Aargh! The Deficit Is a Secondary Problem

Here’s the headline from a top of page 2 article from the March 14 issue of The Wall Street Journal:

Serious Debate on the Budget Deficit Has Started

Here we go again …

No one chooses a budget deficit. Those choices are primary.

The budget deficit is a result of those choices. This makes it secondary.

The choices in question are spending policies and tax policies. I say policies instead of amounts, because our government officials are forced by bean counters and the legal system to pretend that they can predict the amounts more closely than they actually can.

But, even if we give them a lot of wiggle room on amounts (and we should) there are two bald facts to be reckoned with:

• Government spending has been trending up.
• Tax revenues have been flat.

These facts are after scaling for the size of the economy (which takes care of population growth, economic growth and price inflation in one step).

And, these facts are long term trends. We can quibble about short-term rates of change, but the big picture has been stable for 2-3 generations now.

Here’s the graph from the article:

Look closely. Over the last 40 years:

• Social Security spending is up by 1/3.
• Medicare spending has quadrupled.
• Medicaid spending has quintupled.

Do the back-of-the-envelope calculation: these three used to be 4% of GDP, and are now closer to 10%. That 6% difference, in a $13,000B economy, is $780B. That’s far more than the average deficit over the last 10 years (cut Obama and the Democrats a break here by taking a longer sample: if they’d had the Bush economy maybe they would have acted differently).

And yet the article starts out with:

… An adult conversation has begun on the federal budget deficit.

And the follows with this whopper:

… The political climate is growing more hospitable to the kind of grand bargain needed to rein in the rest of the budget—potentially encompassing the tax code, the defense budget …

I’d say the reporters have been fooled about the level of maturity of the conversation.

Krauthammer on Obama’s Priorities

First off … let me emphasize that Obama isn’t doing any worse than almost all other politicians in the last generation.

Having said that, let me link to an op-ed piece by Charles Krauthammer that appeared in the local paper on March 15.

Krauthammer is no friend to Obama, but he’s not a bomb-thrower either. He’s the conservative column for the otherwise liberal Washington Post: so, he’s got to be good, but if he was idiotic that paper wouldn’t tolerate him. Note that the linked piece is from National Review, a conservative publication, so it won’t be as diplomatic as something in the Washington Post.

He starts with:

Everyone knows that the U.S. budget is being devoured by entitlements.

Fair enough. I think we can all agree on that. Then he states:

Everyone also knows that of the Big Three — Medicare, Medicaid, and Social Security — Social Security is the most solvable.

Again, there’s broad agreement there. The he spells out a simple plan:

Back-of-an-envelope solvable: Raise the retirement age, tweak the indexing formula (from wage inflation to price inflation), and means-test so that Warren Buffett’s check gets redirected to a senior in need.

Which brings us to current policy:

The relative ease of the fix is what makes the Obama administration’s Social Security strategy so shocking. The new line from the White House is: no need to fix it because there is no problem. As Office of Management and Budget (OMB) director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.

This is the same position that is taken down in the Blahaus piece posted earlier in the semester.

This is the same position that has been rejected in every macroeconomics textbook for the last 20 years or so.

This is the same position that Al Gore adopted in the 2000 campaign, and for which he was widely criticized at the time (even by Democrats).

The sad part about all of this is that, theoretically, there is nothing wrong with a social security system, and they can be stable forever. But, on the ground, flawed humans have intentionally chosen an unstable path that favors people who are old enough to vote over those who are not old enough to vote (or not born yet).

Mistakes of Left-Wing and Right-Wing Economists

I have copied a good chunk of the original posts (here and here). You should go to those and browse the comments as well.

Tyler Cowen is the dean of blogging economists – he is the better known and more prolific half of Marginal Revolution. I’m quite sure that everyone who reads economics blogs has read these two posts.

