Thursday, February 22, 2018

A Kennedy-Reagan-Trump Fiscal Policy?

Heather Long reports that the White House economists have no clue about the history of U.S. fiscal policy:
President Trump’s policies are driving an economic turnaround that puts him in the company of transformative presidents such as John F. Kennedy and Ronald Reagan, White House economists said Wednesday as they unveiled their first “Economic Report of the President.” The report presents a highly optimistic view of the economy’s current condition and future course, with growth predictions that exceed most nonpartisan economists’ expectations. Economists also caution the White House’s efforts to juice growth could cause the economy to overheat and then careen into a downturn.
Brad DeLong asks whether his latest on fiscal policy and long-term growth belongs in the next edition of Martha Olney's and his macroeconomics textbook? While I say it should, permit me to quote the relevant passages after I inform these clueless White House economists about fiscal policy during the 1960’s and under Reagan as I noted over at Brad’s place:
We did get that 1964 tax cut right after Kennedy died and we did ramp up defense spending for Vietnam. In December 1965 Johnson's CEA had the good sense to tell him that we had gone overboard with fiscal stimulus. Alas we got the 1966 Credit Crunch anyway followed by an acceleration of inflation when the FED backed off on its restraint. Reagan gave us a similar fiscal policy but the Volcker FED did not back off its tight monetary policy so we got the mother of all crowding out - high real interest rates for years and a massive currency appreciation. Glad to see that Trump's CEA has compared this fiscal fiasco to the previous mistakes. Oh wait - Kevin Hassett thinks this is good fiscal policy. It seems the current CEA is as stupid as the President it advises!
OK – now that I’m done with my rant and little history lesson, let’s hear from Brad:
In late 2017 and early 2018 the Trump administration and the Republican congressional caucuses pushed through a combined tax cut and a relaxation of spending caps to the tune of increasing the federal government budget deficit by about 1.4% of GDP. These policy changes were intended to be permanent. Not the consensus but the center-of-gravity analysis by informed opinion in the economics profession of the effects on long-run growth of such a permanent change in fiscal policy would have made the following points: 1. The U.S. economy at the start of 2018 was roughly at full employment, or at least the Federal Reserve believed that it was at full employment and was taking active steps to keep spending from rising faster than their estimate of the trend growth of the economy, so a long-run Solow growth model analysis would be appropriate. 2. The economy's savings-investment effort rate, s, has two parts: private and government saving: s=sp+sgs=sp+sg. 3. The private savings rate spsp is very hard to move by changes in economic policy. Policy changes that raise rates of return on capital—interest and profit rates—both make it more profitable to save and invest more but also make us richer in the future, and so diminish the need to save and invest more. These two roughly offset. 4. Therefore, when the economy is at full employment, changes in overall savings are driven by changes in the government contribution: Δs=ΔsgΔs=Δsg. 5. And an increase in the deficit is a reduction in the government savings rate.
Brad continues using the Solow growth model to demonstrate how the latest fiscal fiasco would lead to less capital per worker over time reducing steady state output, which is what we witnessed in the 1980’s. We have been asking the same question since 1981 – how can anyone argue that a fall in national savings is good for long-term growth? We still have not received a coherent answer.

Will Boilerplate Kill the Invisible Hand?

Will Automation Kill Our Jobs? by Walter E. Williams appeared in the Gaston GazetteCharleston Gazette-Mail, Daily Tribune, Frontpage Mag, Richmond Times-Dispatch, Townhall, Holmes County Times-AdvertiserNational Interest, Rocky Mount Telegram and CNS News (not to mention the Dogpatch Völkischer-Beobachter). It features the following cutting edge (& pasting) analysis:
People always want more of something that will create a job for someone. To suggest that there are a finite number of jobs commits an error known as the "lump of labor fallacy." That fallacy suggests that when automation or technology eliminates a job, there's nothing that people want that would create employment for the person displaced by the automation.
Williams is a professor of economics at George Mason University. His column is syndicated by the Creators Syndicate. Apparently there is still a HUGE market for cuts 'n pastes of well-aged boilerplate. The Trump-bots on twitter eat this shit up.

