Obama’s Economic Policy

Note: this post started out as a comment to a post on the Iowa politics blog Bleeding Heartland. 

Obama’s critics from the left decry his adoption of the GOP frame on deficit reduction. I join them in this critique as a matter of economic policy; the best course right now is larger deficits to stimulate the economy, combined with a longer-term fiscal policy that aims to roughly balance the budget over the course of the business cycle (run surpluses during booms, deficits during during slumps). (Though I would note that as a sovereign issuer of currency the U.S. can comfortably run annual deficits in the 2% to 3% of GDP range indefinitely.)

Still, Obama refuses to follow the standard Keynesian course prescribed by sensible liberals. Why? Why does he adopt the economic policy that he does?

Here are some possibilities that occur to me:

• He genuinely believes that it is the right thing to do.
• It is part of a poll-tested strategy to retain enough independent voters in battleground states to enable him to win re-election.
• He is a blank slate on economic policy and is carrying out the views of various advisers.
• He is in the sway of shadowy special interests, say key Wall Street figures.
• He is basing his policies on a different set of data or assumptions than are his critics; in this case, both sides would call the other side "misinformed."
• He has a deep psychological need to please establishment figures such as the editorial board of the Washington Post, David Brooks, and the rest of what passes for a DC class of opinion leaders.
• He harbors resentment against liberals and wants to show them who's boss.
• He knows that government spending in this country is tied up inextricably with issues of race and that as a Black man he cannot activate those latent prejudices among the electorate.

I think the likeliest explanation is the poll-tested strategy one, but I think the race issue has been curiously underplayed. Which ones did I leave out?

Tax Expenditures

There's plenty to criticize in the Simpson-Bowles and Rivlin-Domenici deficit reduction proposals that have been offered in the last week. Our number-one problem right now is punishingly high unemployment, not the projected deficit in 2030. Also, our long-term fiscal problem is almost entirely a health-care story, and neither plan really addresses that.

But punishingly high unemployment is a really hard problem to solve, and health care is even tougher, so instead I'm going to talk – muse, really – about how much I like the fact that both fiscal proposals adopt the technique of "zeroing out" all the various tax deductions and credits that tend to accumulate in the tax code over time, thereby forcing would-be deficit cutters to justify their full cost if they want to add them back in.

The home mortgage-interest deduction is an obvious one. At the margin, it might turn a few renters into homeowners, but the vast bulk of the expenditure goes toward subsidizing larger, costlier homes than people would otherwise purchase. And, like all tax deductions, it is worth more to high-income families, who have bigger interest bills and higher tax rates, than it is to low-income families. Many if not most of those marginal home-buyers pay too little in interest to itemize anyway; they take the standard deduction and derive no benefit from this subsidy.

Then there are the various tax credits for children, for postsecondary education, for storm windows, for electric cars. If we want to subsidize children and education and storm windows and electric cars, we ought to appropriate the funds and send folks a check so they can pay for these items. That's harder to do politically, but it's more honest.

Businesses get special tax breaks on research and development expenditures, and from time to time they also manage to get Congress to pass accelerated depreciation rules, supposedly to encourage the purchase of capital equipment. Both subsidies may well be worthy goals; if so, let's just cut them a check for R&D and for capital equipment. I imagine this sort of thing would be distasteful to rugged-individualist business owners, but we all have to do our part.

In addition to distorting our economic decision-making and letting economic policy-makers off the hook, these tax breaks, deductions, credits, and so on all cost money. That's why analysts call them "tax expenditures." To offset the expenditure, we have to raise the statutory tax rate. It's like when a furniture store raises the retail price of a sofa before announcing a 50% off sale.

The 1986 tax reform, which abolished many tax breaks, including the preferential rate on capital gains, offers a partial guide, and I'm surprised I haven't heard more people citing it. The broader tax base made lower rates possible, though we may have overshot on the rate-cutting. George H.W. Bush and Bill Clinton both had to raise taxes in the early 1990s to deal with burgeoning deficits. Still, "broaden the base and lower the rates" is the right starting point for any reform.

Wherein I Register my Exasperation with the Folksy Alan Simpson

I really don't care that Alan Simpson used the word "tits" in his description of Social Security as a "milk cow with 310 million tits." Yeah, I realize that he was being jerkily provocative. He knew that his rough language would result in a satisfying amount of pearl-clutching, while meanwhile he could hide behind an ersatz farm-boy "well out in the barnyard that's how we pronounce 'teats'" line.

The plain truth is that Sen. Simpson has made a tidy post-Senate career out of fronting as a sort of affable country dumbass. In the mid-1990s, while he was cooling his post-DC jets at a Kennedy School sinecure here in the People's Republic of Cambridge, he even had a local TV show on WGBH with Robert Reich called "The Long and Short of It." Ha ha, see, because Simpson is very tall while Reich is very short.

