Archive for February, 2009
Will Stimulus Become a $3 Trillion Nightmare?
A huge threat from the $800 billion stimulus plan in front of Congress this week is that much of the spending may morph into a permanent expansion of government. If the bill is signed into law, lobbyists will immediately start pressing for the long-term extension of all the new spending on health care, transportation, education and other items.
Let’s look at the Senate bill to illustrate the fiscal impact of such a nightmare scenario. The CBO finds that the Senate bill would increase outlays by $546 billion and cut taxes $292 billion over fiscal years 2009-2019.
Figure 1 shows CBO’s assumed pattern of spending under the bill. Since we are already part way through 2009, outlays peak in 2010 at $206 billion and taper off after that. Note that 41 percent of total spending occurs after 2010 because federal and state agencies have limits on how fast they can spend the huge pile of cash. (Thus 41 percent of spending in the bill is certainly not short-term “stimulus” even if you believe in Keynesian theory).
What if special interest groups successfully lobby to extend all the new benefits and subsidies? One possibility would be that the 2010 funding level of $206 billion is extended permanently, as shown in Figure 2. Rather than the stimulus bill costing $546 billion through 2019, it would trigger spending totaling $2.2 trillion over the period.
In sum, here are the budget effects through 2019 of the stimulus nightmare scenario:
- Temporary tax cuts in the Senate bill: $292 billion
- Spending continued permanently at the 2010 level: $2.2 trillion
- Rough guess at the additional federal interest costs: $500 billion
- Total increase in federal debt under nightmare scenario: $3 trillion
Extending the (mainly useless) tax cuts in the stimulus package would make deficits even larger. And, of course, all this increase in debt would come on top of the debt piling up from financial industry bailouts and regular budget spending. It’s madness.
Enzi Lays Down Health Care Marker
Sen. Mike Enzi (R-WY), the ranking Republican on the Senate’s Health, Education, Labor, and Pensions Committee, has a good op-ed in today’s edition of The Hill.
Enzi rather interestingly does not see Medicare Part D as an example of Congress “simply throwing more money at Medicare.”
That aside, Enzi stakes out a position against creating a new Medicare-like program to compete with private insurance, and against price controls in health care. Those are two of the three positions I advised free-market advocates to take in this op-ed.
The third is a firm opposition to mandates that require individuals to purchase health insurance, whether directly or through an employer. I’m sure Enzi’s saving that for his next op-ed.
Latin Americans Are Fed Up With the War on Drugs
Today, the Latin American Commission on Drugs and Democracy released a report providing more evidence that Latin Americans are fed up with the war on drugs and that momentum is building for a paradigm shift in dealing with drug abuse.
Headed by ex-presidents of three leading Latin American countries—César Gaviria of Colombia, Ernesto Zedillo of Mexico, and Fernando Henrique Cardoso of Brazil—the commission calls for Latin American and other leaders to “break the taboo” of criticizing anti-drug policies.
It is imperative to rectify the ‘war on drugs’ strategy pursued in the region over the past 30 years…
Prohibitionist policies based on the eradication of production and on the disruption of drug flows as well as on the criminalization of consumption have not yielded the expected results. We are further than ever from the announced goal of eradicating drugs.
The commission further calls for drug use to be dealt with as a public health issue, notes that prohibition has increased violence and corruption, and has otherwise undermined democracy as it has led to “the criminalization of politics and the politicization of crime.”
Leading Latin American intellectuals, including Peruvian writer Mario Vargas Llosa, Mexican writer Enrique Krauze, and Venezuelan policy expert and editor of Foreign Policy Magazine Moisés Naím, were also members of the commission.
This is a significant report and comes after Honduran President Zelaya’s recent call for legalization. In the past, Latin American leaders have expressed frustration with Washington’s heavy handed war on drugs, but have nevertheless relented in the face of enormous U.S. pressure. A few public officials, such as former Mexican Minister of Foreign Affairs Jorge Castañeda, have been openly critical of prohibition, but they have been virtually alone and without official support for their views. The commission’s report is a sign that Latin American leaders feel more confident in acting together to counter a policy approach that is destroying the region. And, as my Cato colleague Ted Carpenter notes, now that Mexico is being consumed by an unwinnable war against drug trafficking that is spilling over into the United States, Washington can no longer easily ignore the damaging effects of its policy in the region.
The Political Class Really Is Better
In how many ways is this wrong? (Think Detroit’s chronic financial problems, public officials-private schools, and even a little sexism thrown in for good measure.) I suppose, though, the officers are making extra money, and any time that happens it stimulates the economy, right? That makes everything OK.
Nostalgianomics: If the Shoe Fits…
In a recent post commenting on my new Cato paper, Matt Yglesias just doesn’t get why I would accuse Paul Krugman of peddling nostalgia for the good old days of his boyhood. Indeed, Matt says my whole argument is “kind of silly.” Here’s the gist of Matt’s critique:
In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role [in increasing inequality]. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom — that it would be impossible to reverse the growing inequality of our society.
