Posts tagged ‘deficits’

Trading $1 in Debt for 85 cents of Economic Activity

UPDATE:  Mea culpa.  One point in the original post was dead wrong.  It is possible, contrary to what I wrote below, to get something like a 0.7%  difference in annual growth rates with the assumptions he has in the chart below (Drum still exaggerated when he called it 1%).  I don't know if the model is valid (I have little faith in any macro models) but I was wrong on this claim.  Using the 0.7% and working more carefully by quarter we get a cumulative GDP addition a bit lower than the cumulative debt addition.  There is still obviously a reasonable question even at a multiplier near 1 whether $1 of economic activity today is worth $1 of debt repayment plus interest in the future.  

I am not a believer, obviously, in cyclical tweaking of the economy by the Feds.  To my thinking, the last recession was caused by a massive government-driven mis-allocation of capital so further heavy-handed government allocation of capital seems like a poor solution.  But what really drives me crazy is that most folks on the Left will seductively argue that now is not the time to reduce debt levels, implying sometime in the future when the economy is better will be the appropriate time.  But when, in any expansion, have you heard anyone on the Left say, "hey, its time to reduce spending and cut debt because we need the fiscal flexibility next time the economy goes wrong."

I will leave the stuff in error below in the post because I don't think it is right to disappear mistakes.  For transparency, my spreadsheet reconstruction both confirming the 0.7% and with the updated numbers below is here:   reconstruction.xls.

 

Kevin Drum is flogging the austerity horse again

I see that Macroecomic Advisors has produced a comprehensive estimate of the total effect of bad fiscal policies. Their conclusion: austerity policies since the start of 2011 have cut GDP growth by about 1 percentage point per year.

Something seemed odd to me -- when I opened up the linked study, it said the "lost" government discretionary spending is about 2% of GDP.  Is Drum really arguing that we should be spending 2% of GDP to increase GDP by 1%?

Of course, the math does not work quite this way given compounding and such, but it did cause me to check things out.  The first thing I learned is that Drum partook of some creative rounding.  The study actually said reductions in discretionary spending as a percent of GDP reduced GDP growth rates since the beginning of 2011 by 0.7% a year, not 1% (the study does mention a 1% number but this includes other effects as well).

But it is weirder than that, because here is the chart in the study that is supposed to support the 0.7% number:

click to enlarge

Note that in the quarterly data, only 2 quarters appear to show a 0.7% difference and all the others are less.  I understand that compounding can do weird things, but how can the string of numbers represented by the green bars net to 0.7%?  What it looks like they did is just read off the last bar, which would be appropriate if they were doing some sort of cumulative model, but that is not how the chart is built.  If we interpolate actual values and are relatively careful about getting the compounding right, the difference is actually about 0.45%.  So now we are down to less than half the number Drum quoted see update above (I sent an email to the study author for clarification but have not heard back.  Update:  he was nice enough to send me a quick email).

So let's accept this 0.45% 0.7% number for a moment.  If GDP started somewhere around 16 trillion in 2010, if we apply a 0.45% the quarterly growth numbers from his chart, we get an incremental economic activity from 2011 through 2013:Q2 of about $333 billion.

So now look at the spending side.  The source says that discretionary spending fell by about 2% of GDP over this period.  From the graph above, it seems to bite pretty early, but we will assume it fell 1/12 of this 2% figure each quarter, so that by the end of 2013 or beginning of 2014 we get a fall in spending by 2% of GDP.  Cumulatively, this would be a reduction in spending over the 2.5 years vs. some "non-austere" benchmark of $388 billion.

Thus, in exchange for running up $677 billion $388 billion in additional debt, we would have had $445 billion $333 billion in incremental economic activity.  A couple of reactions:

  1. Having the government borrow money and spend it definitely increases near-term GDP.  No one disputes that.  It is not even in question.  Those of us who favor reigning in government spending acknowledge this.  The question is, at what cost in terms of future obligations.  In fact, this very study Drum is quoting says

    Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, “crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nation’s overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

    High deficits and debt also undermine the efficacy of macroeconomic policies and reduce policymakers’ flexibility to respond to unexpected events. For example, in a recession, it would be harder to provide fiscal stimulus if deficits and debt already were high. Furthermore, fiscal stimulus might be less effective then. Additional deficit spending could be seen as pushing the nation closer to crisis, thereby forcing up interest rates and undercutting the effects of the stimulus. With fiscal policy hamstrung, the burden of counter-cyclical policy is thrust on the Federal Open Market Committee (FOMC) but, particularly in a low interest-rate environment, the FOMC may be unable (or unwilling) to provide additional monetary
    stimulus.

