Sunday, February 28, 2010

Some humor

Why couldn't my classes have been more like this?

Friday, February 26, 2010

Some reading suggestions

I'm currently reading "Capitalism and Freedom" by Milton Friedman.  It's one of the books in what one might call the conservative canon (at least for modern American conservatives.)  Friedman is up there with Edmund Burke, Friedrich Hayek, William F. Buckley, etc. as one of the most cited right of center political thinkers.  So far I've been impressed with how tightly logical and well-reasoned the book is.  I would recommend it to all political junkies out there.  The chapter about education policy, in which he famously argues for a voucher system, is especially good so far.  For people with a more casual interest in politics, this book might be a bit dry.  I think "Parliament of Whores" by P.J. O'Rourke is one of the best politics-for-dummies books I've ever seen.  Try that out first, and if you're still hungry for more, give "Capitalism and Freedom" a chance.  Friedman is amazing for his ability to explain sophisticated economic concepts using plain English and once in a while some simple arithmetic.

Here's an example of Friedman explaining his political views in common sense terms, in this case criticizing the notion that government action tends to be more moral than the pursuit of self-interest by individuals in the marketplace:

Thursday, February 18, 2010

Some Jazz

I don't feel like philosophizing too much today. I'll leave you with one of the best jazz songs of all time, imho.

Here's Louie doing the same song.

OK, fine, one more.

Wednesday, February 17, 2010

Ranking the Presidents

OK, I think that last post would be boring for most people. This might be mildly more interesting.

The art (and I use the term loosely) of ranking presidents has been popular recently. People have talked about Bush's place in history. Weirdly, we're already talking about Obama's legacy. I think it's probably too early to speak very intelligently about either.

Who was the best president? I think this is an interesting question, but also a bit silly, because it's usually so poorly defined. Do we mean most influential? Do we mean the president who did the most net good? Should we take into account the options available to the president? Do we judge him on his own terms, the terms of most of the people at the time, or our own terms? Is there really some fair and meaningful way to compare a president like Lincoln who was in office during very important political events and a president like Coolidge or Clinton who led during times that were comparatively boring in the US. Despite these problems, history buffs still love trying to rank the presidents. If we have to rank the presidents, I'd probably make my criteria for being near the top something like: Was consequential and did more good than bad. Pretty vague, but good enough I suppose. In the surveys of scholars, Lincoln and FDR are always in the top 3, and the third member of that triumvirate is usually Washington, but sometimes Jefferson or Teddy Roosevelt. I don't have a big problem with those selections, other than those general problems I outlined above. It's not uncommon to find a conservative who would put Reagan in the top 3, presumably bumping out FDR. I think that's probably hard to justify, because, frankly, fighting WWII was more important than speeding up the end of the Cold War. There's also the related question of favorite president. I have a soft spot for some of the boring ones, like Eisenhower and Cleveland. But it's hard to top Washington.

What is Bush's legacy? I think it's too early to say. I think he and his friends probably are hoping for a Truman-esque result: Unpopular when he left office but later realized to be a very good president. I think this is Bush's best case scenario, but is pretty unlikely. I think a more likely, reasonably good outcome for him would be Wilsonian: did some important good stuff and important bad stuff, and we'll endlessly debate whether he did more good than harm. LBJ is also a decent analogy.

How was Obama's first year? I think many people would say that it was OK, but not that great. Definitely highly disappointing to many of his supporters. Probably surprisingly ineffective in eyes of many of his opponents. I'm a little surprised that his popularity disappeared so fast, but I'm not surprised that he's effected so little change. Before he was president, I figured there wouldn't be much difference between McCain and Obama on some of the biggest questions of foreign policy and economics. Basically, in times like these, the president just doesn't want to mess up, so he's going to listen to smart foreign policy and economic advisers, who will likely not be rabid socialists or whatnot. I think my rather modest expectations have been largely vindicated. He's largely been a continuation of the second Bush term so far. Maybe the biggest difference between the two will end up being their Supreme Court nominees.

