]he economy will grow at a solid pace in 2014 and for the next few years…Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades. That projected slowdown mainly reflects long-term trends—particularly, slower growth in the labor force because of the aging of the population.” (p. 1)
  • “The unemployment rate is expected to edge down from 5.8 percent in 2017 to 5.5 percent in 2024.” (p. 5)

The Debt

  • “[T]he deficit is projected to decrease again in 2015—to $478 billion, or 2.6 percent of GDP. After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy— because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP.” (p. 1)

The Consequences (p. 18)

  • “The nation’s net interest costs would be very high (after interest rates moved up to more typical levels) and rising.”
  • “National saving would be held down, leading to more borrowing from abroad and less domestic investment, which in turn would decrease income in the United States compared with what it would be otherwise.”
  • “Policymakers’ ability to use tax and spending policies to respond to unexpected challenges—such as economic downturns, natural disasters, or financial crises—would be constrained. As a result, unexpected events could have worse effects on the economy and people’s well-being than they would otherwise.”
  • “The likelihood of a fiscal crisis would be higher. During such a crisis, investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow funds at affordable interest rates.”

Beyond 2024, things only get worse

  • “Although long-term budget projections are highly uncertain, the aging of the population and rising costs for health care would almost certainly push federal spending up significantly relative to GDP after 2024 if current laws remained in effect. Federal revenues also would continue to increase relative to GDP under cur- rent law, reaching significantly higher percentages of GDP than at any time in the nation’s history—but they would not keep pace with outlays. As a result, public debt would reach roughly 110 percent of GDP by 2038, CBO estimates, about equal to the percentage just after World War II. Such an upward path would ultimately be unsustainable.” (pp. 25-26)

Of course,  the core driver in these projections is the aging of the population.  Policymakers have the ability to reform key policies to reduce the long-term impact of the demographic shift, and the earlier these reforms are introduced, the less dramatic they need to be. But given the endless campaign and the struggle over the news cycle, who can even contemplate serious entitlement and tax reform.  It is far easier to focus on the shiny objects than to acknowledge the core message of the CBO’s report.

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The news has been ripe with administration scandals as of late and will likely be for some time (Memo to BHO: There may be no better way to keep scandals in the news than to use the Justice Department to go after the Associated Press). But soon attention will turn to the issue of fiscal sustainability (or at least one hopes).

I have been updating some charts for a second edition of a book I wrote a while back. One of my favorite charts presents inflation-adjusted spending per capita. I focused on domestic spending in this chart not because I discount the importance of defense spending, but because it was in support of an argument I was making. To give you a flavor of the numbers, consider the following (all figures are in 2005 dollars):

  • Starting at the New Deal, the peak level of domestic spending before US entry into WWII was $865 per capita (1940).
  • Let us leap forward to the 1960s. The highest level of domestic spending per capita under LBJ was $2,265 (1968).
  • Peak domestic spending during the Reagan presidency was $4,950 (1987).  That is 218 percent of the Great Society levels (Don’t fight the urge to cheer “LBJ, All the Way”).
  • President Clinton assured us that we were witnessing the end of Big Government. While federal spending as a percentage of GDP fell to 18.6 percent (2000), per capita domestic spending stood at $6,206.
  • George W. Bush increased that figure to a peak of $7,215 (2007). And Barack Obama made history in 2010, when domestic spending per capita hit $8,631 (it stood at $8,141 in 2012).

Real Spending

A couple of thoughts: First, while many may associate “big government” and FDR,   “that man” (as Grover often calls him) was a piker. In inflation adjusted terms, the Reagan Revolution entailed spending 5.72 times that sum. In 2010, the federal government was spending almost 10 times that amount. Second, these numbers grossly understate overall domestic spending. State and local governments expenditures are 11.3 percent of GDP—a larger share of GDP than the federal government spent in any year during the domestic phase of the New Deal (the peak was 10.3 percent in 1939). If we combine federal domestic, state and local spending for 2012, it stands at $13,034 per capita. Third, the big driver is the combination of demographic trends and mandatory spending on entitlements programs.

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The Economist provides a concise discussion of the debates surrounding the impact of debt on economic growth. The focus is on the work of Carmen Reinhart and Kenneth Rogoff, drawing on some of the research they conducted for their fine book This Time is Different.  The Reinhart/Rogoff paper (link here) had a simple takeaway point: debt seems to have little impact until it reaches 90 percent of GDP, at which point there appears to be a sharp reduction in the rate of growth.  As one might guess, this conclusion attracted a good deal of attention given the implications for fiscal policy decisions and the stakes in stabilizing debt (e.g., Paul Ryan cited it when framing his case for the GOP budget). Critiques have engaged issues ranging from coding errors (acknowledged by the authors) to the direction of causality.

The debate is by no means over and it may prove of some interest as the budget battles heat up and policymakers turn their attention to the vexing issue of entitlement reform. For a recent installment in the discussion over the growth-debt relationship, see Martin Wolf’s column (“Austerity loses an article of faith”) in the Financial Times.

