We've all seen signs like this:
There's
an old joke about how engineers figure out these limits: they build a
bridge, drive successively larger vehicles over it until it collapses,
and then they rebuild the bridge and put up the sign.
Of course,
in reality, do engineers try to do better than that? Well, of course
they do. I'm not implying that they don't, just that we should expect
some failures.
Unfortunately, most policy applied at the
macroeconomic level is non-experimental. You can't run a controlled
experiment to see if it will work or not. Instead, you just do it, and
reflect later on whether it worked the way you thought it would. If
we're lucky, the decision-makers may even update their thinking. So most
of macroeconomic policy is analogous to the bridge's weight limit
problem.
This came up when New Orleans was hit by Hurricane
Katrina: the levees held ... until they didn't hold any more. Then we
cleaned up and pointed fingers. (For readers who have never seen the
levees, this was one of the biggest federal infrastructure projects in
history).
And yet, Charles Marohn writing at
Strong Towns
notes that almost the exact same excuse was used by former Federal
Reserve Chair Ben Bernanke in describing the policy response to the
Great Recession:
My favorite part of that interview
was Bernanke reacting to himself from a 2005 MSNB interview where he
said housing problems were localized and would not impact the national
economy. Here's what he said:
I
absolutely – first things you said, by the way, when saying in 2005 and
2006 the economy was going to continue to do well, it did do well.
2007 was not a bad year until the end. So, the economy was doing OK in
a broad sense. What we missed, what we didn’t anticipate, was that the
decline in house prices and the problems in mortgages would generate
this huge panic. So that — you know, I can’t, I can’t deny that. I
think that I wouldn’t give us a particularly good grade before the fall
of 2007. After that, when we began to see what was going on, there, we
were much more aggressive in responding.
In other words, when he said things were doing well, they were doing well, until everything fell apart, and then they reacted.
Now,
let's change direction a bit. Returning to the bridge joke, what do you
think get's budgeted for? Building one bridge, or building two? The
Katrina case should make it clear to everyone that ultimately we pay
twice (or more). But that's not the way we start out. Instead, we budget
one version, and then we add to that later on.
So, here's another quote from former San Francisco mayor Willie Brown:
Referring
to huge cost overruns during the construction of San Francisco’s
four-and-a-half-billion-dollar Transbay Transit Center, Brown wrote, “We
always knew the initial estimate was way under the real cost…. If
people knew the real cost from the start, nothing would ever be
approved. The idea is to get going. Start digging a hole and make it so
big, there’s no alternative to coming up with the money to fill it in.” [italics are from the source article]
In
terms of macroeconomics, this means that you don't let on how big your
policy is going to ultimately be. Instead, you start small, and add to
it. Then if there's a failure, you use that to double-down and expand
the program.
Oxford business professor Bent Flyvbjerg† dubs this "survival of the un-fittest":
... the least deserving projects get built precisely because their cost-benefit estimates are so misleadingly optimistic. [italics are original]
So now we've got three related issues:
- We don't really know whether some things will work until they fail.
- We don't like to pay enough for something that won't fail, so we start with something cheap and add on to it.
- We
fib to ourselves about the cost of doing things right, so we end up
choosing what seems cheapest (because we didn't include the opportunity
costs of doing it right or doing it twice).
Is there an
example of how this works in macroeconomics? Well, how about Social
Security, or even better the program that was added to it in 1965:
Medicare.
Of course, on the first point, Social Security and/or
Medicare haven't failed. But, there have been ominous rumblings for a
few decades now.
On the second point, we started with social
security in 1935. This offered a government check to former workers,
aged 65 and older. Life expectancy for a 65 year old at the time was 2
years. Many things have been
added to our government's social security offerings: coverage for spouses and dependent children in 1939,
coverage for disabled workers in 1954, early retirement in 1961 (even though people were living longer), coverage for the disabled who weren't workers (
SSI) in 1972, and automatic cost-of-living adjustments in 1977. But by far the biggest one is
Medicare. Initially, in 1965, this was just two parts (A and B, for hospital stays, and more general insurance). But we got
Part C in 1997 (with more broader and more flexible coverage), and
Part D
in 2006 (with prescription coverage). Now, here's a little secret.
"Obamacare" was pitched to the public as being about patient protection
and affordable care. But everyone who follows policy knows that a
huge part of Obamacare was new fixes to Medicare to rein in costs.
That
covers the start small and make additions part of the argument. What
about the idea that costs are understated because no one would agree to
them?
Well, Medicare is a liability of the federal government (a
liability being something that generates cash outflows rather than
inflows). The money for those checks needs to come from somewhere. If
not, it's called an unfunded liability. Current estimates are that the
unfunded liabilities of the Medicare system are about $36T (that's the number that Obamacare reduced, by perhaps $10T). That's twice the size of the "official" national debt. That
unfunded liability is not included in the national debt because it hasn't been borrowed ... yet. This sort of like carrying a $1,000 balance on a credit card, and
knowing
that you're going to have to put a $2,000 car repair on the card, yet
still thinking that your debt is only $1,000. Well, technically it is,
but this is clearly magical thinking.
Then there's the third
point: did we choose to structure the laws this way because we were in
denial about some of the costs? I don't know of any direct evidence to
support this, but the indirect evidence is how we treat increasing life
expectancy. It's no secret that life expectancy has been increasing in
the United States for, well, not really decades but in fact a couple of
centuries now. And yet 80 years into our era with Social Security, we
still do not have any concrete plan for matching up when people can
start to collect benefits with how long they can be expected generate
costs to the system.
Maybe macro isn't that hard. Maybe what's hard is admitting to this pattern of behavior.
† I swear I did not make that name up.
BTW: Thanks to
Cold Spring Shops to pointing me to this source article, from which I'm getting the previous entry in this series too.