This brings me back to Reagan. I was amazed by the hype surrounding Obama during the campaign. How can anyone who knows any history have so much enthusiasm for a politician? I don't mean that they're all bad, but they usually tend not to accomplish much. Presidents are not too different from hitters in baseball: probably will bat about .250 and rarely hit any grand slams. Arguably Reagan was the most important, transformative president since FDR. I don't feel competent to judge his foreign policy accomplishments, but let's grant that they may have been very impressive. But look at his domestic accomplishments. He didn't roll back the welfare state. Conservatives don't like 2 of his 3 Supreme Court appointments. The 1980s were not a return to the cultural/social values of the 1950s. Inflation was conquered under his watch, but mostly by Paul Volcker. It's glib, but not entirely inaccurate, to say that his two big domestic policy achievements were Antonin Scalia and drastically lowering the highest marginal income tax rates. (Not all taxes went down, e.g. the payroll tax went went up.) These are not small achievements, but you can see why I don't expect huge social transformation to come from presidents.

Cowen on the VAT

Tyler Cowen makes a case for raising taxes to deal with the long term budget problems. I assume he means some time in the next few years, not necessarily now.

I don't want to get into an overly technical discussion about the value-added tax, partly because I don't know enough about it to really discuss it thoroughly. My understanding is that it's basically like a sales tax, but it's collected along various stages of production, rather than just when the final consumer purchases the product. For various reasons it's considered to be an efficient way to raise revenue. It's widely used in Europe. Conservatives worry that it's so good at raising revenue that it will encourage politicians to increase the amount of government spending even more. Liberals worry that it would hurt the poor the most, since they spend a larger % of their income, whereas richer people save/invest more of theirs, and income from savings/investments are not taxed by a VAT.

I'm not entirely opposed to his idea, but I'm not yet convinced that people hate curbing spending more than they hate raising taxes. I'd probably be happy with a deal that does both of those.

Tuesday, February 16, 2010

Public Policy and Opportunity Costs

Tyler Cowen has an interesting post about the likely affects of increasing health insurance coverage. He's raising a really basic point that somehow is often forgotten: when deciding whether to pursue some policy the test is not whether the policy would "do some good," but rather the test is whether the policy is the best option available. Economists refer to this as "opportunity cost," and I think it's one of the most important ideas in all of economics. [Wiki attributes the idea to John Stuart Mill, but I wouldn't be surpised if it was thought of thousands of years ago avant la lettre. Maybe Aristotle or Plato talked about it?] Basically, the opportunity cost of something is the next best option available to you that you must forego to get the thing you end up choosing. That sounds complicated, but think of opportunity cost as what you have to sacrifice in order to get something. Example: the cost of going to law school isn't just the outrageously high tuition. It's also the three years of income you had to give up. And we can extend this to non-financial concepts as well: you had to give up a lot of sleep, maybe give up blogging, etc. We realize that the cost might be way higher than we thought at first.

So, when you are deciding whether to buy an ice cream cone, don't just ask: Would I like an ice cream cone? You probably would answer yes. And this logic would lead you to spend thousands of dollars on ice cream per year. Ask instead, what else could I spend this money on? Do I like these things better than ice cream? Now you'll behave in a more reasonable fashion: buying ice cream here and there, but also purchasing other important things, like clothing or housing or education.

The above sounds really obvious, and it might describe the way most of us act most of the time, but I think we often forget this common sense in policy debates. So, someone will say that of course we should spend more money on education. It's "for the children" after all. Who could be stingy when it comes to that? And then the environmentalist comes along and asks you to spend some money to save the environment. And surely you can't skimp on that. And soon enough you realize that you've run out of money, and you haven't even tipped the waitress for lunch yet. Oh yeah, and you forgot to pay for national defense, a police force, health insurance, etc. Oops.