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The Washington Post reports on some of the details of the Obama administration’s budget proposal, which is to be released next Wednesday. There are several important proposals (the largest of which have appeared before in the negotiations with the Speaker). Although the devil is in the details, a few salient points:

  • $200 billion cut from defense and domestic budgets
  • $400 billion cut from Medicare and other health programs via negotiation over pharmaceuticals and means testing
  • $230 billion (combined cuts and revenues) in Social Security via changes in the formula for calculating cost of living adjustments (from CPI-W to chained CPI)
  • $200 billion from farm subsidies and federal retirement benefits
  • Elimination of a loophole that allows people to simultaneously collect unemployment and disability payments.

All of this (and more) in exchange for $580 billion in new tax revenues largely through ending various tax expenditures. As the Washington Post notes: “The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs.”

If one were serious about achieving long-term fiscal stability, this would appear to be a proposal worth serious consideration. Of course, there will be predictable challenges from the Left and the Right.

  • On the Left, entitlement reform is simply off the table. Senator Bernie Sanders (I-VT) is quoted as proclaiming: “Millions of working people, seniors, disabled veterans, those who have lost a loved one in combat, and women will be extremely disappointed if President Obama caves into the long-standing Republican effort to cut Social Security.” The same might be said of Medicare. And one can expect the claims that one should not pursue austerity when economic recovery has proven so elusive.
  • On the Right, many in the House GOP will scoff at any more taxation, even if it is accompanied by major concessions on entitlements.  After all, that $580 billion will be stripped from the corporate welfare larded on the oil and gas industry and tax expenditures that currently place no cap on the size of retirement funds (the administration wants to cap tax subsidized retirement accounts at $3 million).

Presidents’ budgets rarely survive the congressional budget process, so the document to be released on Wednesday might be little more that a symbolic gesture that will allow the administration to signal its commitment to fiscal restraint under the assumption that it will be declared DOA before the ink is dry.  But what if the President is serious?

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As we approach midnight February 28 (tick..tick…tick…) and March 1st arrives, the nation appears to be headed toward a cataclysm. There is an ever-growing number of stories informing us how bad things could get.

The sequestration will force a sharp drop in the economy. It will kill the surging stock market. It will delay tax refunds. It will prevent entrepreneurs from starting new small businesses. It will compromise meat inspection. It will hamper airport safety and Homeland Security more generally. It will prevent assistance for Hurricane Sandy victims.  It will disproportionately harm women, and poor women in particular. Mother Jones expands on this claim to note that it will simply “screw the poor” (e.g., by undermining education, Title I finding, rural rental assistance, the processing of Social Security disability claims, unemployment benefits, veterans services, nutritional assistance, special education…you get the idea).

The Washington Post has provided a user-friendly guide to the White House data on how sequestration will effect each state . Of course, the categories have been nicely selected to construct a politically useful alternative universe (i.e., one where government is seemingly restricted to supporting teachers and schools, Head Start, job-search assistance, child care, vaccines for children, preventing violence against women, etc., etc).  Core message: what government does is universally good and necessary. There is no room for cuts.

Things seem quite dire, until one recalls that the $85 billion will not be sucked out of the economy as the clock turns to 12:00:01 on March 1 and, more than likely, there will be some agreement in the waning moments of February or the first few days of March to avoid this self-inflicted sequestration.

But even if there isn’t, one might question whether $85 billion is all that significant when the President’s budget request for 2013 is $3.803 trillion. Subtract that $85 billion, and the budget would fall to $3.745 trillion.  Placing things in historical context, that would be the largest budget since…(insert drum roll here)… 2012.

Placing things in a broader historical context, the budget (in nominal terms) would be over 160 percent of what it was a decade earlier, around 135 percent if we adjust for inflation.

The most striking thing to contemplate: If this is the political firestorm that arises out of a $85 billion reduction in discretionary spending out of a $3.8 trillion budget, imagine what will occur when focus turns—as it must—to the issue of entitlements.

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Now that the fiscal cliff has been averted  delayed, we move on to the debt ceiling. Critics are correct in noting that there is no principled reason not to raise the debt ceiling, since it is nothing more than the sum of past spending and taxing decisions.  One can hardly blame the credit card bill for the patterns of spending that created it. Nonetheless, the House GOP skillfully used the debt ceiling in 2011 to extract the agreement that led to the fiscal cliff (and we all know how well that worked out for the GOP).

In the wake of the fiscal cliff, President Obama struck a hard position regarding the debt ceiling. As he proclaimed:

“I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed, Let me repeat: We can’t not pay bills that we’ve already incurred. If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff.”

Of course, the President will bargain. As George Sargent notes in todays Plum Line:

The idea appears to be that the White House and Democrats will only engage in conversations over the sequester, tax reform, and spending cuts, and simply won’t confer any legitimacy on GOP threats not to raise the debt ceiling. But it’s unclear to me how this will work in practical terms. Unless Obama is prepared to go into default — or to pull some other ace out of his back pocket, such as the 14th amendment or “platinum coin” options — he will inevitably be negotiating over the debt ceiling. And he doesn’t appear prepared to do any of those things.

One can doubt that the President would be willing to go into default, so he will bargain (or more correctly, he will proclaim, campaign, disengage, and send in Biden). But is there any reason to take the House GOP seriously at this point regarding its willingness to stand its ground?  Given its recent track record, does the President have any reason to believe that the House won’t blink?

I remain skeptical.