Let's see what Professor Williams thinks of Adam Smith's lump of labor fallacy:
Dear Professor Williams, 
I was interested to read the other day your account of the "lump of labor fallacy" in the Charleston Gazette-Mail. As you pointed out, the number of jobs is unlimited as long as there are people who want more of something that requires work to be done. 
I had previously read a statement by a famous economist claiming that the number of workers who can be employed cannot exceed a certain proportion of the capital of the particular society the workers live in. I am wondering if you can clarify for me whether that economist has committed a lump of labor fallacy by suggesting that the number of jobs is limited by something other than the demand for goods or services, which -- for all intents and purposes -- is unlimited, as you have pointed out.
Furthermore, I am intrigued by the idea that people contribute to the public good without intending to when they are only pursuing what they perceive as their own self-interest within a free and competitive system of market exchange. Would such a contribution to the public good result even if their notion of their self-interest was "erroneous," as in the lump of labor fallacy? 
For example, if truck drivers were afraid that self-driving vehicles would put them out of work, they would presumably be acting in their self-interest if they made campaign contributions to candidates who promised to ban such vehicles on the grounds that they would create unemployment. Such contributions would be free speech, as defined by the U.S. Supreme Court. But wouldn't such a ban, at least on those grounds, be based on a fallacious assumption? 
Finally, I have been wondering who actually said that there is "a fixed amount of work to be done" or that "there is only a certain quantity of work to be done." I have seen numerous rebuttals to such a view but no positive statements of it from representatives of organized labor. I would be grateful if you could identify sources who actually commit the lump of labor fallacy in plain words.
Sincerely, 
Tom Walker

Wednesday, February 21, 2018

Divide and Rule

There was a time, one I can remember from when I was growing up (the 1950s and 60s), when being a liberal meant you wanted certain rights and benefits for everyone, at least ostensibly.  We had Social Security because everyone should have a basic pension when they retire, and all disabled people need to be cared for.  Freedom of speech was for everyone, even those horrible Nazis in Skokie.  Liberals wanted national health insurance so everyone could afford medical care, but settled for Medicare, a universal program for seniors.  Protestors like me were not against the rhetoric of universalism but the hypocritical practice, where blacks, Mexican and Filipino farmworkers and poor single moms were denied their share.  That was then.

Now, liberals are concerned about minorities and the poor.  They are against privilege, which is defined as not being a minority or poor.  Public programs are designed to give assistance to the most oppressed and not waste their resources on those who have the privilege to fend for themselves.  A poster child for the new politics is higher education.  Liberals want bigger subsidies, like more Pell Grants, for the poorest students and those who self-select by enrolling in community college.  They were distraught at Bernie Sanders’ call for free public higher ed for all, since that would siphon off scarce resources for the benefit of privileged, nonpoor families.  From their perspective, this was proof that Bernie and his ilk were unwoke: unaware of the scourge of privilege, they even wanted public support for it.

In fact, nothing is more important for the future of progressive politics than a return to universalism.  If you doubt this, read this powerful reportage in the New York Times on the divisions opened up by Obamacare.  It describes two women, one working part-time and living below the poverty line who gets ample, free health coverage, the other working full-time in a middle class job who is stuck with monthly $1000 premiums and a big deductible.  That’s not a bug but a feature: the program was set up to focus its support on those at the bottom and charge full freight for everyone else.

The effect is to divide the working class into two groups, poor winners and nonpoor losers.  The politics are toxic, as you might expect.  (Yes, the reporter found a Democrat to represent women below the poverty line and a Republican for women above it, which gives it an unfortunate air of exaggeration, but the logic of the comparison remains compelling.)  It is also bad social policy, since at the margin households making $80,000 a year (the middle class example) can also skimp on care if the financial pinch is too much.

There is an interesting analysis of this phenomenon in “When Exclusion Replaces Exploitation: The Condition of the Surplus-Population under Neoliberalism” by Daniel Zamora.  He points out that modern politics has become a contest between a Right that demonizes poor people, minorities and immigrants as living off the hard work of decent folk (the role formerly assigned to the capitalist class by socialists) and a Left that valorizes these same oppressed groups and regards everyone else as privileged.  They differ over which side they take, but they both see the cleavage between the bottom and the middle as the essential point of departure.  I’m not on board with his solution (explained here), but he is spot on about the problem.

I wish it were enough to just espouse a universalist progressive agenda, but we are so deep in the muck today that we have to go beyond this.  We should be as clear and outspoken as possible about the moral and political dead-end to which “targeted” liberalism has taken us.