  2. I guess we have pretty much given up on the >1 multiplier, huh?  Beggaring our children for incremental economic growth today is a risky enough strategy, but particularly so with the implied .66 .85 multiplier here.

This is not the first time Drum has taken, uh, creative data approaches to cry "austerity" during a mad spending spree. 

Meet the Person Who Wants to Run Your Life -- And Obama Wants to Help Her

I am a bit late on this, but like most libertarians I was horrified by this article in the Mail Online about Obama Administration efforts to nudge us all into "good" behavior.  This is the person, Maya Shankar, who wants to substitute her decision-making priorities for your own

article-2381478-1B11DB61000005DC-332_308x425

 

If the notion -- that a 20-something person who has apparently never held a job in the productive economy is  telling you she knows better what is good for you -- is not absurd on its face, here are a few other reasons to distrust this plan.

  • Proponents first, second, and third argument for doing this kind of thing is that it is all based on "science".  But a lot of the so-called science is total crap.  Medical literature is filled with false panics that are eventually retracted.  And most social science findings are frankly garbage.  If you have some behavior you want to nudge, and you give a university a nice grant, I can guarantee you that you can get a study supporting whatever behavior you want to foster or curtail.  Just look at the number of public universities in corn-growing states that manage to find justifications for ethanol subsidies.  Recycling is a great example, mentioned several times in the article.  Research supports the sensibility of recycling aluminum and steel, but says that recycling glass and plastic and paper are either worthless or cost more in resources than they save.  But nudgers never-the-less push for recycling of all this stuff.  Nudging quickly starts looking more like religion than science.
  • The 300 million people in this country have 300 million different sets of priorities and personal circumstances.  It is the worst hubris to think that one can make one decision that is correct for everyone.  Name any supposedly short-sighted behavior -- say, not getting health insurance when one is young -- and I can name numerous circumstances where this is a perfectly valid choice and risk to take.
  • The justification for this effort is social science research about how people manage decisions that involve short-term and long-term consequences

Some behavioral scientists believe they can improve people's self-control by understanding the relationship between short term memory, intelligence and delay discounting.

This has mostly been used to counter compulsive gambling and substance abuse, but Shankar's entry into government science circles may indicate that health insurance objectors and lapsed recyclers could soon fall into a similar category

I am sure there is a grain of truth in this -- all of us likely have examples of where we made a decision to avoid short term pain that we regretted.  But it is hilarious to think that government officials will somehow do better.  As I have written before, the discount rate on pain applied by most legislators is infinite.  They will do any crazy ridiculous thing that has horrible implications five or ten years from now if they can just get through today.  Why else do government bodies run massive sustained deficits and give away unsustainable pension and retirement packages except that they take no consideration of future consequences.  And it is these people Maya wants to put in charge of teaching me about delay discounting?

  • It probably goes without saying, but nudging quickly becomes politicized.  Is nudging 20-something health men to buy health insurance really in their best interests, or does it help keep an important Obama program from failing?

Postscript:  Here is a great example of just how poorly the government manages delay discounting.  In these cases, municipalities are saddling taxpayers with almost certainly bankrupting future debt to avoid paying any short-term costs.

Texas school districts have made use of another controversial financing technique: capital appreciation bonds. Used to finance construction, these bonds defer interest payments, often for decades. The extension saves the borrower from spending on repayment right now, but it burdens a future generation with significantly higher costs. Some capital appreciation bonds wind up costing a municipality ten times what it originally borrowed. From 2007 through 2011 alone, research by the Texas legislature shows, the state’s municipalities and school districts issued 700 of these bonds, raising $2.3 billion—but with a price tag of $23 billion in future interest payments. To build new schools, one fast-growing school district, Leander, has accumulated $773 million in outstanding debt through capital appreciation bonds.

Capital appreciation bonds have also ignited controversy in California, where school districts facing stagnant tax revenues and higher costs have used them to borrow money without any immediate budget impact. One school district in San Diego County, Poway Unified, won voter approval to borrow $100 million by promising that the move wouldn’t raise local taxes. To live up to that promise, Poway used bonds that postponed interest payments for 20 years. But future Poway residents will be paying off the debt—nearly $1 billion, all told—until 2051. After revelations that a handful of other districts were also using capital appreciation bonds, the California legislature outlawed them earlier this year. Other states, including Texas, are considering similar bans.

Or here is another example, of New York (the state that is home to the mayor who tries to nudge his residents on everything from soft drinks to salt)  using trickery to consume 25 years of revenue in one year.