Anyway, the long-term (i.e. 75-year) shortfall in SS amounts to 0.7% of GDP. Not exactly a huge item, compared to other recent liabilities taken on by the US Govt, including a couple of wars and two rounds of tax cuts for the wealthy in 2001 and 2003. In fact, it turns out that the long-term cost of extending the Bush tax cuts for the plus-$250K crowd is roughly equal to the long term shortfall in SS. So, allow tax rates to return to those ruinous Clinton-era levels for the top 3% or so, devote the resulting dough to SS, and bada-bing, SS "crisis" solved for another 75 YEARS.

Speaking of which... did you know that the US Defense budget is scheduled to "go bankrupt" in about one month? ONE MONTH! Geez, according to current polling I guess it's more likely that E.T. will be dispensing my Ham Squishee at the Quik-E-Mart than the Defense Dept. will be fully funded for FY2011.

The Healthcare Elephant in the Room

Since my home in the 8th Dimension has been without electricity for five days now (and still counting), it's given me lots of time to think up a new post.

Apparently there's some sort of discussion going on about healthcare reform, so I figured that would be a good topic.

But I don't want to comment on the proposed reform(s) in Congress. For sure, my political philosophy gives me a point of view. But I think most of the arguments over these bills are really fueled by philosophy rather than an actual disagreement over facts that can be ascertained. There's plenty of blogging already on that, I'm sure.

Nor did I want to blog about whether conceptually we have a systemic cost crisis on our hands. For the record, I don't understand why everyone gets so freaked out about a rising percentage of GDP going to healthcare. For individuals on the margin, this is a legitimate issue. But as a country, where else do people think that money should be spent by individuals? More entertainment? Travel? Bigger (or second) houses? More food? More technological gadgets? Defense?

I personally think that Americans generally have the type of healthcare system we want already. We want to have hospitals be somewhat local even if they're half full, we want lots of extra tests to make sure no one misses even a low-probability terrible outcome, we want to be seen by specialists even if the outcome isn't better, we want lots of intensive end-of-life care rather than be told it's time to give up, etc. We have more disposable income per capita than other countries, so this is how we spend it. I'm not too worried about healthcare eventually becoming 100% of GDP-- I'm a strong believer in Herbert Stein's Law. ("If something cannot go on forever, it will stop.") How it would stop and what Americans would agree to live without, no one knows.

Wait, I guess I did want to blog about that part a little bit.

Here's the part I had in mind -- a simple math exercise to analyze how to cut healthcare costs if that is one's goal.

The first place most people would look are medical devices, pharmaceuticals and biotechnology products. The prices are more visible to most healthcare consumers and often have a sticker-shock effect. Not to mention all the political rhetoric. Unfortunately, it turns out that these products comprise only about 10% of healthcare spending.

These industries have average after-tax profits of about 15%. So, in other words, of that 10% contribution to healthcare spending about 1.5% is pure profit. This means that even if all those industries were nationalized and run permanently on a breakeven basis, healthcare spending would drop only 1.5% in the first year. Then presumably, the cost trend would resume.

Where does the real money go? This is the elephant in the room that everyone seems to be avoiding but must be obvious to anyone who has studied the issue. About 35% of healthcare spending goes directly to physicians - the largest single slice of the pie. How do other countries keep costs down? This is where.

In Canada, physicians make 40% less than their U.S. counterparts. In Germany, the average physician annual income is $80,000. This is less than electricians and plumbers make in Germany.

If you want to take 5% or 10% off of healthcare spending, this is how you can do it. Cutting physician salaries by 20% would take seven hundred basis points out of healthcare spending. (The other way to do it would essentially be to ban end-of-life procedures but this is very difficult to imagine happening. About 25% of the Medicare budget is spent on the last four weeks of 5% of enrollees' lives. But you never know going in which ones will pull through.)

Some people argue that physicians in those countries haven't accumulated huge debts as medical schools are heavily subsidized. This is a true point, but the math doesn't work. If the average doctor enters the field with $200,000 in debt, that's only 18 months of average salary to pay off. It's not enough of an argument (on its own) to justify the high salaries compared to the rest of the world.

Why does no one want to acknowledge this when the math is so obvious? I believe it is because doctors are well respected both as a profession and (almost always) when it comes to one's personal physicians, and because everyone in Congress knows this is a lobby that cannot be defeated politically.

Image: State Library of New South Wales via Flickr.

Google Results League Table: "_______ is Theft"

FURTHER UPDATE (Mar 2, 2010 4:50 PM): In what has now become a world-class blogalicious cock-up, commenter Albert Esplugas reports that he cannot reproduce Hans's figures. And I couldn't either, at least I couldn't yesterday. But now I can again. Not sure what is going on. Anyway, be wary of any reference to the number of Google results that some phrase or other supposedly returns. I'm clearly out of my depth here.