Tyler Cowen makes a very convincing case that there would be much better, politically feasible ways to spend the money that the Democrats would like to spend on their health reform proposals. Bjorn Lomborg makes similar arguments regarding climate change. If you haven't already, I recommending doing a youtube or google video search of Lomborg's interviews or lectures. He's a very powerful speaker.

Saturday, February 13, 2010

Long-run Deficits

As you might have gathered from the post below, those who are serious about deficit reduction must be willing to talk about slimming down the large parts of the budget [note: this doesn't literally need to be a cut in spending, it can just mean slowing the rate of growth of spending], including defense, medicare, medicaid, or social security. Or they must be willing to raise taxes drastically in the future. Anyone who says that these parts of the budget are forever sacrosanct and also that taxes must remain low is not a serious thinker on this matter and should be ignored. When people talk about fiscal responsibility, they often talk about cutting down on pork-barrel spending. This is a laudable goal, perhaps (too much pork-barrel spending may allow bad politicians to stay in office by "buying" their constituents' votes), but it is basically irrelevant to the problem of the deficit. We routinely have deficits in the hundreds of billions of $, and these days they even top a trillion. When someone talks about cutting out $1 million somewhere, he might be right, but he's not really making a serious suggestion regarding the deficit. If you're $100,000 in debt due to college loans and someone suggests that it might help if you try to pick up pennies off the pavement, you would be right to ignore that person or maybe kick him in the shin.

So, what to do: raise taxes or cut spending as a % of GDP or some combination of the two? I think a good case can be made for keeping taxes relatively low. Taxes affect the incentives people face, thus altering their behavior. Higher income taxes can cause people to choose to work less. Example: You're interested in being promoted to regional manager, but you find out that this higher salary will move you into a higher tax bracket, so that you only get to keep, say, 40 cents on each additional dollar you earn. It's not so unlikely that the new job will look less appealing. You might not think it's worth all the time and effort to get this promotion. So, you're content to remain assistant to the regional manager and spend more leisure time learning about new beet recipes. So, higher taxes can mean that people work less than they would have otherwise, in other words they produce fewer goods and services than they would have otherwise. So, as a society we end up less wealthy than we would have been. This harmful effect of taxation is what economists call a "deadweight loss" (i.e. there's some income that goes neither to you or to the government, but is just never produced, because you choose to spend more time watching TV rather than working.) This doesn't mean that higher taxes are never justified, but it means they can impede economic growth, and so I tend to have a bias against them.

So, I think most of the deficit reduction will have to come from the spending side. Defense spending isn't my biggest concern, because it doesn't appear to have a consistent upward trend. It ebbs and flows as threats rise and fall. So, you see the spike of spending during the Vietnam War. You see the increased spending under Reagan and under Bush after 9/11. But you also see that it fell in the aftermath of the Cold War, for example. So, the main problem for future deficit hawks is to deal with entitlement spending (e.g. Medicare, Medicaid, and Social Security; especially Medicare.) Social Security and Medicare (and in some cases Medicaid) are entitlements given to the elderly. But we have way more old people than we did when these programs were created in the 1930s and 1960s, respectively. Also, these old people are living longer than they used. Thus, the number of people benefiting from these programs has sky-rocketed, but the number of taxpayers has grown more slowly. So, to a large extent our budget problems are demographic problems. One of the most economically efficient, humane solutions would be to raise the retirement age (i.e. when people are eligible to participate in these programs.) This has already been raised from 65 to 67 for people born after 1959. Perhaps it should be raised again to 70 or so, for people who are, say, 45 or younger and have time to make the appropriate changes in their work and saving habits. Even this wouldn't completely fix the system, but it would be a good start.

Unfortunately, when politicians talk about changing Social Security or Medicare, senior citizens go bonkers and opposing politicians play into this fear. This happened to Reagan (though there was a compromise made in 1983 to gradually raise the retirement age to 67), G.W.Bush, and in 2009 it happened to the Democrats.