Other New York deals engineered without voter say-so include a $2.7 billion bond offering in 2003, backed by 25 years’ worth of revenues from the state’s gigantic settlement with tobacco companies. To circumvent borrowing limits, the state created an independent corporation to issue the bonds and then used the money from the bond sale to close a budget deficit—instantly consuming most of the tobacco settlement, which now had to be used to pay off the debt.

By the way, I recommend the whole linked article.  It is a pretty broad survey of how state and local governments are building up so much debt, both on and off the books, and how politicians bend every law just to be able to spend a few more dollars today.

Genetics, Race and IQ

Brink Lindsey has an great article discussing race, genetics and IQ.  It's hard to excerpt, but here is a bit of it:

A study of twins by psychologist Eric Turkheimer and colleagues that similarly tracked parents' education, occupation, and income yielded especially striking results. Specifically, they found that the "heritability" of IQ - the degree to which IQ variations can be explained by genes - varies dramatically by socioeconomic class. Heritability among high-SES (socioeconomic status) kids was 0.72; in other words, genetic factors accounted for 72 percent of the variations in IQ, while shared environment accounted for only 15 percent. For low-SES kids, on the other hand, the relative influence of genes and environment was inverted: Estimated heritability was only 0.10, while shared environment explained 58 percent of IQ variations.

Turkheimer's findings make perfect sense once you recognize that IQ scores reflect some varying combination of differences in native ability and differences in opportunities. Among rich kids, good opportunities for developing the relevant cognitive skills are plentiful, so IQ differences are driven primarily by genetic factors. For less advantaged kids, though, test scores say more about the environmental deficits they face than they do about native ability.

I have been struggling to articulate my issues with IQ for a long time.  I have always been frustrated with the nature vs. nurture arguments on intelligence, because I have always thought the answer is both.  But Brink's article get's me thinking along the lines of this simple model:

iq

In this model, intelligence is not a product that works straight out of the box, so to speak.  It's an engine with some inherent potential that requires a lot of fine-tuning and a long break-in period to reach that potential. Let's say in the US suburbs our kids have a development percentage of 0.9 (we have to leave room for future Flynn Effect -- it would be awesome if it turned out we were only at 0.5).  I assume education is an exponential rise to a limit, where early gains are easy but incremental gains at the margin are harder and harder to achieve.

development

If this is the case, then US suburban kids are probably pretty tightly clustered around that 0.9 (say from 0.88 to 0.92).  This cluster seems tight but again remember in an exponential rise to a limit, the effort and expense to take a kid from 0.88 to 0.92 might be very very large**.  In this situation, measured IQ is going to be driven mainly by genetics, with a wide bell curve in native intelligence dwarfing the effect of a much tighter bell curve around development.  Small improvements in educational development in this model both come at a high price and have little effect on measured IQ.

In a different sort of society, say in rural Mexico, kids might be much lower on the development scale, say around 0.6, due to cultural factors, educational opportunities, even diet.  In this case, large changes can occur in measured intelligence even from small changes in education (the steep part of the curve) and difference in education and development might be at least as important as the genetic contribution.

** Postscript:  Some may object that differences in education seem to be much larger than these in US schools, but we have to make sure we are talking about the same output.   Here we are solely talking about the ability to improve IQ as measured by IQ tests.  There are many other things education does than just polish native intelligence and cognitive ability.  It teaches skills.  For example, it teaches one to write.   I would agree that there are huge differences in schools in their ability to produce kids that can write good 5-paragraph essays, or complete a calculus problem, or understand how to analyze a historical document.

When Low Interest Rates are Anti-Stimulus

We have heard about the difficulty folks who are retired are having with low interest rates.  But low interest rates are having a huge impact on corporations that still have defined-benefit pensions.

Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners.

In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve....

Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.

The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company's future pension payments. The lower the discount rate, the greater the company's pension liabilities.

Boeing's discount rate, for example, fell to 3.8% last year from 6.2% in 2007. The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.

Boeing reported a net pension deficit of $19.7 billion at the end of 2012.

The discount rate is based on the yields of highly rated corporate bonds—double-A or higher—with maturities equal to the expected schedule of pension-benefit payouts.

Moody's decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation. And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS's discount rate fell 1.20 percentage points.

This is obviously not a wildly productive use of corporate funds, to divert ever-increasing amounts of money to pay people who are no longer producing.  But at least corporations are acknowledged the problem (I will give credit where it is due -- thanks to accounting rules and government regulations that force a fair amount of transparency here).

It is interesting to note the Boeing example, where their expected rate of return on pension funds fell from 6.2% to 3.8%.  Compare that to corrupt government entities like Calpers, which bravely faced this new reality by cutting its discount rate from an absurd 7.75% to a still absurd 7.5%.  This despite returns last year around 1%.  By keeping the number artificially high, Calpers is hiding its underfunding problem.  An interesting reform would be to force Calpers to use a discount rate equal to the average of that used by the 10 largest private pension funds.