Here’s what he sees as the problems of left-leaning economists (e.g., some that are easy to find on the internet are Paul Krugman, Brad DeLong, Mark Thoma, James Hamilton and Joe Stiglitz – Krugman and Stiglitz are both Nobel Prize winners):

1. Suggesting that money matters in politics far more than the peer-reviewed evidence indicates.

2. Evaluating government spending on a program-by-program basis, rather than viewing the budget as a series of integrated accounts.  Cross check with the phrase "Social Security," or for use to take many discretionary spending cuts off the table.

3. A reluctance to incorporate sophisticated "public choice" theories into the analysis of favored programs. 

4. Sins of omission: there are plenty of bad policies, such as occupational licensing, which fail to come under much attack from the left.  Sometimes this is because the critique would run counter to the narrative of needing more government or needing more regulation.

5. Significantly overestimating the quality of the political economy of an America with more powerful labor unions and underestimating the history of labor unions as racist, corrupt, protectionist, and obstructions to positive change.

6. Overestimating the efficacy of fiscal policy, underestimating the power of monetary policy, and sometimes ignoring or neglecting how the two interact ("the monetary authority moves last").

7. Citing weak versions of structural unemployment theories and dismissing them with a single sentence or graph, while relying on stronger versions of structural theories in other, non-cyclical contexts.

8. Lack of interest in discussing ethnicity and IQ as relevant for social policy, except in preferred contexts.

9. Overly optimistic views of the fiscal positions of state governments.  Since the states don't have the same tax-raising powers that the feds do, and since state government spending is favored, there is a tendency to see these fiscal crises as not so severe, or as caused by mere obstructionists who will not raise taxes to the required levels.

10. A willingness to think that one has "done one's best" in the realm of policy, and to blame subsequent policy failures on Republican implementation, rather than admitting that a policy which cannot be implemented by both political parties is perhaps not a good policy in the first place.

11. Use of a strong moral argument for universal health care coverage, combined with a fairly practical, hard-headed approach to the scope of the mandate, and not realizing the tension between the two.  Failure to indicate where the "bleeding heart" argument actually should stop and at what margins we should (and will) let non-elderly people die, if only stochastically.

12. Implicitly constructing a two-stage moral theory, which first cordons off the sphere of the nation-state (public goods provision, etc.) and then pushing cosmopolitan questions off the agenda in the interests of expanding a social welfare state.  (In fairness, many individuals on the right don't give cosmopolitan considerations even this much consideration, although right-oriented economists tend to be quite cosmopolitan.)

13. What about countries?  Classical liberals are increasingly facing up to the enduring successes of the Nordic nations.  There is not always a similar reckoning with the successes of Chile and Hong Kong and Singapore; often this is a sin of omission.  (Addendum: comment from Matt here.)

14. Reluctance to admit how hard the climate change problem will be to solve, for fear of wrecking any emerging political consensus on taking action.

As someone who was conditioned to be a left-wing economist in my early days, I have suffered from 1-2, and 6-12 in the past — although probably only 8 and 11 in the last 15 years.

Here’s what he sees as the problems of right-leaning economists (e.g., Russ Roberts, Greg Mankiw, Mark Perry, John Taylor, Nobel prize winner Gary Becker are fairly easy to find in blogs or columns):

1. There is excess fear of inflation and hyperinflation in the current economic environment.  Further there is often an excess estimate of the costs of inflation in the two to five percent range.

2. We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

3. Lower taxes don't spur economic development as much as it is often claimed, at least not below the "fifty percent or less of gdp" range.

4. There are many climate change issues of relevance here, not mostly economics, but it seems remiss not to mention them.

5. I'm all for Health Savings Accounts, but unless done on a Singaporean scale, and with lots of forced savings, they're not a health care plan to significantly benefit most Americans.  There is less of a coherent health care plan, coming from this side, than one might like to think.

6. There is already considerable health care cost control embedded in the ACA, most of all for Medicare, and this is not admitted with sufficient frequency.

7. When it comes to the historical determinants of the Industrial Revolution, the Great Divergence, and the like, the importance of state-building in that process is often neglected.