Tuesday, February 20, 2018

Paying for Health Care Over Time

Simon Wren Lewis illustrates the long-run government budget constraint with this tale:
There are many reasons why, outside of a recession, deficits that, if sustained, would steadily increase the debt to GDP ratio may be bad for the economy, but let me give the most obvious here. For a given level of government spending, interest on debt has to come out of taxes. The higher the debt, the higher the taxes. That is a problem because high taxes discourage people from working, and it is also unfair from an intergenerational point of view. This last point is obvious if you think about it. The current generation could abolish taxes and pay for all spending, including any interest on debt, by borrowing more. That cannot go on forever, so at some point taxes have to rise again. A whole generation has avoided paying taxes, but at the cost of future generations paying even more. As a result, unless there is a very good reason like a recession, a responsible government will not plan to sustain a deficit over time that raises the debt to GDP ratio. The problem though is that it is very tempting for a government not to be responsible. The current US government, which is essentially a plutocracy, wants above all else to cut taxes for the very wealthy, and if they do it without at the same time raising taxes on other people but instead by running a deficit they think they can get away with it. Democrats have every reason to say that is irresponsible, although of course the main thing they should focus on is that the last people who need a tax cut are the very rich.
In my discussion of a paper by Jeffrey Miron, I exemplified what he is saying here with the Reagan tax cuts for the rich and defense spending build-up, which may be a description to what Trump is doing now. As Simon admitted after this comment, borrowing to fund infrastructure investment is different:
But surely spending from borrowing and at least some taxation wouldn't necessarily have the same effect. An equilibrium could at least be sought at higher levels of borrowing and higher levels of economic activity. Particularly with spending on education of course (where in any case the intergenerational fairness argument is weaker).
I added a comment that the 1983 prefunding of Social Security benefits is another form of intergenerational equity where we build-up a trust fund to pay for our future retirement benefits – assuming of course that the Republicans do not squander it on more tax cuts for the rich. But let me tackle the issue of health benefits since my noting of the Baumol Cost Disease drew this appropriate response from Barkley:
The Baumol cost disease hits all labor-intensive services, including large amounts of government activities that are not health-related. But somehow the US has had this especially rapid rate of med cost rise not experienced in any other nation, sort of like our exceptionalism on mass school shootings. This is way beyond Bauumol cost disease.
I agree and more on this after noting Barkley’s other comment:
Miron is right that the main upward driver on the spending side is medical care, but somehow Miron does not seem to offer any hope that we can restrain its cost growth to the inflstion rate or even less.
We can and should reign in medical costs. As I see it – there are two issues that both impact how Federal health care payments evolve over time. One is the fairness issue sometimes known as universal health care. If we as a nation do the right thing and make sure health care is both accessible and affordable to all, it is likely that government funding of health care will take a greater portion of total health care spending. I guess we could leave this to the states like Paul Ryan wants to but then states tend to use more regressive forms of taxation. I would prefer a greater role played by funding via a progressive income tax system. Barkley’s point is that we pay a lot more per capita than other developing nations. This chart may not be the “chart of the century” but it is “excellent” as it traces total health care spending as a share of GDP since 1980 for both the U.S. and other nations. Whereas our ratio jumped from 8% in 1980 to near 17% now, other nations have only seen modest increases in their health care spending relative to GDP. So maybe the Baumol Cost Disease is a small part of the story but rising market power for health care providers is a serious problem for the U.S. but not other nations. Timothy Lee is right:
Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
Of course this also means governments need to crack down on market power in these sectors. The relative price of a string quartet’s performance may have to rise over time but there is no reason to pay the musicians twice the market salary. Maybe doctors should be properly compensated even as their productivity does not rise with manufacturing sectors but we need to find a way to hire U.S. doctors at salaries closer to what doctors receive in the rest of the developed world. But let me finish with what really galls me about Jeffrey Miron’s paper:
Given those projected values for real GDP, I construct projections for revenue and discretionary spending by assuming they always equal 17.3 percent and 8.2 percent of real GDP, respectively. The values equal the average revenue-over-GDP and discretionary-spending-over-GDP ratios, respectively, between 1975 and 2014. …Figure 20 suggests that even with tax revenue substantially above its postwar average, and assuming no effect on growth, fiscal imbalance would still be large. If higher taxes have even a modest negative impact on growth, tax increases have no capacity for restoring fiscal balance.
To say we cannot raise the ratio of taxes to GDP much above 17.3% is just absurd. We can if we have the political will. But Republicans either argue this is not fair or there is some Art Laffer magic wand. As an economist, I reject the latter. But on the politics, let’s think of a young man who just got married and is expecting a family of children. Inevitably some parents will face rising health care costs unless they are lucky. I would hope this father would not put going out on the town and expensive vacations ahead of the health care needs of his family. For a nation – rising health care costs over time need to be funded and most hopefully by an equitable Federal government even if the very rich get to take less vacations in the Hampton or fewer shopping sprees on Rodeo Drive.

Monday, February 19, 2018

Shorting China

I just saw “The China Hustle” as part of the Portland International Film Festival.  It’s a very (very) slick documentary about the listing of fraudulent Chinese companies on US exchanges during the post-financial crisis era.  The companies were mostly real, but their financial data were fictitious, although given the stamp of approval by the SEC, investment banks, specialty law firms and the big four accounting firms.  The movie might be called “The Medium Size Short” because it centers on several market players that have righteously fought this upwards-of-$50 billion fraud by shorting it.

I think it does a great job of explaining the financial mechanisms at work (especially the short itself), and it holds your attention with lots of jump-cutting, extreme facial closeups, brightly lit à la Errol Morris, and the other techniques of zingy video journalism.  It would make a great classroom enhancer in courses on finance or political economy, provided you’ve got a 90-minute block of time to spare.