For Some, There Can Never Be Enough Government Spending

In his New York Times column, Paul Krugman blames the coming British recession on the government's "austerity."  In the Left's parlance, "austerity" means the government is not spending and in particular deficit spending enough.

But it turns out that

a. Of 44 major economies in the world, the British have been running the highest budget deficits of any country except two - Greece and Egypt are higher.

b. British real government spending has risen every year through the financial crisis

Presuming Krugman has access to these basic facts, is his argument that Britain should be deficit spending even more (and if so, wtf is enough?) or is this just political hackery to help Obama dispel concerns about his deficits?

Also From the "This Time We Really, Really Mean It" Files

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

  • What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
  • Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
  • How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.

Recipe for Disaster

At a time when government finances are already overdrawn, let's take the US industry with the fastest growing costs, where there is the least understanding or consensus how to control costs, and where the emotional price for cutting costs is the highest -- and let's nationalize it.

Remember that when you think about the current fiscal debate and mess -- because the horrible current deficits that Congress is trying to address are pre-Obamacare.  It is only going to get a lot worse.

A Thought on the Trade Deficit

Most of the time when folks lament about the US's trade deficit, I just yawn.  That is because to a large extent the trade deficit is simply an artifact of an arbitrary accounting definition.  Basically, we define a certain fairly arbitrary subset of total commerce and commercial activity between two countries, and then throw tantrums when that arbitrary account is unbalanced.  At the end of the day, the payments loop has to close - the dollars come back to the US somehow.  Historically, most money from such trade deficits have come back to the US as foreign investments in US assets (think, for the example, Japanese investments in the late 80's in US real estate and high profile companies).

It is amazing that we would complain about such a situation.  First, we should be thrilled that foreigners choose to invest in our productive assets rather than just our manufactured goods.  Second, think about it this way -- if we export a product, we get the foreign money but the product goes overseas.  When foreigners invest in our fixed assets, we get the money and the assets remain here.  It is the outsized political influence of shareholders and workers in a few export-oriented industries  rather than economic rationality that keeps the US Congress so fixated on the "trade deficit."

The one issue I have with the trade deficit is it is in large part tied closely to the budget deficits run by the Feds.   Think about it this way -- let's take the definition of the balance of trade and keep it intact, adding just one single additional export product to the calculation:  US Government debt securities.   Certainly these are products we export, and there is nothing wrong with thinking about them as an alternative way for foreigners to spend dollars vs. buying US exports  (just as we all face the choice of investing for savings or buying consumer goods with our own incremental income).

Last year the US trade deficit was between $400 and $500 billion per year.  In 2009 the US government deficit was something like $1.4 trillion.  Assuming they issued debt securities to fund this deficit (ignore QE for now) and assuming foreigner bought 40-50% of these bods, then we exported as much as $700 billion in US government bonds to foreign buyers.  Now, suddenly, when we consider this one additional export product in the mix, we are running a trade surplus.  This is why currencies like the yuan are not necessarily as undervalued as people (including President Obama) may assume -- the issuance of government bonds creates a huge demand for the dollar, and keeps the value high.  If exporters are truly pissed off about the high value of the dollar vs. the yuan, they should not complain to the Chinese, they should complain to Obama and the US Congress for competing with them in foreign markets.  Though we tend to go through phases where we forget it, saving is a competitive product to consumer goods.

Update: Scott Grannis via Carpe Diem

"The Chinese sell us mountains of cheap goods, then turn around and invest most of the proceeds (equivalent to our trade deficit with China) in U.S. Treasury securities. We get the goods, and we get to keep the money. Then we devalue the dollar, and they lose on their investment. Why we would want them to stop doing this is beyond me, though if I were a Chinese citizen, I would be furious with my government for directing such massive quantities of my country's export earnings to Treasuries.

Amazing Rebranding

At first I thought Kevin Drum was re-branding "laissez faire" into "economic nihilism."  But after reading the linked article, which blames deficits 100% on Republican tax-cutting rather than either Democratic or Republican free spending, I suppose he is really equating the policy of opposing tax increases to economic nihilism.    For this to be true, given the definition of nihilism, it means that all meaning, purpose, and everything of intrinsic value flows from the government.  Denying government more money = nihilistic negation of reality.