8. The story of steady and significant economic progress for most Americans is accepted too readily.

9. The role of market failure in the recent financial crisis is underestimated.  It is also believed that we can somehow commit to a policy of no future bailouts.  Promoting that myth will make future bailouts more likely.

10. Relying on liability law, whether or not it is a good idea, is not intrinsically more pro-market, more libertarian, or less interventionist.

As a fully-fledged right-wing economist, I acknowledge suffering from 2, 4-5 and 8-10, although liberals would probably identify me as suffering from all of them.

From Brent

Now for the more serious economic and political implications.

Not spending more than you have is hard when the government’s inflows and outflows are much more uncertain than the typical households.

And, saving for the inevitable emergencies is hard when you 1) operate on a cash-in cash-out basis with a strictly annual budget, and 2) are forbidden from saving in the same sense that most households understand it.

More Debt Data

Shaulauna recommended this page for its information about the national debt.

It’s not shrill, but I think it’s presentation suffers from the same problems as many other sites:

• No adjustment for inflation
• No adjustment for the size of the economy
• No adjustment for the size of the population
• No comparison with national assets.

Having said that, I like the rest of the site: there’s lots of cool data and posts (I liked his dictionary).

Why Is Macroeconomics So Hard?

Macroeconomics is one of the harder classes on a college campus, but that isn’t anything special – there are lots of hard classes.

Macroeconomics is special though, in that it is both hard and beset by an extra set of difficulties.

The list of college classes that are both taken by a lot of students and that cover a lot of hard material is pretty short: calculus, statistics, organic chemistry, microeconomics and macroeconomics.

The list of college classes about whose subject matter non-experts have strong opinions is also pretty short: evolution, human sexuality, some education classes, and macroeconomics.

The only course that is on both lists is macroeconomics, and this can make it extra hard for you to master. Here’s a list of the pitfalls.

• Everybody has an opinion about macroeconomic issues.
  • Most classes you take in college do not cover subjects on which everyone feels entitled to have their opinion respected.
  • For example, if you take Organic Chemistry, your weird Uncle Fester is not going to want to argue about it over a holiday dinner – but he might about macroeconomics.
  • In many ways, discussing macroeconomics with friends and relatives is like discussing primary education, evolution, religion, or human sexuality – everyone has an opinion, everyone thinks their opinion is right, many people are stubborn about their opinions, and – while most of the opinions are worthwhile – many of them have no foundation whatsoever. They may even know that their viewpoints are incorrect, but they are too wedded to them to change – a psychological condition known as cognitive dissonance.