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Small-government types have often debated whether the 17th Amendment to the U.S. Constitution, establishing direct election of senators, is in part responsible for the decline of federalism in the U.S. I have long been skeptical of the 17th Amendment repeal movement, because Germany has a system in which states (Länder) elect senators (members of the Bundesrat), and Germany has within a few decades moved from a stronger system of federalism than the U.S. enjoys to a much weaker federalism than the U.S. enjoys. I’ve recently been reading Fiscal Decentralization and the Challenge of Hard Budget Constraints, edited by Jonathan Rodden, Gunnar Eskeland, and Jennie Litvack, and it turns out this arrangement or something like it is more common than I realized — and with even worse consequences.
First, here is Rodden on Germany (p. 174): (more…)

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In the last budget, the New Hampshire state legislature cut state university funding by nearly half, as part of an effort to deal with a large budget gap opened up by unrealistic revenue forecasts issued by the previous legislature. Today, the NH Union-Leader reports an all-time best in fundraising success for the state university system:

Gifts and pledges in fiscal 2012, which ended June 30, were up more than 77 percent from last year, to a total of $22.5 million.

The goal was $20 million.

The total raised is second only to the final year of the last capital campaign in 2002, according to a release from the foundation.

The president of the university obliquely seems to acknowledge the role of budget cuts in the fundraising success:

“As we continue to plan for a comprehensive campaign, this represents a vote of confidence in UNH from more than 19,000 alumni and friends,” UNH President Mark W. Huddleston said.

Huddleston also is serving as the interim president of the UNH Foundation.

“Private support, especially in light of a historic cut in public funding from the New Hampshire Legislature, is crucial for student scholarship support and faculty development,” he said.

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General government final consumption expenditures for the 27 member countries of the European Union, from 2002 to 2011 (fiscal years):

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Constitutional debates swirling around the PPACA’s individual mandate have much to do with federalism. The core issue the Supreme Court is addressing is whether the federal government has essentially unlimited authority in economic policy, or whether they are yet some areas of economic policy-making (such as whether to compel commerce) exclusive to the states. As someone who believes that constitutions ought to be read according to – I don’t know – what their actual words say, I think the entire act is obviously unconstitutional. Article I, section 8 of the U.S. Constitution permits Congress to legislate in order to “regulate commerce…among the several states.” Thus, Congress has the authority to regulate interstate commerce. Not “anything that might be related somehow to interstate commerce,” plus “anything necessary and proper to any of those things.” Of course, no one on the Supreme Court, except perhaps Clarence Thomas on issues like this one, shares my judicial philosophy.

Putting the constitutional issues to one side, however, I want to address the desirability of the kind of federal system that classical liberals — and, perhaps, Justice Thomas — favor. We can summarize that federal system as follows:

  1. The primary regulatory authorities in the country are state and local governments.
  2. The economic role of the federal government is to ensure a common market: to prevent states from levying barriers to the free flow of goods, services, people, and capital, from tariffs to invidious regulations to local preferences in government procurement.
  3. The national court system protects basic human rights and civil liberties from infringement by federal, state, and local governments.
  4. State and local governments fund their activities almost exclusively out of their own resources. The federal government should not, in general, provide grants to state and local governments.
  5. State governments are politically autonomous, constitutionally sovereign, and independently elected. They may legislate freely within the bounds expressed above.
  6. State governments are permitted to form compacts to deal with externalities. For instance, states may choose to adopt uniform regulations on insurance so that companies can sell the same product in multiple states with a quicker approval process. Because states retain their sovereignty, they are free to enter and withdraw from such compacts at any time.

OK – so what are the arguments against this kind of system? (I go over some of the arguments and evidence in favor here.) One common objection to “states’ rights” is that state governments may violate the civil rights of some of their citizens. I share this concern, one reason I don’t think the term “states’ rights” is appropriate for my position; nevertheless, the concern is addressed with point 3 above. Another objection might be that problems like pollution and endangered species can cross state boundaries. Given a sufficiently small number of states, however, I do not see why they cannot contract with each other to solve their commons problems. What else?

There are two concerns about fiscal federalism that many progressives share that I take seriously: that inter-jurisdictional competition under federalism will undermine the welfare state, and that the system will lead to greater inequality among regions. The first concern (more…)

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I have just finished reading a fascinating symposium of papers on America’s sovereign debt crisis published in the most recent Econ Journal Watch (volume 9, number 1: January 2012). It is introduced by Tyler Cowen, and includes short papers by Jeffrey Rogers Hummel, Garett Jones, Arnold Kling, Joseph Minarik, and Peter Wallinson.

It is fascinating, if sobering. I am among those who believe the debt matters—indeed, that it may soon become the only issue that matters, because it will cripple our ability to handle any other issue. If you care about national defense, health care, education, investment in “green” energy, or anything else, beware: the ever-larger portion of our wealth that will need to go to paying interest on our debt, and of course the entitlements of Social Security, Medicare, and Medicaid, will mean that there is ever-less wealth available for anything else.

(By contrast, some, like Paul Krugman, argue that the debt is not as big an issue as I believe it to be, but I have a harder and harder time believing that position has credibility. Scott Winship has a point when he argues in National Affairs that we often exaggerate the economic “bogeymen” we face, but the national debt is one bogeyman he rather conspicuously leaves out of his discussion.)