Krugman on Libertarianism

I was going to write a long post on Krugman's article, but Michael Cannon takes care of it with one sentance:

Paul Krugman says libertarianism is not a serious political philosophy because politicians are corruptible, do stupid things, et cetera.  My colleagues Aaron Powell and David Boaz demonstrate why that's a bigger problem for Krugman than for libertarians: Krugman's statism wouldn't make politicians any less ignorant or corruptible, it would just give those ignorant and corruptible politicians more power.

By the way, I thought this earlier article by Brett Barkley was pretty interesting.  He investigated which economists changed their views the most based on who occupied the White House.  Want to lay any bets on who won the title of most politicized economist?

When the White House changes party, do economists change their tune on budget deficits? Brett Barkley does a systematic investigation. Six economists are found to change their tune "“ Paul Krugman in a significant way, Alan Blinder in a moderate way, and Martin Feldstein, Murray Weidenbaum, Paul Samuelson, and Robert Solow in a minor way "“ while eleven are found to be fairly consistent.

Stock Up on Meeses and Gippers

The CBO, which Democrats frequently tell us to pay close attention to only when it is giving them the answers they want, is not particularly sanguine about the US budget deficit:

President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.

Bruce McQuain, as always, has some good analysis.

States, apparently, are not in much better shape:

Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity....

In a recent AEI working paper I've shown that the typical state employee public pension plan has only a 16% chance of solvency. More public pensions have a zero probability of solvency than have a probability in excess of 50%. When public pension assets fall short, taxpayers are legally obligated to make up the difference. The market value of this contingent liability exceeds $3 trillion.

Productive people in this country are about to get plastered with huge new taxes.  Hang on.

Is Greece the New Montreal?

Hosting the Olympics practically bankrupted Montreal.  Via Megan McArdle, Victor Matheson argues that the current Greek financial problems may have stemmed from hosting the Olympics.

Greece's federal government had historically been a profligate spender, but in order to join the euro currency zone, the government was forced to adopt austerity measures that reduced deficits from just over 9% of GDP in 1994 to just 3.1% of GDP in 1999, the year before Greece joined the euro.

But the Olympics broke the bank. Government deficits rose every year after 1999, peaking at 7.5% of GDP in 2004, the year of the Olympics, thanks in large part to the 9 billion euro price tag for the Games. For a relatively small country like Greece, the cost of hosting the Games equaled roughly 5% of the annual GDP of the country.

Of course, the Olympics didn't usher in an economic boom. Indeed, in 2005 Greece suffered an Olympic-sized hangover with GDP growth falling to its lowest level in a decade.

Hosting Olymics is just a super-sized version of the fallacy that causes governments to fund billion dollar sports stadiums.

Napolitano: Last Politician to Head DHS

I have said for a while that Homeland Security is the worst possible job for any politician who actually wants to have a future political career.  The job is all downside.  I wrote a year ago:

Yeah, I know it is not a done deal, but the rumors are that our governor Janet Napolitano will be Obama's choice for Homeland Security.

On its face, this both makes a ton of sense, and simultaneously is odd.  It makes sense because Napolitano is one of those rising Democratic stars who get special love in part for not being white males.  It is odd because pulling her up to Washington would, by law, pass the governorship for the next two years to the Republicans (the Secretary of State completes the term, and she is a Republican).  It also strikes me as odd because I think Homeland Security would be an absolutely awful platform for launching a run for higher office.  That job has no upside "“ it is all downside.

But the final reason in the end that this may make sense can be seen in this table below from Paul Kedrosky on projected state budget deficits as a percentage of state revenues

Arizona is almost in as bad of shape as California, and California is a disaster area.  So the financial chickens are about to come to roost here in Arizona for the drunken spending spree the state has been on, presided over by Napolitano.  To preserve her from going to the Gray Davis Memorial Retirement Home for Failed Governors, Obama is likely to beam her up to Washington.

As I wrote before, I don't think Napolitano would normally have accepted this job had she not been desperate for a face-saving way to escape Arizona mid-term.  But after recent events, I think it is highly unlikely anyone else on an elected-official career track will take this job.  Look senior FBI or CIA types on the future.

Update: More here from Expresso Pundit.

So in the next six months--probably much sooner--Janet will move on and the President will pick an obscure, non-political, retired General who is clearly qualified and above reproach.

Update: Health Care Bill Cost Gimmickry

It has bothered me in an earlier post that I missed several critical tricks the Democrats in Congress are using to understate the cost of their health care bills.  These are important enough that I am re-writing the original post:

I think most folks were shocked that the CBO scored the Baucus bill as deficit-neutral.  Well, we are starting to understand why (by the way, these are not criticisms of the CBO, but of the Senate).  So far, four major budget tricks have been identified:

1. The cost of the individual mandate is not in the scoring. There seems to be a lot of spin on this issue, as to whether the mandate is a "tax" or not, but word games aside, clearly the individual mandate is a major cost of the program to Americans.  The best analogy I can give is that if the government cut your taxes that go to road construction but then mandated that everyone fund directly out of their pocket the cost of a quarter mile of road repairs each year, most people would see this as a cost either way.  But it turns out that the CBO scores things differently.