• Macroeconomic policies have been practiced for thousands of years – so there is a very strong element of “we’ve always done it this way” in the way government officials think about things.
• Our Constitution was written over 215 years ago, yet macroeconomics wasn’t recognized as a separate discipline until 70 years ago – so our government isn’t designed for the timely execution of proper macroeconomic policy. We’ve stapled this to their job description.
• We elect people to do something. In fact, those who have a need to do something are attracted to government. Should we trust them to do the right thing when it is to do nothing at all? We might get better policy decisions if we bought every policymaker a Nintendo Wii to keep them from creating new policies just to stay busy.
• Legislative politics is about finding acceptable compromises, not making the right choices. If it’s hard to order an 8 slice pizza for 3 people that make them all happy, can you imagine trying to formulate macroeconomic policy in Congress or The White House?
• For better or worse, a lot of politics is just adversarial grandstanding. Democrats and Republicans, liberals and conservatives, often say one thing when in power, and the opposite when out of power – kind of like a “friend” who is never hungry until you pay for the pizza.
• The positions of political parties are a mishmash of ideas that have been cobbled together because that combination might attract a majority of the votes. This is like having to choose the better dresser between two old men on the golf course.
• The individual policy positions of a political party are often swapped or reversed through time without consideration of whether the overall platform is consistent. This makes them act like the “mean girls” in high school – they often drop their traditional friends very quickly, and retain allies for loyalty rather than sensibility.
• Most members of Congress and other government officials have little or no background in economics – we primarily elect lawyers to write our laws and then dump responsibility for national economic well-being on them as their primary job. Maybe we should feel sorry for them – they know not what they do.
• Just about everyone gets their information about macroeconomic policy from people in the media who have little or no background in economics – some of them probably even went into the media to avoid economics in college, and now they have to talk or write about it for a living. That must ____!
• The media is obsessed with presenting viewpoints that are balanced, in the sense that they try to present experts with different opinions. The problem is that they don’t tell you how much work it took to actually find a different opinion – what if there isn’t any disagreement except from crackpots?
• Policy debates are often lacking answers to really basic questions. How much is this going to cost? Compared to what? How can you be sure? Why do we listen at all if we don’t get answers to these questions first?
• It’s hard to believe, but there’s quite a bit of evidence that policymakers actively suppress the collection of data on controversial policies, but spend freely to collect repetitive information on uncontroversial policies.
• The media are availability entrepreneurs: they are actively seeking out information that is available, and which fits the world view of their consumers. If the information isn’t readily available you won’t hear about, and you won’t hear about it if people won’t listen to that viewpoint. Bad news sells because that’s what we want to hear.
• Many people focus excessively on prices, because they are easy to observe. But, the real action is in quantities: how much did people work, how much did they buy. Increasing and decreasing prices always help one party and hurt another. But, with goods and services, increasing quantities are good, and decreasing ones are bad.
• We removed one of the checks and balances from the Constitution that kept special interest politics in check. Prior to the 17^th amendment, Representatives represented people, and Senators represented state governments. Now Senators are elected the same way as Representatives, meaning that special interests only have to convince one group (the voters) instead of two (the voters and the states’ government officials). It’s not that different from kids getting more special favors when there’s just one parent around.
• There’s what The New York Times David Brooks calls a metacognition deficit: “Very few in public life habitually step back and think about the weakness in their own thinking and what they should do to compensate.” Outside of politics, this is most commonly seen among those who apply their religious doctrine more broadly that it is applicable or even intended. Reversing that argument, it may be that those on the opposite side of the political spectrum disagree with you because they believe you are acting out of faith, and to them your faith is simply wrong and not worth discussing.
• Many people suffer from what Bryan Caplan calls the “activist’s fallacy”. It goes like this: 1) something must be done, 2) this is something, 3) therefore this must be done. It’s a fallacy because this could be just about anything. This is compounded by the fact that most government policies don’t have any sunset provision (basically, an expiration date). For example, in the U.S., 85% of the population has health “insurance” provided as a fringe benefit of their job – this is a holdover from World War II when the Roosevelt administration didn’t want employers paying workers more in cash, and this is what managers came up with.

The upshot of all of this is that you will often hear things from friends, relatives, and the media that don’t match up with the textbook, my lectures, or the insights you are getting from them.

Trust what you’ve learned in class – by the end of the semester you’ll have learned more macroeconomics than most people ever get the chance to, and it will be fresh in your mind.

From time to time, in response to some odd observation on the world around you, I’ll say – remember that first lecture of the semester? Don’t take offense when I do!

And don’t forget – while I teach facts and uncontroversial theories about macroeconomics, this is still a dynamic and evolving field, and I might later be proved wrong.

N.B. This is a list that grows every year. Check back to this site in the coming years for new additions.

More State Budget Data

The big story of the recovery from the Great Recession has not been the problems of industry but those of state governments. This chart came from an article entitled “Budget Battles Roil Straitened States” in the February 25 issue of The Wall Street Journal.

The legend is missing, but Utah is in the best category in this chloropleth.

Wisconsin, which is aggressively reacting to their problems, is in the second to best group.

N.B. The gray states provided no data, so they aren’t necessarily the good ones.

Note that the right hand side of this map is missing from the online version, but is in the print version.

There was another graphic on that same page of hard copy, and it is not available online. The data is here. It showed that Utah is a little worse than average on where state tax revenues stand: the average is 89% of peak levels, and we’re at 85%. It also showed state pension liabilities as a percentage of GSP, and here we’re a little better than average: 5% vs. 7%.