So, back to the EJW symposium. I highly recommend reading it, sharing, as I do, the editors’ “hope that it’s not too late for them to make a difference” (22). I will not attempt reproduce their arguments and data, but I will offer a handful of short reflections that might whet your appetite for the papers themselves.

1. One thing the contributors seem to agree on is that there is only a handful of possible ways we might address the impending fiscal crisis. As Jones puts it, “There are four possible tools: Higher revenues, lower spending, inflation, and default” (41). But it strikes me that there is at least one other possible way we might address the potential crisis, a possibility that none of the contributors mentions: imperialism. By that I mean that we might start invading other lands, territories, and countries, and simply appropriating their assets. There is certainly ample historical precedent. I do not think we should discount the potential attraction of large-scale theft and confiscation as a method of financing our debts and the lifestyles to which we have become accustomed.

2. There is some disagreement about how likely default is. Jones, for example, argues it is relatively unlikely; Kling argues it is relatively more likely. I would be interested to hear how Jones and Kling might respond to one another, but, beyond that, another striking feature of the discussion is the astonishing degree to which they seem to agree that no one really knows. We are in uncharted territory here. The prospect of the largest wealth-producing nation in the entire history of humankind, whose economy has huge and deep ramifications in the rest of the world’s economies, facing the prospect of being unable to service the largest amount of debt that any nation has ever produced in the history of humankind—well, who knows? Kling writes, “much of what I will be discussing is outside the competence of . . . well, anybody, making the exercise highly speculative” (51; ellipsis in the original). Perhaps this fact contributes to the reason Tyler Cowen writes, in his introduction to the symposium, “Our times are now truly scary” (21). Indeed.

3. Finally, I wish there had been more discussion of possible solutions. The contributors seem to agree both that we are facing a desperate situation and that, nevertheless, we can avoid catastrophe if we act quickly. They offer various reasons for being pessimistic that solutions will actually be forthcoming (see particularly Minarek’s and Wallinson’s contributions), but perhaps recommendations about positive steps that might actually help, along with some discussion of how these steps might be feasible, would be helpful. Diagnosing the true extent of the sclerosis is, of course, the first step; but recommended courses of treatment are the next step.

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Once upon a time, local governments accounted for the lion’s share of economic policy-making in the United States. Before World War I, not only was the federal government’s economic policy-making activity strictly limited to areas such as international trade, management of federal lands, trust-busting, and food and drug regulation, but state governments themselves were also internally decentralized. In 1913, local government own-source revenues (revenues raised autonomously by local governments, thus excluding grants) as a percentage of total state and local revenues (including federal grants to state and local governments) stood at a whopping 82%, according to my calculations based on historical Census Bureau data. If we assume that revenues track economic policy activity closely, this figure implies that four-fifths of all state and local economic policy activity occurred at the local level.

Today, of course, local governments are quite limited in their economic policy autonomy, with the most important remaining policy role left largely to local governments being K-12 education. Local revenue decentralization (the variable described in the last paragraph) was just 38% in 2008. This chart shows the evolution of local revenue decentralization over time for the U.S. as a whole:

So who killed local autonomy in the U.S.? The answer is: (more…)

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Events in the Eurozone are unfolding at a more rapid pace than ever, with even the normally staid Economist warning that the Eurozone might break up, with “horrible” consequences. Indeed, while a Greek default might not spell disaster for global finance and might not even require Greece’s exit from the euro, Italy is the third-largest sovereign debtor in the world. Interest rates on Italy’s ten-year debt have leaped past thresholds some economists consider “unsustainable.”

Arguably, Italy is, unlike Greece, not insolvent, merely illiquid. It enjoys a primary surplus (revenues minus non-interest expenditures). The problem is that interest-rate rises themselves will push Italy into bankruptcy, as it cannot afford to float new debt to pay off old debt. From one perspective, Italy is suffering from (irrational?) investor contagion, a speculative attack based on a self-fulfilling prophecy. Another point of view is that investors are rationally anticipating an ECB “firehose to the Italian treasury.” The firehose, of course, is merely default in another form – but it may allow Italy stay in the Eurozone and keep European taxpayers off the hook (even as consumers get the shaft).

Furthermore, the Italian crisis came about principally because the Greek crisis has forced investors to update (more…)

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Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”

As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

The first is his claim that the last thirty years has seen the ascendance of “deregulated capitalism.” It is not immediately obvious to me how to measure, and thus evaluate, a claim like that, but a few likely indicators seem to point against Stiglitz. For example, measured in constant dollars, government spending, both federal and combined federal, state, and local, have increased every single year during Stiglitz’s window (he said “the early 1980′s to 2007″; I represent below 1980 to 2007). Here is total spending:

As a percentage of GDP for the same period, total spending has remained fairly flat:

I could not find detailed numbers on regulatory burdens and costs before 1995, but in reports compiled by the U.S. Small Business Administration (a federal government entity) in 1995, 1998, 2001, 2005, and 2010 (all available here), total cost of regulatory burdens increased each year. Moreover, according to economists Veronique de Rugy and Melinda Warren, both total budget outlays of regulatory agencies and staffing of such agencies has steadily increased since 1980, outpacing both inflation and population growth. And economic regulation in particular—which may be what Stiglitz is primarily thinking of—has also increased throughout the period.