First, a little history.  Like both the House and Senate bills, the Clinton health plan would have mandated that individuals and employers purchase private insurance.  In its 1994 score of the Clinton plan, Bob Reischauer's CBO included those mandated "private" payments in the federal budget "“- i.e., as federal revenues and federal expenditures.

And yet, none of the CBO scores of this year's bills include the costs of similar individual/employer mandates as federal revenues or federal spending.

My read of the CBO's score of the Clinton health plan is that the private-sector mandates accounted for around 60 percent of the Clinton health plan's total cost, the remainder being (traditional) government spending.  So how is it that the CBO made the full cost of the Clinton health plan apparent to the public in 1994, but may now be revealing only 40 percent of the cost of the Obama health plan?...

The Medical Loss Ratios memo is the smoking gun.  It shows that indeed, Democrats have been submitting proposals to the CBO behind closed doors and tailoring their private-sector mandates to avoid having those costs appear in the federal budget.  Proposals that would result in a complete cost estimate "” such as the proposal by Sen. Rockefeller discussed in the Medical Loss Ratios memo "” are dropped.  Because we can't let the public see how much this thing really costs.

Crafting the private-sector mandates such that they fall just a hair short of CBO's criteria for inclusion in the federal budget does not reduce their cost, nor does it make those mandates any less binding.  But it dramatically reduces the apparent cost of the legislation.  It is the reason we're all talking about an $848 billion Reid bill, rather than a $2.1 trillion Reid bill.

2.  Now-you-see-it-now-you-don't Medicare cuts. Via Michael Tanner of Cato:

When the Senate Finance Committee released CBO scoring of its health care reform proposal last week, we warned that its claim of reducing future budget deficits was achieved only through dishonestly assuming that Congress will implement a 21% reduction in Medicare payments that is scheduled under current law. We pointed out that Congress has been supposed to make those reductions since 2003, and never has.  Now"”surprise, surprise"”Democrats have introduced a bill to eliminate the scheduled cut, at a cost of $247 billion.  But Democrats cleverly are putting the new spending in a separate bill, so it won't change scoring of health care reform.   Have they no shame?

3.  Transfer of costs off the Federal budget to the states (which the CBO does not score).  Via Glen Reynolds

Gov. Phil Bredesen warned Tuesday that pending federal health care legislation could cost Tennessee far more than the $735 million "best estimate" his administration previously has cited.

The $735 million would stretch over five years, but "in addition, there are huge unknowns for the states in this reform," Gov. Bredesen said, estimating that those costs, if realized, could exceed another $3 billion from 2014 to 2019. . . . "I'm glad they're trying to do it without increasing the federal deficit, that certainly is important," said Gov. Bredesen, a Democrat who has been critical of the plan's impact on states. "But to turn around and increase the state deficits as the way to handle it that does not seem a very appropriate way to do that."

4.  Match 6 years of expenses with 10 years of revenues. From an earlier post:

Bruce McQuain points out something I think has not gotten enough attention in the health care bill.  The new taxes being proposed start in 2010, but the benefits don't begin until 2013 and are phased in through something like 2018.  That means for any 10-year budget look, there are 10 years of taxes but only 6-7 years of benefits.  And even with this trick, the plan STILL adds a trillion dollars to the deficit, even before the certainly more pessimistic CBO numbers come in.

No Shame

I can't even believe he can say this with a straight face:

President Barack Obama, calling current deficit spending "unsustainable," warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

"We can't keep on just borrowing from China," Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. "We have to pay interest on that debt, and that means we are mortgaging our children's future with more and more debt."

Holders of U.S. debt will eventually "get tired" of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. "It will have a dampening effect on our economy."

No duh.   And whose name is scribbled on the bottom of the stimulus bill?  Isn't this the type of concern one expresses before spending a couple of trillion dollars?  Obama reminds me exactly of the young students he lectured at ASU the other day about not getting into too much debt.  He already sounds like kids calling their dad -- it wasn't my fault!  I didn't know!  The only difference is there is no one left out there to bail out the US - no dad, no friendly government, nobody.

By the way, if you are worried about current deficits, read this post Q&O calls "fun" with charts -- there is absolutely nothing fun about it.  A sample:

entitlements_07-580

Napolitano to Homeland Security

Yeah, I know it is not a done deal, but the rumors are that our governor Janet Napolitano will be Obama's choice for Homeland Security.

