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).
- “[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)
- “[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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There seems to be very little disagreement among market-oriented economists that the optimal number of people on the planet is much larger than the number of people currently alive (see here, here, and here for examples). Here are some reasons for skepticism about that claim.
- The main advantage of more people is a deepening of the market and the division of labor. More people means more ideas and more specialization. But the law of diminishing marginal productivity suggests that each additional unit of labor and of human capital is of less value. Furthermore, in a world of 7 billion people we are going to get roughly as many outlier geniuses as we do in a world of 9, 10, or 15 billion.
- Along with diminishing marginal benefits of people, there are rising marginal costs. The human footprint on the natural environment increases with population, and intrudes ever more into ever scarcer (and more socially valuable) undisturbed habitats. Some free-market types like Ron Bailey suggest that this is not the case by pointing to the possibility of peak farmland in the near future. But peak farmland is only achievable (if it is) through ever more intensive applications of synthetic fertilizer and pesticide. In one sense this capital-intensive agriculture may be “sustainable,” in the sense that human ingenuity will always find new fertilizers and new pesticides to keep agricultural productivity growing, but the negative externalities of these methods are considerable. The economic costs alone of invasive species are immense: think about the costs associated with the chestnut blight, Dutch elm disease, hemlock woolly adelgid, and emerald ash borer in North America alone. They run into the billions. A lot of people look around and say, “Well, I see a lot of green, so the environment must be doing OK.” But 91% of all land in the United States consists of human-disturbed habitats. Disturbed habitats are not necessarily bad for biodiversity, but undisturbed habitats are also important — and the fewer there are, the more valuable each remaining one is. More people means more disturbance, more invasions, more “dead zones,” and the like. And yes, the costs are not just economic, but aesthetic. I have no shame in admitting that I aesthetically value the environment, that other people do as well, and that those values should matter in any schedule of “social welfare.” Is a world without butterflies a world worth living in?
- People don’t like being crowded. Part of the reason why people move to suburbs and exurbs is not just high crime and costs in central cities, but distance from other people. Where do people go to “get away”? Generally rural and wilderness areas. The U.S. still has a lot of open space and could perhaps tolerate 50% more population without feeling intolerably dense, but even in this country, much or most of the wilderness is found in areas with little water or harsh climates.
- More people in a country mean more agency problems with the government. The people find it more difficult to constrain their rulers when their rulers don’t pay attention to individual voices, or even small clusters of people. As a country of over 300 million, the U.S. would face severe agency problems were it not for the federal system — and even so, agency problems are significant. In essence, the rulers are less constrained by the people. Higher populations around the world will mean more prevalent problems with mass democracy and mass dictatorship.
- More people will mean more infectious disease. It is a basic principle of ecology that a higher population of a species encourages greater parasitism on that species. As human populations have increased, so have human diseases. Epidemics of influenza have become more frequent. These viral infections are difficult to prevent and treat. Of course, as medical technology proceeds, humans will fight better against infectious diseases of all kinds. But organisms adapt, and medical technologies will of necessity focus on life-threatening diseases rather than chronic and periodic diseases that are not life-threatening. But even the common cold significantly decreases human well-being. In a future world much more densely populated, we could expect human beings to spend much of their lives ill with minor diseases.
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Posted in Economic geography, federalism, growth, ideologies, state politics, tagged civil liberties, communitarians, freedom, Ideology, libertarians, migration, regulation on July 26, 2013|
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I have just posted a couple of my working papers to SSRN for those who are interested. They are as follows:
- “Public Policy and Quality of Life: An Empirical Analysis of Interstate Migration, 2000-2012”
Individuals and households choose their political jurisdiction of residence on the basis of expected income differentials and jurisdiction-specific characteristics covered by the general term “amenities.” In addition to fixed characteristics like climate and terrain, amenities may include public policies, as in the well-known Tiebout model of migration. Do Americans reveal preferences for certain public policies by tending to migrate toward jurisdictions that offer them? This article tests whether state government involvement in fiscal policy, business regulation, and civil and personal liberties more often reflects an amenity or a disamenity for Americans willing to move. As identification strategies, the article estimates spatial, matched-neighbors, and dyadic models of net interstate migration for all 50 states, covering the years 2000-2012. The evidence suggests that cost of living, which is in turn strongly correlated with land-use regulation, strongly deters in-migration, while both fiscal and regulatory components of “economic freedom” attract new residents. There is less robust evidence that “personal freedom” attracts residents.
- “Civil Libertarianism-Communitarianism: A State Policy Ideology Dimension”
This paper investigates the existence of a second dimension of state policy ideology orthogonal to the traditional left-right dimension: civil libertarianism-communitarianism. It argues that voter attitudes toward nonviolent acts that are sometimes crimes, particularly weapons and drugs offenses, are in part distinct from their liberal or conservative ideologies, and cause systematic variation in states’ policies toward these acts. The hypotheses are tested with a structural equation model of state policies that combines “confirmatory factor analysis” with linear regression. The existence of a second dimension of state policy essentially uncorrelated with left-right ideology and loading onto gun control, marijuana, and other criminal justice policies is confirmed. Moreover, this dimension of policy ideology relates in the expected fashion to urbanization and the strength of ideological libertarianism in the state electorate. The results suggest that the libertarian-communitarian divide represents an enduring dimension of policy-making in the United States.