All of this is difficult to explain on Stiglitz’s hypothesis.

The second claim of Stiglitz’s that puzzles me is that during the last 30 years, “most Americans saw their incomes decline or stagnate year after year.” But whether measured in nominal or real terms, most incomes across the classes have increased since 1980, even if modestly. Here is income distribution from 1947 to 2007 in constant 2007 dollars:

Here is real median household income in constant 2009 dollars by race:

File:US real median household income 1967 - 2009.png

This indicates that most incomes have risen when measured in real dollar income. But even that leaves out the important fact that what those incomes can buy in terms of goods and services has increased dramatically. Because the cost of most goods and services tends to go down over time, and because innovation not only finds more efficient ways of bringing current goods and services to market but also produces new goods and services, what people can buy with their money—even if their incomes stayed relatively flat—has increased. Consider just one conspicuous example, the sharp decline in the price of computing power.

That point leads to my final comment on Stiglitz’s essay. Consider this passage, in which he offers his remedies for the fiscal challenges we face:

The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.

Many people, including the president again just last night, have been calling for raising taxes on the rich as at least one part of the way out of the morass. The president suggested that by “the rich” he meant those making over $250,000 per year, which is about 1.5% of American households.

I shall make no comment about the economic sense of the president’s proposed policy, or about what seems to be his zero-sum-game conception of wealth. But let us try to gain some perspective on this definition of “the rich” by comparing it to worldwide standards. People making over $250,000 in annual income are, by any worldly standards—whether measured by the rest of the world today or, even more so, in historical terms—wealthy to a degree that would have been unimaginable just a few generations ago. But then again, everyone in America is.

For most of human history, people survived on something like $1–3 per day in current dollars. Over the last seven generations of humanity, however, that has increased by something like sixteen-fold (read McCloskey’s latest for the data). Average per capita income in the U.S. in 2010 was $47,200, approximately fifty times the average for most of human history. Not a fifty percent increase, not a five hundred percent increase, but a five thousand percent increase. Worldwide, average income in 2010 was $11,200—an astonishing increase by historical standards, but only one-fourth that of the United States.

Indeed, the proportion of the American citizenry whose income is above that of the current worldwide average is . . . do you have a guess? What would you have guessed? It is eighty percent. Eighty percent of Americans earn an annual income higher than the worldwide average, which includes about two-thirds of those Americans who currently pay no federal income tax at all. Today, effectively zero percent of Americans have incomes equal to or lower than double the average worldwide income for human beings throughout most of their history.

All Americans are rich—indeed, we are rich at unprecedented levels. We are not equally rich, but we are all rich. Perhaps therein lies the rub, what really is bothering Stiglitz and others? What if it turned out that the only way we could all have these unprecedented levels of wealth is if we allowed great inequality?

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Noel Johnson, Matt Mitchell, and Steve Yamarik have a new working paper answering that question in the affirmative. They look at state fiscal and regulatory policies and find that Democrats generally like to increase taxes and spending when in control of state houses and Republicans do the reverse. But when states have tough balanced-budget requirements called “no-carry rules,” Democrats and Republicans don’t differ much on fiscal policy. Instead they try to appeal to their constituencies by pursuing regulatory policies – in general, Democrats increasing regulation and Republicans cutting it. As the paper’s still in the working draft stage, they are looking for comments on it.

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Is liberty an “amenity” that people find attractive? We know that people do not necessarily tend to vote for liberty, in part because they are politically ignorant or even irrational, but when it comes to where they choose to live, people can be expected to pay close attention to how the laws in different places affect their quality of life. Economists model migration rates across jurisdictions as a function of economic opportunities (real income differentials) and “amenities” (example). Thus, it is standard practice in the literature to use inter-state migration rates in the U.S. (adjusted for the component predicted by economic growth) as a proxy for the desirability of different states as places to live. The question I address here is whether liberty is an amenity; in other words, do states with more freedoms attract more people?*

My study with William Ruger, Freedom in the 50 States, addressed this issue briefly. We find that both economic and personal freedom are associated with net inter-state migration over the 2000-2009 period. In other words, freer states attract people from less free states. The relationship holds when we control for climate, measured as average January temperature in a state’s largest city. We also find that real personal income growth (total, not per capita) over 2000-2007 is positively associated with economic but not personal freedom. Thus, it remains an open question whether economic freedom attracts people because people find it desirable for its own sake, or whether it attracts people by promoting economic growth. However, it does appear that people are attracted to personal freedom for its own sake.

This blog post offers a first look at a much more sophisticated analysis of the issue, bringing in more control variables and more advanced, appropriate estimation methods. (more…)

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Why do “red” states that tend to vote Republican in presidential elections take more federal money than do Democratic-leaning, “blue” states? This surprising correlation between ideology and federal dependence has been often noted (see for instance here, here, and here). Indeed, this fact seems to be trotted out whenever we hear “what’s the matter with Kansas/Connecticut” arguments from the left/right, respectively. Are conservative states hypocritical and liberal states self-abnegating, or is there some deeper explanation?

First, let’s take a look at that correlation. In the chart below, I’ve plotted each state with federal grants to state and local governments in that state, as a percentage of personal income, for fiscal year 2007-8, on the Y axis, and percentage of the vote for Obama, McKinney, and Nader in the 2008 election on the X axis. The line through the points represents the least-squares line of best fit. As you can see, there does indeed appear to be a negative relationship between liberal ideology and acceptance of federal grants.