I have two qualms with the content.  First, it makes the case that the victims of this crime are the millions of small investors and pension-savers, people like you and me.  And it’s true that many pension funds and ordinary folks were ripped off.  But the real indictment is this: the financial sector has doubled its share of the economy, and its ballooning profits are a major contributor to the rise in inequality.  What are we paying for?  As this film clearly shows, we are definitely not buying better information or a more productive allocation of capital, at least not in the sectors of the market it shines its light on.  On the contrary.  We are being fleeced by sharp operators whose only reason for existence is that they can stash away their cut of the loot before anyone learns enough to stop them.  That’s a pretty big lesson, in my book.

Also, the film ends by suggesting that the entire market capitalization of the major Chinese firms—they point to Alibaba in particular—may be fraudulent, and that we’re on the verge of another 2008-style market meltdown.  I’m not a specialist in Chinese equities, so I won’t take a position on this.  Nevertheless, it’s clear that there is a lot of genuine economic growth going on in China, and some of it must be serving to support asset values.  It is unlikely that the entire capitalization of Chinese firms will prove to be as flimsy as that of the smaller pseudo-firms exposed in the film.  Of course, between full current market value and zero there’s a lot of potential space for unpleasant surprises.

Sunday, February 18, 2018

A Critical Review of Jeffrey Miron’s Call to Slash Entitlements

I accused John Cochrane of incoherent babbling on the Federal deficit issue noting his update where he flip flopped:
He went from fiscal policy being sober to we are in dire straights just like that! Oh my the sky is falling. We have to take away those Social Security benefits that my generation have been paying into for 35 years. We cannot afford Federal health care spending. After all those tax cuts for the rich can never be reversed. Yes John Cochrane is part of the Starve the Beast crowd even if granny starves from these supposedly required reductions in transfer payments.
But let’s note why Cochrane flip flopped in his update:
Jeff Miron wrote to chide me gently for apparently implying the opposite, which is certainly not my intent. One graph from his excellent "US Fiscal Imbalance Over Time".
Having read this Cato paper, it is time for my critical review that I promised. The review will start with the technical finance which in one way is a lot better than Cochrane’s rants but still troubling in certain ways. I will next turn to the policy if not political issues where this paper is even worse than Cochrane’s update. Beware – we will have to cover a fair amount of numbers but I hope to keep this within the context of my present value model:
Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend.
Miron is using the same basic model, which he expresses as:
Fiscal Imbalance = Present Value of Future Expenditure – Present Value of Future Revenue + Outstanding Debt
What I like about this equation is its focus on future spending and revenue not historical decisions which can be summarized as the current level of debt in terms of our model. Cochrane’s rant was a bit weak in this regard. May I suggest Cochrane rent the 1989 movie and check out this scene as the Joker gets basic finance! While I may quibble with Miron with respect to his forecasts, my big problem the use of nominal figures to draw his graph – which is far from “excellent”. Note his measure doubled in nominal terms since 2000 but so has nominal GDP (higher prices, more people, and higher income per person). Which is why this title and introduction is misleading:
U.S. Fiscal Imbalance over Time: This Time Is Different. The U.S. fiscal imbalance—the excess of what we expect to spend, including repayment of our debt, over what government expects to receive in revenue—is large and growing.
Evsey Domar introduced “The Burden of Debt” in 1944 by expressing everything as a percentage of GDP. While his approach was first order differential equations, our present value approach done properly is easier to follow and perhaps more policy relevant. But let’s be clear – Domar was trying to figure out how high tax rates needed to be to cover past fiscal decisions captured in the debt/GDP plus the present value of expected future government spending. We will return to the policy implications of this shortly. Back to Cochrane’s ranting:
The US fiscal situation is dire. The debt is now $20 trillion, larger as a fraction of GDP than any time since the end of WWII. Moreover, the promises our government has made to social security, medicare, medicaid, pensions and other entitlement programs far exceeds any projection of revenue.
Could he have admitted that nominal GDP now is about twice that of the circa $10 billion per year level in 2000? Back then the debt to GDP ratio was 54% while it is 104% now. Back then the nominal interest cost was 3.5% of GDP which is the same ratio as it is now. Yes the debt ratio has almost doubled but we see both lower inflation rates as well as lower real interest rate. One the things that might puzzle you is how Cochrane paints 2000 as a period of large primary surpluses whereas Miron suggests it was a period of fiscal imbalance. This is where forecasting comes in as it might be naïve to assume that the current levels of g and t are good means for forecasting the future. But before we get into the forecasting which involves politics, let’s talk a bit about r and n by going back and poking a little fun at DOW 36000:
Imagine the whole U.S. corporate sector as if it were a single company. And imagine that this company - and the economy - will grow steadily forever, say at 5 percent nominal (3 percent real plus 2 percent inflation). Suppose also that the interest rate is 6 percent. What is this company worth? The answer should be that it is worth 100 times dividends.
Krugman was assuming real growth = 3% and a real interest rate = 4% back in 2000. Sounds about right for then but I would lower both of these by 1% for today. In either case, the present value of a primary surplus would be 100 times the current surplus in a steady state model. In other words, we would have needed a primary surplus equal to 0.55% of GDP back then but now we would need a primary surplus equal to 1.05% of GDP now. Permit me to quibble a bit with Miron’s assumptions:
I create projections for real GDP, starting in 1965 and going forward as far as necessary. Those projections are calculated by taking actual real GDP in 1965, followed by 2.55 percent growth every year thereafter….All present values assume a real interest rate of 3.22 percent, which equals the average real interest rate on 30-year long-term government bonds in the United States over the past four decades.