On its face, this both makes a ton of sense, and simultaneously is odd.  It makes sense because Napolitano is one of those rising Democratic stars who get special love in part for not being white males.  It is odd because pulling her up to Washington would, by law, pass the governorship for the next two years to the Republicans (the Secretary of State completes the term, and she is a Republican).  It also strikes me as odd because I think Homeland Security would be an absolutely awful platform for launching a run for higher office.  That job has no upside - it is all downside.

But the final reason in the end that this may make sense can be seen in this table below from Paul Kedrosky on projected state budget deficits as a percentage of state revenues:

state_deficits

Arizona is almost in as bad of shape as California, and California is a disaster area.  So the financial chickens are about to come to roost here in Arizona for the drunken spending spree the state has been on, presided over by Napolitano.  To preserve her from going to the Gray Davis Memorial Retirement Home for Failed Governors, Obama is likely to beam her up to Washington.

California Insanity

The WSJ ($) has an article on California showing the growth of expenditures and the budget deficit.  I took the expenditures numbers and converted them to 2007 dollars and put them on a dollar per state resident basis, to correct both for growing population and inflation.  Here are California government general fund expenditures on a 2007 dollar per person basis:

1990-1991: $2,755
1995-1996: $2,470
2000-2001: $3,558
2005-2006: $3,416
2007-2008: $3,767

From these figures, we can learn a couple of things.  First and foremost, the state of California demonstrates itself to be just as financially incompetent as any condo-flipping doctor who now finds himself stuck with a bunch of mortgages he can't pay.  Lured by the false prosperity of the Internet bubble, California increased real government spending per resident by nearly 50% in the latter half of the nineties, and has done nothing to reign this spending in (thus the deficits).  The only place where the analogy with the person caught short by the housing bust falls apart is that the person with expensive mortgages is probably not out buying a new Mercedes and big screen TV, whereas that is exactly what California is doing, passing a $14 billion a year health care plan that will whose price tag can only rise.

The Flip Side of the Trade Deficit

I originally got to this post at Carls Talk because of the cool map I put in this post.  However, I was really struck by his lament that foreign companies won't sell into Norway because it is too small.  Given that Norway has a trade surplus, you would think that given all the whining in the US about trade deficits that everything would be hunky-dory in Norway and that they would be thrilled that foreign companies wouldn't sell there.  But check this out:

When seeing Norway's GDP in the context of this map, one realizes
why Norway often is one of the last countries U.S. companies consider when
expanding to Europe.

Norway might be an unattractive market when considering expansion
because the market is so small and as a result there is little domestic
competition.  This  has enabled local players to
build monopolies or duopolies with substantial  entry-barriers in many
industries.  Furthermore, the government has sheltered the domestic
market against international competition by adding a hefty import tax
and inconvenient delivery methods on goods purchased outside the
country, rendering international online merchants at a disadvantage
when competing on price and convenience.

On the flip side, if you manage to establish your business here, you
can overcharge your customers and get away with horrendous customer
service.  The average Norwegian customer is not used to good service
and competitive prices.  Online merchants are slow.  Recently it took
four weeks before I received a book shipped to me from a local
merchant.  On a recent trip I recently purchased shoes for our kids in
the U.S.  The selection was superior, and the price:  1/4th of what the
local Norwegian merchant was charging. 

Gee, you mean there is a price consumers pay for protectionism that might offset a few job gains in sugar growing and textiles?

A Challenge to Lou Dobbs

Sorry posting has been light this week.  A reader was nice enough to point to the latest rant by Lou Dobbs here.  Apparently, he has decided to take the position that free traders are now elitists, while folks like him who want the government to pick and choose winners among American businesses and industries as "populist."  The obvious response of course is that beneficiaries of American protectionist legislation tend to read as the who's who of politically connected elitists.  It is also hilarious to equate free trade, whose benefits are backed by 100 out of 100 economists, with some irrational faith-based belief system.  But I will leave that aside to point to this line:

He and others completely disregard the $5 trillion in trade debt that
the United States has built up through 30 consecutive years of trade
deficits. That trade debt is rising faster than our national debt and
is simply economically unsustainable, no matter what any faith-based
economist would argue. Our political, business and media elites
continue to disregard reality.

Here is my very, very simple challenge for Lou Dobbs to help those of us who obviously don't get it:  Point to where this $5 Trillion of Debt is.   What private individuals or corporations owe it to whom?  That should be simple.  With the national debt, we can just go out and count all those government bonds.  But where is this trade "debt"?