Is the correlation statistically significant? To see this, I (more…)

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Interesting piece on Robert Barro in today’s Telegraph.  Money quotes:

On the stimulus package:

Turning to the $600bn (£373bn) to $800bn US package, he added it was “mainly a waste of money”. Stimulus programmes, he said, offer little more than “rearranging the timing” of economic growth. “Possibly you could make an argument that it’s worth it. But it’s going to be a negative-sum thing overall, so you have to think it’s a big benefit for boosting the recovery.”

Stimulus, when necessary, should only direct funds to programs that can be justified on their merits.

“The lesson is you want government spending only if the programmes are really worth it in terms of the usual rate of return calculations. The usual kind of calculation, not some Keynesian thing. The fact that it really is worth it to have highways and education. Classic public finance, that’s not macroeconomics.”

But in the long-run, such programs may impose greater costs than benefits:

Mr Barro argued that, taken over the long term, for every £1 spent, the cost to the economy will be more than £1 – creating what he called a negative fiscal multiplier. Orthodox thinking is that current stimulus programmes have a positive multiplier effect by creating growth.

Barro will be delivering the Institute of Economic Affairs Annual Hayek Memorial Lecture. I am looking forward to reading the transcript.

Update: A recording of Barro’s lecture is available here.

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When tensions with England finally began to degenerate into violent altercations, first on the western frontier in such places as Tippecanoe and later along the Great Lakes, the Madison administration decided the time had come to vindicate America’s claims of offended sovereignty. Unsurprisingly, these claims also happened to coincide with popular desires to expand into the Old Northwest and Canada. Those particular voices were especially powerful in the mid Atlantic and southern states. Two of the leading voices of those regions, Henry Clay and J.C. Calhoun were united at this point in their careers, generally supporting more vigorous forms of nationalism at home and abroad.

But Mr. Madison had let the charter of the first Bank of the United States expire in 1811, and when he turned to finance his war he had of necessity to turn to state banking institutions. These entities were comprised of various private and state banks who were generally quite willing to buy American treasury securities. There was one region, however, that was not quite so willing: the New England states and the banks that operated under their approval.

Already rocked by years of embargo, New Englanders were poised to suffer even more outrages in open war. Popular sentiment ran high against the conflict, and when the treasury presented its notes for sale to New England banks they received a cool reception. The vast majority of such paper was consequently sold to the south and west. Indeed, needing to purchase supplies in the north, the national government found this a particularly galling impediment. To remedy the situation, Madison’s administration not only borrowed from existing banks in the mid-Atlantic states, it actively promoted new ones, even over the existing laws of those states that had tended to restrict private unchartered banks.

From 1811 to 1815 the number of banks more than doubled, from 117 to 247, 35 of which were unincorporated. The result was a massive increase in circulating paper money–nearly three times the amount in circulation at the start of the war. Treasury certificates were used as, and encouraged to be considered backing for notes in the same fashion as gold or silver. But one difficulty was not anticipated. When the District of Columbia was burned by British marines on August 24, 1814, it quickly became apparent that certificates on the U.S. government might not be such a sound investment.

Runs the banks that very month demonstrated the insolvency of most of the new institutions, and in opposition to various state laws, the national government encouraged the mid-Atlantic and southern states to ignore or restrict bankruptcy proceedings against their offending banks, but allowed those very institutions to pursue such proceedings against their own debtors. All this was done, no less, while they continued to make new loans, adding yet even more to the already general inflation.

Only one region did not experience suspension of payments or bank runs: New England. For once in over six years, the New England states could boast a small economic indicator in their favor. In Federalist 10, Madison had argued that federalism might serve to insulate local evils from becoming universal, national ones. In this case, the evils of expansionism had been halted at the gates of Massachusetts, and New England’s representatives left little doubt about their sentiments in this regard.

In words that would later come back to him, a young Daniel Webster, then a representative of New Hampshire, declared in Congress on December 9, 1814, that the “operation of measures unconstitutional and illegal ought to be prevented by a resort to other measures which are both constitutional and legal. It will be the solemn duty of the State Governments to protect their own authority over their own militia, and to interpose between their citizens and arbitrary power. These are among the objects for which the State Governments exist, and their highest obligations bind them to the preservation of their own rights and the liberties of their people.”

Would it be too much to suspect that Webster both knew and approved of the New York statement of ratification? But even if he hadn’t, and that seems dubious, the words demonstrate just how deeply the sense of the states as checks to central power was engrained in the American mind. At this point in time, Webster was no Jeffersonian. He was a New England Federalist, and the home states were listening. On to Hartford.

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With the war in Europe between France and England intensifying, Americans found their rights as neutral traders regularly violated by both French and British navies, and French and British port restrictions further limited American opportunities for commerce. To make matters worse, on numerous occasions, English vessels had boarded American ships and “impressed” many of their crews into service as if they were British subjects. Such disregard for American sovereignty and rights was taken hard by the public, but America’s naval capacities were far from adequate to enforce a due respect on the high seas. Yet doing nothing was not a popular option.