Historical averages do not strike me as a reasonable approach to forecasting future long-term growth or interest rates. But this is just a quibble as we are not that far off in terms of our denominator (r – g) so let’s focus on the numerator that is expected cash flows. As I noted:
In 2017, g was 19.5% and t was 18.5% so maybe we should be more concerned especially since we have had another tax cut for the rich as well as a call for a larger defense budget.
Back in 2000 government spending including interest rates was only 19.5% so government spending excluding interest rates excluding interest rates was only 16%. Government revenues exceeded 20% of GDP. If these ratios were expected to continue forever, then one might get Alan Greenspan’s concern that we might pay off the national debt very quickly. Of course we did not and Miron suggests we should have known that government spending would rise over time. Glassman and Hassett’s glaring error in many ways was to have a very stupid model of expected cash flows as they pretended cash flows equal profits even as a firm has to invest some of its profits for new capital in a growing economy. And to think Hassett is now heads the CEA! Miron may be better at forecasting but we need to think about the politics of what he is arguing:
As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA)… Despite widespread agreement that spending or tax policies must change, however, appropriate adjustments have so far not occurred. Indeed, many recent policy changes have worsened the U.S. fiscal situation. These changes include the creation of Medicare Part D ($65 billion in 2014), new subsidies under the Affordable Care Act ($13.7 billion in 2014), the expansion of Medicaid under the ACA (from $250.9 billion in 2009 to $301.5 billion in 2014), higher defense spending (from $348.46 billion in 2002 to $603.46 billion in 2014), increased spending on veterans’ benefits and services (from $70.4 billion in 2006 to $161.2 billion in 2014), and greater spending on energy programs (average annual spending was $0.52 billion over 1998–2002 but $11.43 billion over 2010–2014).
I’m not a big fan of using terms like mandatory versus discretionary spending preferring to look at defense purchases, nondefense purchases, Social Security payments, and health care benefits. Miron’s figure 9 shows Social Security benefits have risen to 5% of GDP but we knew this would happen back in 1983 when Greenspan chaired Reagan’s Social Security reform commission which led to a large increase in the payroll tax to prefund the Social Security Trust Fund. I guess Greenspan in 2001 had forgotten the notion to “think about the future” that so ably guided him in 1983. Paul Ryan and President Trump at times tells us that they do not want to take away the Social Security benefits that my generation has been paying for since we entered the workforce. Miron also notes:
Defense spending averaged 8.4 percent of GDP in the 1960s, 5.6 percent in the 1970s, 5.6 percent in the 1980s, 3.8 percent in the 1990s, 3.7 percent in the 2000s, and 4.2 percent in the past four years.
While the defense spending/GDP ratio fell below 4% at the end of Obama’s second term, Mitt Romney promised to keep at above 4% had he and Paul Ryan been elected in 2012. Which is odd since Ryan told us that total Federal purchases (defense and nondefense) would be limited to only 3.5% of GDP. President Trump has promised a large increase in defense spending so let’s get more realistic about nondefense purchases than the Ryan promise to run the rest of the Federal government on a budget of negative 0.5% of GDP. Nondefense purchases rose from 2.34% of GDP in 2000 to 3% of GDP in 2011 before falling back to 2.66% of GDP in 2017. While it is true that Trump wants to cut this ratio a bit, he has also promised to fixed the underinvestment in infrastructure . William Galston is not impressed with the Trump proposal:
But there is a void at the core of the administration’s plan: funding. Not only does the administration not specify where it will find the additional $200 billion of direct spending it calls for over the next decade, but also it makes what most experts regard as wildly unrealistic assumptions about the amount of state, local, and private funding this modest increment will spark. Although the word “leverage” is sprinkled liberally throughout the plan, hardly anyone believes that $200 billion federal dollars will produce an additional $1.3 trillion investment from non-federal sources, especially when state and local budgets are being squeezed by rising costs for education and health care.
Privatizing our toll roads was one fiscal trick used by certain states but that turned out to make their long-term financing worse, while their roads will likely be poorly maintained. States could pick up the tab if state taxes are raised in lieu of higher Federal taxes. Or are conservatives saying we should cut education spending as well as police protection? Speaking of healthcare, let’s return to Miron:
even projections that incorporate less rapid health care cost inflation still show Medicare and other health care expenditure growing faster than GDP by enough to make fiscal imbalance large…the main drivers of America’s fiscal deterioration appear to be the ever-growing costs associated with Medicare, Medicaid, and other health programs. Whereas Social Security has accounted for a relatively constant share of expenditure in proportion to GDP, Medicare and Medicaid costs have been growing as a ratio of GDP for the past four decades. This growth is what makes the country’s fiscal path unsustainable.
OMG – Federal spending on health care is out of control! Well no. We earlier discussed the implications of Baumol’s Cost Disease for relative prices of certain services nothing this from Timothy Lee:
Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
During the 2012 campaign both Obama and Paul Ryan had plans to reign in the growth of Medicare spending with Ryan wanting to cut benefits to people leaving the obscene profits of the providers untouched as opposed to Obama wanting to expand benefits but reigning in this market power. But let’s be clear – we will spend as a nation more on health care as a share of GDP. The policy question is who pays for it. Ryan’s proposals on Medicaid are akin to Trump’s on infrastructure – force this burden on state governments and if they do not choose to raise their taxes, let the private sector pick up the slack. On both issues, the private sector does a poor job of providing services equitably. If we want an honest debate on fiscal policy these discussions from Cochrane and Miron fall miserably short in their arbitrary rejection of the possibility that we cannot raise taxes as a share of GDP. Let’s add that if the fiscal situation was so dire – why were conservative economists so eager to reduce taxes on the rich? And do not peddle that Laffer canard that reducing the national savings rate will lead to some growth miracle.