Answer:  IT DOESN'T EXIST.  What he means is that over some time span of several decades, American has a cumulative trade deficit of $5 trillion.  But trade deficit does not mean debt.  I showed this in great detail here.  Calling it a "trade debt" is not a sloppy mistake on Dobbs part but an outright lie, meant to make the point that running deficits every year is unsustainable.  But America has become the wealthiest country in the world running trade deficits for the majority of the last 100 years.   In fact, one can argue that the trade deficit itself only exists as a phantom of the awkward and limited way in which we measure trade

Postscript:
I constantly get people who write me that the fact the Chinese are buying up a lot of US government bonds or corporate bonds with their trade profits is proof of a "trade debt."  No such thing.  The US Government bonds are evidence of a fiscal deficit of the federal government, also called the national debt, and exists not because of trade but because Congress has no fiscal discipline.  Corporate debt is growing to buy back stock, make corporate acquisitions, and to buy new plants and facilities.  The fact the Chinese help to fund these debts does not mean that trade caused this debt.  In fact, foreigners buying US debt securities depresses interest rates and actually keeps the national debt lower.

Here is a thought experiment:  Wal-Mart runs a multi-billion dollar trade deficit every year with China.  Why isn't it building up lot's of debt to the Chinese?

Libertarians and Republicans

As a libertarian that voted rather unenthusiastically Republican in the last election, I am right here with Ryan Sager:

While
some libertarian types may have been upset with President Reagan's
deficits, he was at least singing from their hymn book: Government is
the problem, not the solution. George W. Bush on the other hand has
never even gone to the trouble of aping a small-government posture.
Instead, Bush has adopted one of Reagan's other famous lines, sans
irony: I'm from the government, and I'm here to help. 

This
represents a fundamental shift in the direction of the Republican Party
and a threat to its traditional alliances. The shift is self-evident.
Instead of being the party that tries to rein in entitlement spending,
the Republican Party is now the party of the $1.2 trillion Medicare
prescription-drug benefit. Instead of being the party that is opposed
to even having a federal Department of Education, the Republican Party
is now the party of extensive intrusion into local schoolhouses by Washington.
And instead of being the party of the rule of law and state's rights,
the Republican Party is now the party of Congressional intervention
into the thoroughly adjudicated medical decisions of an individual
family.

A few weeks ago I wrote here that about the high-stakes battle over judicial nominations.  When Republicans were out of power, they could be trusted to support non-activist judges against liberal activist alternatives.  Now, however, my fear is that Republicans may have shifted their stand, seeking to nominate activist conservative judges.  Leaving no one at all in Washington to support a constitutional separation of powers.

Conservatives and the Oscars

I really didn't want to go here again, but after some thought, I am really amazed at all the disdain for the Oscars coming out of the conservative blogs(CQ,Powerline,LaShawn Barber,LGF).  As I posted here, I thought Rock did an OK job, and for once all the awardees kept their speeches focused on movies rather than their own lame political views. 

However, conservative blogs have pointed out that most conservatives probably got turned off during Rock's monologue, particularly his jabs at GWB, and tuned out.  I am confused just what Rock said that was so horrible.  First, it is expected that monologues like this take some shots at whoever is in the White House.  And Rock certainly did so, but he also took shots at prominent liberals and Hollywood luminaries as well.

Second, just what did he make fun of?  He made fun of going to war and not finding WMD.  Now, I am certainly bright enough to know that the argument for war was more nuanced (heh heh) than just WMD's, but if I was a conservative, I would LOVE it if someone made fun of GWB every day for our WMD intelligence.  If such jokes at his expense occur frequently enough, maybe he will get mad enough to do the real thorough house cleaning of the CIA which is desperately overdue.

The other thing Rock poked fun at Bush for was the growing deficit.  Hey, conservatives out there, what's wrong with that?  Again, I am smart enough to understand there are valid reasons for deficits - wars and recessions are two of them.  Also, I understand that if you want to cut spending, you usually have to cut taxes first, drive the budget into deficit, and use that as a lever for getting spending cuts.  However, Bush has done NOTHING in four years to try to reign in domestic spending, and has done several things (e.g. prescription drug benefit) that greatly increase spending.  Reagan ended up with large deficits but only after putting up a valiant fight with a Democratic-controlled Congress to cut spending.  GWB has a Republican Congress and hasn't even tried.  So what's wrong, even for conservatives, with taking a poke at GWB on deficits?

Oh yes, the blogs have one other complaint - that he said "ass".  You know, whenever I hear this kind of complaint, it just reminds me of Beavis and Butthead going "heh, heh heh, heh -- he said ass -- heh, heh"