President Jefferson attempted to draw a lesson from our colonial past and impose an embargo of American trade. The hope was that such an embargo would inconvenience European commerce to such a degree as to bring the powers, especially Britain, to that level of respect which American arms were insufficient to obtain. In 1807, the Embargo Act was imposed, interdicting all vessels from entering or exiting American ports. Trade was the life blood of New England, however, and the Embargo hit them especially hard. As weeks moved to months and months to a year, the suffering in the port cities became nearly unbearable. Numerous calls for lifting the interdiction were heard, but none of the offending powers seemed even remotely ready to bargain. Unwilling to surrender the point of honor or to risk outright war, Jefferson’s administration remained steadfast in its policy.

At a certain point, the states began to question not only the efficacy of the measure, but its justice. Should not the risks of trade be borne by the traders themselves? Why a general restriction? If families and communities are ruined, is this not an indication of a policy gone too far? Indeed, so far that it might conflict with a vital principle of constitutional government? The national authority was to engage in defensive action in support of the states and their communities, not in their strangulation. If it could not live up to its military obligations, this was no excuse for an imposition of a total ban on trade, a power not contemplated in the original design.

In the earliest resolutions of Massachusetts, Connecticut, and Rhode Island the hue and cry was again heard. Massachusetts’ legislature, as Thomas Woods noted in his collection of sources, sought only formal political means, and counseled patience on the part of its citizenry as it pursued these avenues of redress. Rhode Island observed that it was “the duty of this general Assembly, while cautious not to infringe upon the constitution and delegated powers and rights of the General Government, to be vigilant in guarding from usurpation and violation, those powers and rights which the good people of this state have expressly reserved to themselves…” Here were the states as Sentinels calling out their warning.

But Connecticut, first through its governor and then its legislature went further still, openly and officially “declining to designate persons to carry into effect, by the aid of military power, the act of the United States, enforcing the Embargo.” And “that the persons holding executive offices under this state, are restrained by the duties which they owe this State, from affording any official aid or cooperation in the execution of the act aforesaid.”

This action went the further step of embracing the idea of non-cooperation, and its precedent went back to colonial legislatures that had refused to cooperate with the enforcement of the Imperial Stamp Act. No force would be applied directly to interdicting federal officials, but no cooperation would be accorded them either. They could do their work on their own, but in the absence of active assistance or support from state institutions, they would find that task far more difficult. No power of the federal government could compel action on the part of the states in this regard.

And here New England’s civil society operated in yet a further way to exert force against the centralized exercise of power, again, much like what had happened in earlier colonial protests. While not directly engaged in administering smuggling, the governments of New England gave tacit affirmation of private actions through their resolutions. New England’s merchants were long practiced in the arts of running goods around imperial restrictions. Now they would do the same with respect to national ones. And the general government found its resources stretched to the breaking point.

Remarkably, Jefferson himself later reflected on this opposition of local authorities. He recalled this episode as a powerful illustration of why local governance is so critically important to the maintenance of a free society! No longer president, he could reflect with some approval on the nature of the opposition he had then faced. (more…)

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While the U.S. economy has been officially out of recession for a while and growing at a decent clip (1.8% at a seasonally adjusted annual rate in the first quarter of this year, 3.1% in the last quarter of 2010 – see chart), unemployment remains very unusually high, 9.0% in April 2011 (seasonally adjusted), compared to just 4.5% five years ago. The Economist wonders whether the U.S. has caught the European disease of “structural unemployment.” What can be done to get unemployment down fast?

Click “Continue Reading” to view the Sorens Deficit-Neutral Plan to Slash Unemployment (SDNPSU – catchy acronym, right? Try pronouncing it like “sudden Sue”): (more…)

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There has been lots of good news recently regarding America’s fiscal state of affairs. The life spans of Medicare and Social Security have been adjusted down (and this ignores the fact that the trust funds are not stores of wealth. Under current conditions, the only option is to borrow funds to cover the transfers from the trust funds to their intended use). And then there is the debt ceiling.

One immediate response is: Problem, what problem? The rates on Treasuries are low suggesting that the markets are not taking the risk of default seriously. I am not certain how to interpret the low rates on Treasuries. Does this suggest that the markets believe (1) that we will find a workable solution before Armageddon;  (2) that members of Congress are so craven that ultimately they will blink and raise the debt ceiling after a few symbolic concessions; or (3) none of this really matters because, after all, the USA does not have to play be the same rules as Greece, Ireland, Portugal et al?

Regardless of how one interprets the Treasuries, is there any reason to believe that Democrats or Republicans are committed to finding a path to fiscal stability when all are intent on maximizing short-term political returns?

As a generalization, Republicans continue with the illusion that reductions in discretionary spending, reforms to means-tested programs, and cuts in foreign aid will do the job. New revenues are unnecessary and, in fact, additional tax reductions might stimulate new growth. Democrats nurture the illusion that eliminating the Bush tax cuts and ending Bush’s two wars will do the trick. And since every Democratic spending program is, by definition, an investment in America’s future, children, competitiveness (you name it), they are hesitant to propose any significant cuts in expenditures.

Both sides agree on the need to address “waste, fraud, and abuse,” of course. But those terms are defined so narrowly as to be completely irrelevant.