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RETRACTION (Feb 25, 2010 2:12 PM): Commenter Hans has found a serious fault in my Google phrase search methods. I tried a "* is theft" search and noted the top responses that came up in the auto-complete box. But Hans simply typed in some other phrases and found the following:

"sex is theft": 40,400
"love is theft": 57,000
"everything is theft": 111,000
"government is theft": 10,300,000 (!)

This will teach me to post after my bed-time. Although I do suppose the fact that the numbers seemed plausible to everyone but Hans (and others who were dubious but who didn't bother to comment) says something?

Original (and now basically useless) post appears below:

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In recent days, while following the raging inflation debates, I've noticed the phrase "Inflation is theft" in blog comments a lot. I remember that Ron Paul had a hand in popularizing the concept during his 2008 presidential run, as he criticized the United States's fiat money and Federal Reserve systems, which he argued lead to too much savings-munching inflation (which he considers theft).

It got me to thinking, "What else do people think is theft?" I'd heard of both taxation and property being equated to theft, even though the partisans of those views occupy opposite extremes of the economic policy spectrum. I wondered if other interest groups had hit upon the idea of branding the thing they didn't like as "theft."

So I did a Google search on the wildcard phrase "* is theft" and was a bit surprised by what I found, though I probably shouldn't have been. The top Google result, by far, was for "Piracy is theft," with 2.4 million results. Not high-seas piracy (though there were probably a few of those in there), but piracy in the sense of illegal downloading and/or copying of digital media, especially movies, video, music, and software. All by itself, Piracy accounted for 79% of the total results for the top 12 phrases combined. But the digital publishers, represented by powerful trade groups such as the RIAA and the MPAA, don't stop there. The terms Copying, Downloading, and Sampling are also in top 12, and together these four supposed theft-equivalents account for almost 80% of the total results.

Another surprise was that the phrase "Theft is theft" came in second, probably owing more to its rhetorical use by the digital publishers than as a logician's example of the law of identity, but I decided to give the logicians credit anyway.

Compared to the RIAA-MPAA juggernaut, the economic and political ideologues are a rag-tag bunch when it comes to applying the "theft" label to things they don't care for. The Libertarians ("Taxation is theft") are the best of the rest, with the Pacifists ("War is theft"), and Anarchists ("Property is theft") not too far behind. The Communists ("Profit is theft") were a distant fifth, followed by the Academics (Plagiarism), the Squatters (Rent), and Ron Paul's Goldbugs (Inflation) coming in at number 11:

A graph of the distribution of the top 12 Thefts looks like this:

The blue bars show the actual counts, while the yellow line traces the function of the trend line specified in the equation. It's a classic power-law distribution of the type that Wired's Chris Anderson wrote about in his 2006 book The Long Tail, where a single market leader grabs the vast majority of market share and is trailed by a long list of lesser players:

Images from top: Nick Humphries via Flickr, used under a Creative Commons license; the author; and Hay Kranen via Wikimedia Commons.

The Robin Hood Tax

The fact that it features Bill Nighy (definitely Netflix the original UK miniseries "State of Play"-- forget the pale US theatrical release) is just one of dozens of reasons why this video is awesome.



For an economic analysis of how a 0.5% financial transaction tax in the U.S. could raise $100 billion per year, (even assuming reductions in trading activity due to the tax) while also curbing speculation, check out this briefing paper from the Center for Economic and Policy Research:
PDF | Flash

Who is Organizing the Unemployed?

Does anyone know if there is any organizing going on among the unemployed anywhere? I admittedly don't see all the news, but I haven't heard of anything. My hunch is that the Tea Party is grabbing most of them. Time for us progressives to wake up and start offering an alternative to Tancredo and Palin!

A couple of options off the top of my head:

(1) Check out your local Jobs with Justice chapter. If it seems like they have it on the ball, join up and encourage them to start organizing among the unemployed, if they aren't already.

(2) Check out your local MoveOn chapter. The MoveOn health care rally I attended a couple weeks ago was impressive in terms of its demographic diversity. I was out of town for the local organizing meeting this past weekend, but I've heard good things about it so far.

Any other ideas?

Hyperinflation, Chuck? Really?

Via Bleeding Heartland, Iowa Senator Chuck Grassley tells the Des Moines Register that he feels that Fed Chairman Ben Bernanke has been too soft on inflation:

“I’m waiting to see what he says about the fight against inflation,” Grassley said about Bernanke. “And I think we’re in for hyper inflation in a couple years like we had in ‘79 and ‘80, if something isn’t done about it and I’d like to see something.”