I think Matt misunderstands both my argument and what Krugman has been doing. I quite agree that Krugman doesn’t want a full-scale reinstatement of the corporatist, cartelistic policies of yesteryear. I say as much in the paper. What Krugman does want, however, is to portray the economic policies of the early postwar decades as an inspiration for progressives today — an example of how activist, interventionist government can simultaneously promote growth and reduce inequality. To quote Krugman’s Conscience of a Liberal: “During the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.”
To get to that ideologically convenient punch line, Krugman is forced to systematically misrepresent the policies and culture of the early postwar decades. He has to leave out all the things he doesn’t like, all the things that virtually all his fellow economists and fellow progressives don’t like, about the supposedly good old days — for example, the widespread cartelization efforts of the thirties, farm supports, price and entry controls on large sectors of the economy, restrictions on retail competition, high trade barriers, racist immigration laws, and the sexist confinement of working women to a pink collar ghetto. All of these contributed to the compression of incomes, yet they don’t serve Krugman’s ideological purposes. So he ignores them. That’s nostalgia-mongering, plain and simple: the selective recall of the past to make it seem better than it really was.
The relevance of all this to today’s situation is both real and important. Progressives have returned to power, and because of the current economic crisis the policymaking environment is incredibly fluid. Big changes are possible, indeed almost inevitable. In particular, proposals to substitute government control for market competition on a massive scale are now on the table: large-scale industrial policy in the name of creating “green” jobs, a full-court press to restore the power of private-sector unions, a qualitative increase in government’s role in health care, and “temporary” (such a dangerous word in Washington) government control of large parts of the financial system. We run the risk right now of making disastrous mistakes that will haunt us for many years to come. And that risk is exacerbated by the nostalgic fantasy, peddled by Krugman and others, that the record of the early postwar decades shows that Big Government and Big Labor are actually good for the economy.
Executive Pay Restrictions
Government-imposed pay restrictions are generally a bad idea; we have literally centuries of evidence showing that price controls always undermine economic performance.
But in the case of executives who came begging to the feds after mismanaging their companies: Sorry, guys, you asked for it.
President Obama’s proposal gets me nervous since it may lead to further meddling by government, but there is a silver lining. Bailouts are a major threat to the economy’s long-run dynamism, so I want to discourage companies from sticking their snouts in the public trough. Restricting pay for incompetent corporate executives is not a proper role of government (by definition, successful corporate executives do not try to loot taxpayers). But propping up poorly-run companies is so misguided that second-best (or even 50th-best) options may be palatable. Corporate chieftains who run their companies into the ground should not be allowed to simultaneously shift the burden of their mistakes to taxpayers and expect multi-million dollar pay packages.
Meet the New Boss…
On Tuesday the Obama administration changed tunes from his campaign rhetoric and did nothing to change the government’s position on the State Secrets Privilege. A government lawyer told the Court of Appeals for the Ninth Circuit that the government was continuing to assert the controversial defense to a civil suit arising from the extraordinary rendition program.
Glenn Greenwald and David Luban have taken the Obama administration to task. Read some more here and a word from my colleague Tim Lynch.
Reporting on Smoking Costs
How does one explain a one-sided story like “Cigarettes’ Cost in Dollars and Lives” in the Washington Post?”
The article assumes that everyone agrees that smokers impose big costs on society, with the upshot that the government needs to try and squelch the bad behavior.
The article discusses how “doctors, health advocates, and patients tally the costs” of smoking, but left out one crucial group: economists.
If the reporter had done his homework, he would have found out that many economists believe that smokers may actually subsidize nonsmokers through various fiscal effects.
For example, the Congressional Research Service found that smokers either impose fairly small costs on nonsmokers or they subsidize them “primarily because smokers’ early death leaves their Social Security and pension contributions unused and available to reduce future financing demands on nonsmokers.”
One can find many similar views by other economists in articles on the Internet. Thus, if the Post reporter had Googled “smoker cost on society” the second hit leads to this quote by economist Kip Viscusi:
The other study I’ve done is looking at the financial ramifications to smoking for the rest of us. These include higher medical costs on the one hand, but lower social security, pension, and nursing home costs on the other hand because smokers die sooner. On balance if you put those together, smokers don’t cost us money, but save society $0.32 per pack.
Don’t they know how to use Google at the Washington Post?
Hat tip: Patrick Fleenor.
Michael Moore Is Speaking to Me Again
Oh, rapture.
And all I had to do was point out how the health care industry tends to hijack the big-government health care reforms . . . that . . . he . . . supports. Wait, that’s why he stopped talking to me in the first place!
Mike, honey, I can’t keep riding this rollercoaster.
Obama Truth Check
President Obama may have preempted the first hour of prime time Monday night, but he certainly did not fail to entertain with several pronouncements that require suspension of disbelief.