Voters, it appears, are quite happy to embrace tax cuts for the rich and an expansion of politically popular entitlement programs. But as recent polls reveal, even so called Tea Party supporters overwhelmingly reject any cuts in Medicare, Medicaid, and Social Security.

There are some voices of sanity.  Even if you don’t buy all of Paul Ryan’s plan (I certainly do not), he is making the case for politically unpopular cuts. The recent editorial Alan Simpson, Erskine Bowles, Pete Domenici, and Alice Rivlin shows that it is possible to get bipartisan recognition of the magnitude of the problem and the difficult sacrifices that will be needed. Of course, Ryan is an anomaly and the Bowles-Simpson-CEA crowd is populated by people who have no reason to fear the phalanx of angry voters who focus intently on maintaining or expanding existing benefits without increasing levels of taxation.

My fear: short of an apocalyptic collapse, elected officials will continue to do what elected officials do. They will appeal to constituents’ myopic demands and whistle past the grave yard, fearing that to do otherwise would ensure their name would end up on a political gravestone.

If you are interested in some thought provoking posts on the debt ceiling from the past few days, I recommend the posts by Tyler Cowan and MeganMcArdle.

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Not long after the ratification of the Constitution, Madison came to have serious doubts about his former Federalist friends. Particularly, he came to suspect the sincerity of many who had asserted that the new government would possess only those powers specifically delegated to it.

The first disappointment came with Hamilton’s championing of the incorporation of the Bank of the United States in 1791. It sparked the formation of the first party system: Federalists who supported the bank versus Republicans (not the modern party by that name) who opposed it. Madison felt especially sensitive to this issue. He remembered that the power of incorporation had come up at the Philadelphia convention. Indeed, he remembered it so well because he had been the one to move for its approval. He also recalled that it had been roundly voted down.

To Madison’s thinking, the power to incorporate was a very particular and peculiar power. At the time he had proposed its inclusion in the Constitution, he was certain it could serve important national purposes, but having been voted down, he was just as certain that no such power had been given to the general government.

Hamilton took a different view. The bank, he argued, would be of such significant utility to the collection of taxes, the paying of obligations, the administration of finance, both public and private, and of the regulation of commerce and the value of coinage, that it achieved the level of an implied power. Its necessity was established by its usefulness, and as such, it was constitutional.

To Madison that way of thinking amounted to no limits at all. By such an assumption, anything deemed useful could be done by the federal government regardless of whether or not it had been specifically written down. Where then was the promise of reserved and delegated powers?

Madison summarized his concern poignantly on the floor of the House: “With all this evidence of the sense in which the con (more…)

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“The political process will outperform S&P’s expectations … The fact is when the issues are important, history shows that both sides can come together and get things done.”

So says White House Press Secretary Jay Carney, in response to Standard & Poor’s announcement yesterday that it has changed its outlook for US sovereign debt from stable to negative, thereby raising the odds that it will downgrade US debt within the next two years. When someone cites the lessons of history, I usually check my wallet.

While S&P’s warning could provide additional leverage for those who are serious about pursuing fiscal responsibility, one wonders: will the electoral calendar intervene?  There is an interesting debate on this issue at the New York Times.

Perhaps Pileus readers would like to add their contributions here?

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Harry Truman (if I recall correctly), frustrated with the economic advice he was receiving from the Council of Economic Advisors, asked for a one-armed economist who could not say “one the one hand…on the other.”

Ten former CEA heads have issued a joint letter on the long-term budget crisis: Martin N. Baily (Clinton), Martin S. Feldstein (Reagan), R. Glenn Hubbard (Bush I), Edward P. Lazear (Bush II), N. Gregory Mankiw (Bush II), Christina D. Romer (Obama)Harvey S. Rosen (Bush II), Charles L. Schultze (Carter), Laura D. Tyson (Clinton), and Murray L. Weidenbaum (Reagan).

While they disagree on some of the details, “we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.”

While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.

Bottom line: they “urge that the Bowles-Simpson report, ‘The Moment of Truth,’ be the starting point of an active legislative process that involves intense negotiations between both parties.” Reducing waste, fraud and abuse and cutting domestic discretionary spending are simply insufficient. Entitlements, defense, and significant tax reform (elimination of expenditures) must be central to any solution.

Of course, the fact that the Bowles-Simpson Commission, former GAO head David Walker, the Congressional Budget Office’s Long Run Budget Projections, and now ten former CEA chairs agree on the fundamental problem may not be sufficient to outweigh the short-term incentives of our elected officials who remain—with a few exceptions–addicted to rent extraction, mud-farming, and kicking the can down the road.

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One of the purposes of “right to work” legislation, currently being debated in Indiana, New Hampshire, and other states, is to reduce the percentage of the workforce covered by collective bargaining agreements. Leaving aside the ethics of collective bargaining as practiced in the U.S. today, what are the political and economic consequences? Since unions donate almost exclusively to Democratic candidates and lobby heavily for more government regulation and spending, it would be unsurprising if more unionized states ended up with bigger state governments.

To examine the evidence, I ran statistical models of unionization and taxation over the 2000-2008 period. The dependent variable in the first analysis is state and local tax collections as a percentage of state personal income, excluding mineral severance and gas taxes (since large and resource-abundant states will otherwise look like states with large tax burdens), in Fiscal Year 2007-8, the latest year for which data are available. The main independent variable is (more…)

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