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Bob Higgs has used the concept of “regime uncertainty” to explain why the Great Depression lasted so long. In brief, the argument is that FDR’s escalatingly anti-capitalist rhetoric in the mid- to late-1930s spooked investors, who were uncertain whether they would be allowed to enjoy the future fruits of their investments. Therefore, investment declined, provoking a slump in 1938 and generally prolonging the Depression.
Some have argued that the prolonged period of high unemployment and anemic growth the United States has experienced in the wake of the 2007-9 “Great Recession” is also due to regime uncertainty. They blame the Obama Administration and Democrats in Congress for fostering a regulatory environment hostile to business.
But if that explanation of poor growth in 2009-10 is right, how can it explain poor growth in 2011-12, after Republicans took the House of Representatives? Under divided government, regime uncertainty is nil. The 2011-12 Congress is on pace to be the least productive since 1947 in terms of passing laws. Libertarians say gridlock is good — well, we definitely have gridlock, so where are all the benefits?
Here’s the evidence:
The chart shows inflation-corrected personal income, excluding transfers from the government. Real personal income today still stands below its level at the start of 2008. If these figures were divided by population, they would look worse still. There has been a very weak recovery.
Why should we not blame House Republicans as much as Democrats and Obama for the bad economy? (more…)
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In my last post on this topic, I described an ideal system of federalism and its advantages and disadvantages. One of the concerns that progressives often have about this kind of federalism, which I wish to take seriously, is that it will lead to a growing gap between the incomes of rich and poor regions (such as states in the U.S.). In this post, I’m going to summarize my findings on the empirical evidence on the relationship between federalism and inequality.
What I want to explain here is the extent to which different countries feature regional convergence or divergence in per capita incomes. That is, in some countries rich regions grow faster than poor ones, and in others poor regions grow faster than rich ones. The way to measure that is with the “annual rate of convergence,” which represents the average rate at which the differences in per capita income between a poor economy and a rich economy disappear, all else equal. A figure of 2% would mean that 2% of the average income difference between a rich and poor economy disappears each year. Even when convergence is happening, that does not mean that measured inequality between regions necessarily goes down, because random shocks can intervene (such as oil discoveries or real estate busts). But it’s a key question whether federalism can cause regional economies to convergence faster or more slowly (or even diverge).
Here is how some countries differ in their measured rate of regional convergence over the 1995-2005 period, the longest and most recent period for which consistent data are available (regions are defined as the subnational tier of government enjoying the greatest economic self-rule, which is in turn defined below: states in the U.S., autonomous communities in Spain, provinces in Canada, Laender in Germany, counties in Denmark, etc.):
Some countries actually experience regional divergence, in which richer regions grow faster than poorer ones: Slovakia, Poland, Ireland, Hungary, the Netherlands, and Japan, most notably. The fastest converger in the sample is the European Union (the 15-member EU prior to the entry of the postcommunist states and Cyprus). In other words, the gap between poorer EU states and richer EU states was erased at a 5% annual clip between 1995 and 2005. Much of this remarkable performance had to do with the steep rise of Ireland, but even when Ireland is excluded, the EU is a star performer among these “countries.”
In the chart above, there is no clear relationship between how (more…)
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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:
- The primary regulatory authorities in the country are state and local governments.
- 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.
- The national court system protects basic human rights and civil liberties from infringement by federal, state, and local governments.
- 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.
- State governments are politically autonomous, constitutionally sovereign, and independently elected. They may legislate freely within the bounds expressed above.
- 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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Since the East Asian financial crisis of the late 1990s, a consensus among even free-market economists has been developing: financial liberalization for developing countries usually don’t make sense. The financial crisis of 2008 and the ongoing Eurozone crisis have only fortified this consensus. The mainstream economic position seems to be that, at least for developing countries with smaller markets and poorly trained regulators, restrictions on capital account transactions in liquid portfolio assets often make sense.
Even the usually reliably free-market, pro-globalization economist Jagdish Bhagwati writes in his popular book, In Defense of Globalization, that the East Asian financial crisis
…was a product of hasty and imprudent financial liberalization, almost always under foreign pressure, allowing free international flows of short-term capital without adequate attention to the potentially potent downside of such globalization. There has been no shortage of excuses and strained explanations blaming the victims… [T]he motivation underlying these specious explanations is a desire to continue to maintain ideological positions in favor of a policy of free capital flows or to escape responsibility for playing a central role in pushing for… gung-ho international financial capitalism. (199-200)
Strong words! And then there’s this (more…)
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