Friday, February 16, 2018

Fiscal Stability or Dire Straights: John Cochrane’s Latest Rant

At times John Cochrane babbles on incoherently on what should be a straight forward issue. This post is one example:
Once you net out interest costs, it is interesting how sober US fiscal policy actually has been over the years. In economic good times, we run primary surpluses. The impression that the US is always running deficits is primarily because of interest costs. Even the notorious "Reagan deficits" were primarily payments, occasioned by the huge spike in interest rates, on outstanding debt. On a tax minus expenditure basis, not much unusual was going on especially considering it was the bottom of the (then) worst recession since WWII. Only in the extreme of 1976, 1982, and 2002, in with steep recessions and in the later case war did we touch any primary deficits, and then pretty swiftly returned to surpluses.
I too advocate looking at the primary surplus. Cochrane is a finance professor so let’s make this simple. Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend. Cochrane takes us through the Great Recession:
Until 2008. The last 10 years really have been an anomaly in US fiscal policy. One may say that the huge recession demanded huge fiscal stimulus, or one may think $10 trillion in debt was wasted. In either case, what we just went through was huge. And in the last data point, 2017, we are sliding again into territory only seen in severe recessions. That too is unusual.
The Great Recession did demand huge fiscal stimulus – we got a tempered version of what was really needed. The last decade has taken the debt/GDP ratio to 100% but we have returned to near full employment so I do not get his 2 last sentences quoted. In 2017, g was 19.5% and t was 18.5% so maybe we should be more concerned especially since we have had another tax cut for the rich as well as a call for a larger defense budget. But then comes his update!
“The US fiscal situation is dire. The debt is now $20 trillion, larger as a fraction of GDP than any time since the end of WWII. Moreover, the promises our government has made to social security, medicare, medicaid, pensions and other entitlement programs far exceeds any projection of revenue.”
He went from fiscal policy being sober to we are in dire straights just like that! Oh my the sky is falling. We have to take away those Social Security benefits that my generation have been paying into for 35 years. We cannot afford Federal health care spending. After all those tax cuts for the rich can never be reversed. Yes John Cochrane is part of the Starve the Beast crowd even if granny starves from these supposedly required reductions in transfer payments. Give me a break!

All Economists Are Bastards -- Except Us

Peter Frase has a very interesting post up about the role of popular culture in legitimizing the police. Frase recounted a forum he attended with Alex Vitale  talking about his book, The End of Policing. In response to a question about why people believe that the function of policing is to maintain peace in the liberal order when its actual practice and history suggest otherwise, Vitale cited television cop shows like  as "a relentless machine for producing and reproducing the legitimacy of policing in the public mind."

This is what called to Frase's mind the perpetual plot line he calls "'ACAB-EU': All Cops Are Bastards, Except Us.":
The trope works by consistently portraying its central characters as liberal fantasies of the good cop–whether it’s the pseudo-scientists of CSI, the workaday victim-protectors of SVU, or the magical profiler-geniuses of Criminal Minds. At the same time, it makes a seeming concession to concerns about police misconduct, by constantly putting its protagonists in conflict with "bad cops" and their enablers, whether it be a rapist Corrections Officer or a corrupt small town department whose cover-up leads all the way to the Governor.
 Of course this trope works for politicians too. And economists.

Thursday, February 15, 2018

Rumble on Wall St. -- No Other Way of Keeping Profits Up!

At Jacobin, Seth Ackerman did an interview with J.W. Mason about The Class Struggle on Wall Street that considers the trade-off between relative profit and wage shares of income. Whether you agree with his analysis or not, Josh teases out some of the implications of the relationship, both for profit expectations and for political prospects.