Thus, these entitlement programs are basically seen as politically impossible to fix. Not many politicians are willing to touch these programs, preferring instead to punt the problem to future politicians. But eventually they will have to deal with it. It will take courage, but it would be best to solve these problems before they truly become disasters.

Friday, February 12, 2010

Some straight dope on budget deficits

There's a lot of talk these days about federal budget deficits. It's an important issue, but I think a lot of people are worried about the wrong things. I'll try to present what I think is basically a consensus opinion of economists. Some economists would vociferously disagree with me, but I think most would agree with the basics of what I'm saying, though perhaps with some minor reservations.

Deficits can be a problem for various reasons, e.g. they can lead to higher interest rates, which can choke off economic growth. And they can lead people to worry that taxes are going to go up, etc. But deficits are not always and everywhere bad. I don't want to go into overly wonky territory, so let's just look at an example from everyday life. Sometimes it's ok for someone to go into debt. For example, many people take out loans to pay for college. We don't generally regard this as disastrous for the person taking out the loan, as long as there's some plausible plan to eventually repay the loan. Similarly, it's OK for the government to run a deficit, if there's some plausible plan to balance the budget eventually. The consensus among economists is that the government shouldn't try to balance the budget every year. Rather, it's better to balance the budget over the course of the business cycle: i.e. run a deficit in bad year and then run a surplus in good years. (see #8) I'm using somewhat imprecise language, and my analogy isn't perfect (after all, lenders are much more likely to tolerate fiscal profligacy on the part of the US government than they are for an individual person), but I think it's a common sense, fairly accurate way for people to think about budget deficits.

So, when people rail against Obama's stimulus for adding to the deficit, I think they have a legitimate concern, but I think they are basically misguided. It makes sense to run a budget deficit during a recession, either by lowering taxes, raising spending or both. (see #4) There are legitimate debates about how big such a stimulus should be or whether tax cuts are better than spending increases. Traditional Keynesians tend to favor spending increases. The eminent economist Robert Barro prefers tax cuts.

I think it is reasonable to think that the portion of the deficit attributable to the stimulus bill is for the most part short term and manageable. Maybe the stimulus was poorly designed, but a stimulus itself is not a bad idea. People who say things like: "The government cannot create economic growth, only businesses/entrepreneurs can" are flat-out wrong. Economic growth can come from both the public and private sectors or by some sort of combination of the two. Our short-term, huge problem is unemployment. Our long-term problem will be budget deficits. There's a time to be fiscally austere, but not when so many people are suffering and so many are desperate to get back to work.

Yes, in the long-run (say, the next few decades or so) deficits will be an enormous problem. Can we convince creditors that we are reasonably fiscally responsible in the long-run so that they will continue to trust us and lend to us? Our nation is projected to have large deficits indefinitely, largely due to Medicare, Medicaid, Social Security, and defense spending. And these deficits will eventually grow larger and larger. This is a problem that will need to be dealt with. In a few years, the stimulus bill will be but a memory, but we'll still have large deficits, as I said, mostly due to four large components of our budget. I'll discuss this in another post.

[Update: According to Mankiw, you might not need to balance the budget, just keep the deficit reasonably small relative to the economy.]

Wednesday, February 10, 2010

Health Care Policy

One of the biggest political issues of the last year or so has been health care reform. I must admit that I rarely thought about health care policy before 2009. a) I had health insurance through my parents. b) Most of the pundits and intellectuals that I found most interesting and insightful had little to say about health care reform. However, in spring 2009 I took a health care seminar, and so I've spent quite a bit of time in the last 12 months or so thinking about this issue.