Here are four Obama statements that deserve closer scrutiny:
1. “[I]f you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough…”
The fact is that numerous presidents, including Obama’s immediate predecessor, have used desperation and fear to sell some of the truly awful policies to come out of the U.S. government in the last 50 years — the Gulf of Tonkin resolution and the Iraq War resolution, to name two.
2. “What it does not contain, however, is a single pet project, not a single earmark, and it has been stripped of the projects members of both parties found most objectionable.”
This one severely strains credulity. The president is right about one thing: many of the bill’s projects are online for all to see. But could any reasonable person agree that these projects are stimulative and not aimed at special political interests?
3. “Most economists, almost unanimously, recognize that…when you have the kind of problem we have right now…that government is an important element of introducing some additional demand into the economy.”
We’ve been over this, Mr. President. The truth is that a huge and still-growing number of respected economists think that a massive government spending effort in our present circumstances is wasteful and foolhardy.
4. “What I won’t do is return to the failed theories of the last eight years that got us into this fix in the first place…”
OK, so we actually agree with the president on that one. But then why is he bound and determined to repeat the reckless spending habits of George W. Bush? We thought the November campaign was all about “change.”
Obama and Economists
In his news conference last night, President Obama made exaggerated and untrue statements about economics, economists, and the stimulus.
On economics, the president made claims such as “I can tell you with complete confidence that a failure to act will only deepen this crisis.” Yet how can he have “complete confidence” when the economics profession is divided on the stimulus issue, and when we have seen policymakers and top economists making continual mistakes with their policies and predictions over the last year?
On economists, the president opined “although there are some politicians who are arguing that we don’t need a stimulus, there are very few economists who are making that argument.” Mr. President, please look at the Cato list of more than 300 university economists who oppose a big stimulus spending bill. Please have your advisers call these experts to get an independent outside-the-beltway view.
Finally, the president bought into the “Government as Santa Claus” theory with his statement that “the federal government is the only entity left with the resources to jolt our economy back into life.” In reality, the federal government is broke. It has no “resources” left, and will run a $1 trillion deficit this year even without a stimulus. Besides, any resources that the government spends must be vacuumed out of the private economy through borrowing and taxes, which is particularly damaging when the private economy is already suffering from recession.
What the Stimulus Is All About
With the president adopting his predecessor’s strategy of attempting to scare Congress into approving a bad bill by warning of financial doom, it’s worth remembering that the proposed “stimulus” package is about politics, not economics. If the proposed spending was worthwhile, it would be silly to fuss about whether the total comes to $800 billion, $900 billion, or $1 trillion. If we really can’t afford $1 trillion, then how can we afford $900 billion or $800 billion? In fact, the basic goal for most legislators is just to spend as much money as feasible as quickly as possible.
Thus, in Washington today the most important issues are: who gets all of the wealth extracted from the American people and who gets political credit for giving everyone else’s money away. Just consider the local boondoggles being advanced for federal funding by cities around the country–dog parks, tennis courts, neon signs, Harley motorcycles, golf courses, “eco parks,” frisbee golf courses, skateboard ramps, and much, much more not considered worth constructing with funds from local taxpayers.
Eugene Robinson admitted as much in today’s Washington Post. In urging the president to “roll over the Republicans,” he observed:
The House of Representatives loaded up the bill like a Christmas tree as powerful Democrats found room for their pet projects. This was a good thing, not an outrage. Hundreds of millions of dollars for contraceptives? To the extent that those condoms or birth-control pills are made in the United States and sold in U.S. drugstores, that spending would be stimulative in more ways than one.
Also indicative of how the proposed spending is foremost a matter of politics is the role of lobbyists in divvying up the proceeds. The role of House Financial Services Committee Chairman Barney Frank already has been exposed. But he is not alone. Reports the Washington Post:
“Earlier today, Sen. Bingaman met with Treasury Secretary nominee, Timothy Geithner,” the staffer wrote. “The Senator raised concerns regarding New Mexico based Thornburgh Mortgage and their efforts to access TARP funding and convert to a savings and loan holding company.”
Thornburg had been fighting off bankruptcy, and its best chance at a piece of the $700 billion federal bailout known by its initials as TARP could hinge on transforming itself into a regulated thrift and persuading the OTS to recommend it as a candidate for rescue. Bingaman’s aide wanted to schedule a call between her boss and OTS Director John M. Reich.
That short Dec. 9 e-mail offers a glimpse of the flurry of activity involving lawmakers and federal regulators as firms have pursued hundreds of billions of dollars from the Troubled Assets Relief Program and waited for details of how the Obama administration will disperse even more. With so much money at stake and so much uncertainty about who will get it, beleaguered companies fearful of being left behind are scurrying from Capitol Hill to K Street, trying to find a way to the front of the line.
None of this is surprising, of course. But it does demonstrate that the president’s rhetoric bears no relationship with reality. Unfortunately, his proposed “stimulus” bill will stimulate big government, debt, and inflation, not economic growth, jobs, and prosperity.
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