One assertion I would question is "there is absolutely no reason to expect an uptick in inflation." Well, yes, no one expects the Spanish Inquisition, either. While there may indeed be no reason to expect inflation, inflation's chief weapon is surprise... surprise and fear... and ruthless efficiency,

And this is also why I think it would be impossible to empirically confirm Egmont Kakarot-Handtke's "law" of profit. There is no "real" yardstick with which to measure aggregate profit. If Egmont is right that "[m]acroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt," then he is wrong that his profit "law" can be tested empirically and "will be confirmed without exception."

Josh Mason also talks about the "tightrope we have to walk" in thinking about the relationships between profits, wages, inflation and productivity. Not only is the rope tight, it is also tied in knots with "inflation" and "productivity" referring to ratios between incomes, costs and outputs. Egmont's theory reminds us of yet another tightrope -- the tightrope central bank authorities must walk between inflating the money supply through the expansion of credit and persuading the public that such inflation is not inflationary.

The conventional persuader is unemployment. One doesn't have to subscribe to the NAIRU doctrine that insufficient unemployment accelerates inflation to concede that policy-induced unemployment tips the scales against wage increases and thus insulates the profit share of income from the latent inflationary consequences of credit expansion. Yes, the trick here is how to sustain compound profit inflation without accelerating price inflation! How to debase the coin of the realm without debasing the coin of the realm. It's a beauty contest.

There is, after all, no other way of keeping profits up!

Baumol Cost Disease and Relative Prices – Part 2

Many thanks to the Angrybear for reposting this as well as some excellent comments (save that absurd contention I’m a Luddite). If you check the comments over at Mark Perry’s place you will see that Paul Wynn made the same point I made and even linked to Timothy Lee:
This became known as Baumol’s cost disease, and Baumol realized that it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise. And this is exactly what the data shows. Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago… this has an important implication for government policy. Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
Lee wrote this back on May 4 and included the same graph that Mark Perry presented.

Wednesday, February 14, 2018

Tuesday, February 13, 2018

Drastically Changing the Rules On Infrastructure Spending

Most observers have figured out that the Trump infrastructure spending plan seems to be weirdly lopsided in an unrealistic way, with $200 billion in federal spending somehow supposed to inspire a total of $1.5 trillion in spending by state and local sources along with private ones.  What has not been made all that clear publicly is how this plan upends decades of established practice in fiscal relations between the federal and the state and local governments.  The long-established formula has been 8 to 2, that is $8 in federal money for $2 in state or local money in infrastructure construction projects.  Trump's plan proposes to completely reverse this to a 2 to 8 formula, $2 in federal money for $8 in state or local money.  Anyone who thinks this is going to provide any actual infrastructure activity that would not have otherwise is simply completely delusional.

Of course it is well known that the private sector input will involve tolls or other payment methods to make sure the private interests make a positive rate of return. One important area many want to see work done is on fixing bridges. The American Society of Engineers has identified about 50,000 bridges in the nation that need repair.  However rhey also estimate that only about 100 of those are reasonably suitable for private tolling.  This is another not-going-anywhere part of the proposal.

However, Trump is apparently hoping to raise money by outright selling off some publicly owned infrastructure assets.  The Washington Post reports today that in the Washington area this includes the two main airports, Dulles and Reagan National, as well as the George Washington Memorial Parkway (currently not tolled).  I can hardly wait and am curious what else around the country is going to be put on the block for a grand fire sale leading to all kinds of tolls and other nonsense.

Barkley Rosser

Mark Perry Has Never Heard of William Baumol

Otherwise why would he write this nonsense:
The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version … Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.
The reason that prices of certain services have risen relative to the price of manufactured goods is socialism? There could be no other explanation. I guess Perry has never heard of William Baumol’s cost disease:
The example Baumol and the late William G. Bowen made famous is that of the string quartet. The number of musicians and the amount of time needed to play a Beethoven string quartet for a live audience hasn’t changed in centuries, yet today’s musicians make more than Beethoven-era wages. They argued that because the quartet needs its four musicians as much as a semiconductor company needs assembly workers, the group must raise wages to keep talent—to keep its cellist from chucking a career in music and going into a better-paying job instead. The effect now known as Baumol’s Cost Disease is used to explain why prices for the services offered by people-dependent professions with low productivity growth—such as (arguably) education, health care, and the arts—keep going up, even though the amount of goods and services each worker in those industries generates hasn’t necessarily done the same.

Monday, February 12, 2018

The WaPo Gang Going After The Usual Suspects On the Budget Falls On Its Face Factually

All right, all right, that is not completely fair.  Yes, they dump all over Trump and the GOP-run Congress for their massive tax cut directed at the rich, as well as the hypocrisy of the Republicans in so smoothly switching from denouncing budget deficits during the Obama era to a "what? me worry?" attitude now with deficits set to soar in a period of near full employment.  But, of course, the Monday gang at the Washington Post simply cannot avoid making a big deal about somehow "entitlements" are not being cut, although all kinds of other areas are going up, especially defense.  But they just cannot get off this schtick.