This is just bizarre beyond belief. Worrying about "hyperinflation"  when the number of unemployed Americans has doubled in the last two years, is, in a word, goofy.

It's like worrying about the water damage while you're trying to put out a house fire.

It's like thinking about a new layer of shingles while the foundation of your house is crumbling into the ground.

It's like — No, wait. These ho-hum "house similes" just don't quite capture the utter wackiness of Grassley's statement.

How about this: Worrying about hyperinflation now, after two years of the worst economic downturn since the Great Depression, is like worrying that a flock of crazed Canada geese is going to swoop down into Iowa from Minnesota to commandeer all the corn harvesters within a 20-mile radius of Ottumwa, after which this honking gang of super-intelligent goose-fiends organize a mechanized corn harvester batallion to lay waste and destruction to the central Iowa counties of Jasper, Poweshiek, and Story. Could it conceivably happen? Well sure, anything is possible, I suppose. But the chances are so small that worrying about it for even one second would be a waste of time.

I think Grassley tipped his hand when he used the term "hyper inflation." It's so over-the-top that it can't be based on any real, non-ideological analysis of the situation. It sounds to me like a poll-tested scare word, just like his twirl around the dance floor last summer with "death panels."

My well-thumbed copy of The Penguin Dictionary of Economics (Seventh Edition) defines Hyperinflation as follows:

"Very rapid growth in the rate of inflation in which money loses its value to the point where alternative mediums of exchange (e.g. barter or foreign currency) are commonly used." (Italics added.)

Somebody back in my home state needs to hold Grassley accountable for using language like "hyperinflation." Any Iowans out there who want write a letter to the editor? All you'd have to do is quote the definition of hyperinflation I gave above and then ask if Grassley is afraid we will have to start stocking up on gasoline, cooking oil, flour, and Canadian loonies.

What has happened to the cardigan'ed senior Senator from the Great State of Iowa? First death panels, now hyperinflation. The guy used to be kind of a statesman.

Image: 5 Billion Reichsmark Note, Germany, 1928, uploaded to flickr by Adam Crowe and used here via a Creative Commons license.

Wanted at the Fed: An Inflation Dove

I was just reading that Janet Yellen, recently mentioned as a possible replacement for Fed chair Ben Bernanke, is considered on Wall Street to be an "inflation dove," which means that she considers maintaining full employment to be -gasp!- "as important" as controlling inflation.

I also wonder about Brad DeLong at Berkeley. He was in the Treasury Department in the Clinton Administration. He's a free trader, which I guess is neither here nor there when it comes to monetary policy (and not necessarily bad in any case), but I like that he's an economic historian.

In any case, we strongly need someone who will put reducing unemployment tops on the list. I know, from personal experience, how unemployment can convulse a family. My dad, a middle manager in corporate America, died at age 41 after being laid off from five separate companies in five years. Chasing new work forced him to move his young family from Kansas to Texas to Iowa in the space of two years. Then, just as he seemed to find stability in a new job in Iowa, the brutal double-dip recession of 1980 - 1982 cost him his job again. He never recovered from that one.

The costs to my family of that loss are obvious. But the costs are broader than that. When the economy lost my dad, it lost a certain amount of knowledge and experience, and the productivity that went with it. Now I can't say with certainty that if my dad hadn't lost his job of 11 years in 1978, that he wouldn't have died five years later anyway. And, the vast majority of unemployed people will survive, obviously. And, I'm not arguing for an open-ended dole. But, research has shown over and over that bouts of unemployment, especially for the father in a family, carry with them permanent and "baked-in" costs, both to the unemployed person's family, and to the economy at large. I just ask that these costs of unemployment to productivity and economic growth be somehow factored in when the balance between inflation and unemployment is being struck.

Yes, reducing unemployment by tolerating higher inflation transfers money from the financiers to the workers. But given the enormous increase in inequality over the last 30 years, most of it driven by skyrocketing returns to capital, I'd say it's time for a re-balancing.

Image: oddsock, via a Creative Commons license.

Hayek vs. Keynes Rap

This comes from the Hayek side, which I'm not supposed to like, but I don't care. It's just too awesome not to share.



UPDATE: The PBS Newshour did a nice backgrounder on this rap video, and the Keynes-Hayek debate that it dramatizes, back in December.

The Fed and the Treasury: Heads Should Roll

Krugman's "one cheer for Bernanke" notwithstanding, I think some heads have to roll here. Any favorites to replace him?

I've heard Blinder, Yellen, and Volcker mentioned.

And at Treasury, am I wrong to dream of a team featuring Brooksley Born, formerly of the CFTC, Elizabeth Warren of the TARP oversight panel, and maybe Sheila Bair of FDIC? Make Born the Treasury Secretary, Bair the Comptroller of the Currency, and Warren the head of what should be a new Financial Product Safety Commission.