Health care strikes me as a particularly complicated issue. I think the disagreements on this issue between different experts tend to be fairly radical. There doesn't seem to be anything close to a consensus. You might think that this is true of most issues, but in fact, say, economists can actually find a lot of policy ideas that they tend to agree on:

It's easy to find policy experts on the left who want a single payer system (i.e. the government is the only insurer, and insurance companies are rendered obsolete) and people on the right who want a relatively laissez-faire system. I actually have some sympathy with both sides on this issue. Luckily, I think there may be a way to compromise. But first I'll explain what I think some of the major issues are.

a) Many people can't afford health insurance.
b) People are afraid of losing their jobs and as a result losing their insurance and as a result possibly going bankrupt due to health care expenses.
c) People wish their health insurance were cheaper, or at least they wish the price didn't increase so much every year.
d) People want skilled doctors and effective medicine. They want the health care quality to continue to improve and for their to be continued innovation.
e) Medicare and Medicaid are already a huge and growing portion of the federal budget, and we have a huge budget deficit.

You might see that there's some tension here. For example, if we could find a way to pay doctors less (maybe the government could set some sort of price controls) or pay less for drugs (maybe control prices or reimport drugs from Canada, which basically amounts to the same thing), we would start to the solve (a) and (c), but (d) might get worse, since lower paid doctors might mean lower quality doctors and cheaper drugs might mean that pharmaceutical companies have less money for research and development. Maybe we could solve (a) through (d) with some sort of government controlled system or government subsidies, but it seems pretty clearly that (e) would get worse.

In my judgment, unless we preserve some sort of private, competitive market system, we will fail disastrously in (d), (e) or both. For example, as good as the European public health insurance systems might be, I think they don't innovate very much, and so they have to piggy back off the US.

One of the big reasons health insurance is so expensive is that employer provided insurance is tax-free. This policy grew out of the wage controls that existed under WWII. Companies couldn't attract employees with higher wages, so they offered health benefits. What grew out of this is a system in which people grew accustomed to employers providing insurance and they grew accustomed to the fact that the government wouldn't tax these benefits. The resulting mess is not so surprising. In economics it is often said that when you tax something you get less of it and when you subsidize something you get more of it. Well, income is taxed, but health benefits aren't, so naturally we see find that people often receive rather lavish health plans from their employers. Think about it: if your employer says "I can give you $10,000, which will be taxed down to $8,000, on top of what you already make, or I can give you a $10,000 insurance policy on top of what you already make." Which will you choose? Maybe you only needed a $6,000 plan, but who can turn down free money? You can see the same phenomenon at work in housing. If you can deduct mortgage payments from your taxes, but not rent, aren't you that much more likely to buy a house rather than rent?

I think this misguided policy of making health insurance tax free has had three bad effects.
a) Demand for insurance goes up, and so the price goes up.
b) Lavish insurance plans mean that the insurance company (but in fact, indirectly, you) pays for almost everything, so you are less cost conscious and you allow the doctor to perform a million expensive tests. This is another reason health care costs so much. (
c) You are now dependent on your employer for health coverage. If you lose your job, you are in dire straits. If you think about this, it makes no sense. Would you let a spell of unemployment prevent you from having adequate food or housing or clothing?

As you can see, I think employer provided insurance is one of our main problems. I think my preferred solution would be to tax health care benefits as if it were any other income. I would use this revenue to help pay for a system in which everyone in the country could have a voucher for the health care plan of his choice. Thus, people would no longer have to worry about medical bills leading to bankruptcy. And people would be a little more cost conscious when it comes to health care. Lastly, we'd still have a competitive, dynamic, capitalistic system with plenty of innovation. I'm borrowing from Martin Feldstein:

As things stand, this plan is probably too ambitious, and it would be hard to convince people who already have insurance to support such radical changes. If that's the case, maybe the next best thing is something like the Wyden-Bennett bill. Also, maybe we should wait until the economy is better before we talk about sweeping health care reform, tax increases, etc.


Hello readers,
I've been thinking about doing some blogging for a little while now, but due to being busy and not feeling like I had a lot to say, I put it off. However, I had a "snow day" today, so it seemed like a nice day to start a blog.

I think the blog will focus on politics, because that's a topic where I can be pretty loquacious. But I might talk about philosophy, religion, career, etc. I'm open to suggestions.

I don't expect many people to read this blog, but for those that do: enjoy!