I note that Dean Baker has just posted a whole bunch of comments on the newly proposed budget, as well as the recent tax cut, including one focusing on the WaPo gang and their annoying commentaries.  However, I hope to add here some points he does not make.  I am largely in agreement with his posts, with only minor disagreements not worth bothering with here.

Curiously, the usually more annoying WaPo editorial page editor, Fred Hiatt, was less annoying than the usual WaPo Monday economics commentator, Robert J. Samuelson.  Of course, Hiatt mourned that in 2012 and 2013 Obama and Boehner could not agree on "tax hikes and entitlement cuts."  Quite aside from this annoying terminology of "entitlements," there simply was never any good reason for cutting Social Security, Medicare, or Medicaid, at least not directly.  As has been pointed out by many of us from well before then and up to the current time, especially Dean Baker, cuts could have been made, but the way to  do it was to get the wildly high US medical care costs under control in general, which would show up in reductions of Medicare and Medicaid spending, without any loss in quality in care, assuming things were to be managed reasonably.  But Hiatt and crew simply never recognize that. It is just how irresponsible all these politicians are or not just cut cut cutting those darned entitlements, although preferably in conjunction with that very unlikely to happen tax increase.  As noted already, while Hiatt nods at dumping on Dems for supporting some spending increases (not noting that some of them such as disaster relief are really needed), he spends most of his fire dumping on Trump and the GOPsters for their deficit hypocrisy.

However, Samuelson puts on one of his classic performances, indeed worse than usual.  Yes, he does plenty of bashing on the GOP tax cut, but he seems to justify the GOP-pushed increase in military spending (plus $80 billion, the largest increase of any item).  According to RJS, "On defense, President Obama's budgets reduced readiness, left the services too small and made it harder to counter new technological threats, notably cyberwarfare." Really?  The US has bases in 70 nations and special forces in at least 122.  Do we need all that, not to mention that our military spending exceeds the sum of all that going on in the next five or so nations' spending?  I almost do not even know what more to say about this item.

But then when it comes to his specialty, demanding cuts in those darned entitlements, he falls on his face by making outright factual misstatements as near as I can tell.  He starts out with a claim that "so-called entitlement programs...were largely untouched. They represent 70 percent of federal spending."  Oooops!  I checked this number, which I have seen elsewhere previously, and it seems to be fake news, too high.  Looking at 2018, "Pensions" are 25%, "Healthcare" is 28%.  Offhand that 53% should include the big three "entitlements."  If one adds "Welfare" there is another 8%, which puts it up to 61%.  But no matter how you slice it, RJS's 70% number is simply too high, unless one plays some game of simply ignoring some other categories of spending.  RJS really should be above this sort of thing.  And that percentage is not going to rise in 2019 given the big jump in defense spending going on.

There is one more blunder on his part that I find seriously annoying, especially how much reporting of the spending implications and outcomes from ACA have has gone on.  He declares, "Republicans congratulate themselves on new tax cuts; Democrats are always eager to increase social spending - witness the Affordable Care Act."  Ooooooops! yet again.  I double checked.  RJS seems to have forgotten that ACA was sold on actually saving money and it did.  From 2012-2017, the net savings from ACA is estimated at $84 billion.  That maybe not a huge number, but it is a saving that somehow RJS has to turn into an "increase social spending."  Really.  Did he do his homework at all or has he gotten so deep into his standard lines that he is simply dispensing fake news now?  I understand: fake news has simply taken over nearly everything in Washington, but  one would hope that the Washington Post would try to avoid such outright factual errors.

Barkley Rosser

Watch Out for Charlie Kirk's Treacle-Down Tart

"There's many a fly got stuck in there."

Who is Charlie Kirk? He is the 24-year old executive director and founder of Turning Point USA. Jane Meyer profiled the organization in the New Yorker in December:
Based outside of Chicago, Turning Point’s aim is to foment a political revolution on America’s college campuses, in part by funneling money into student government elections across the country to elect right-leaning candidates. But it is secretive about its funding and its donors, raising the prospect that “dark money” may now be shaping not just state and federal races but ones on campus.
A couple of weeks ago in The Baffler, Maximillian Alvarez described the tactics employed by TPUSA to harass and silence opposition to their "free market" totalitarianism. If you like Tomi Lahren, Sebastian Gorka, Donald Trump Jr. and Sean Hannity, you'll love Charlie Kirk.

Charlie Kirk is a Charlatan.

Last Friday, the Sandwichman posted Is the "Invisible Hand" a lump of labor? to EconoSpeak and Angry Bear. It received a little over 300 views on EconoSpeak and a total of three comments on both blogs. Charlie Kirk's twitter video on the "socialist myth of the 'fixed pie'" was tweeted three days earlier. It has so far received 3,300 "likes" and 1,688 comments.