Archive for September, 2009
How Big is American Government?
Federal, state, and local government spending will be 42 percent of U.S. gross domestic product in 2009, according to data from the Organization for Economic Cooperation and Development. That’s huge–more than 4 out of every 10 dollars of everything produced in America now gets channeled through governments.
How does that compare to other advanced nations? Chart 1 shows that total government spending in the United States is somewhat less than the average of the 30 industrial nations in the OECD, but that the U.S. advantage is shrinking. During the 1990s, the U.S. government size was about 10 percentage points smaller than the average OECD government size, but that gap has shrunk and is now only 5 percentage points.
Most of the erosion of America’s smaller government advantage occurred during the early Bush administration years. In the last two years, the recessions and expansionary fiscal actions have boosted the size of governments both here and abroad, as shown in the chart.That’s the bad news. The good news is that some advanced nations have substantially cut the sizes of their governments in recent decades, which illustrates that it can be done. Chart 2 shows total government spending as a share of GDP for the U.S. and for five OECD nations that have had relatively sound fiscal policies. Putting aside the recent recession-induced increases, Canada, New Zealand, and the Netherlands have chopped their governments by roughly 10 percentage points or more since the early 1990s.
What’s the upshot for U.S. policy? Many Americans have been stunned at the rapid expansion in government spending in recent years. But international experience shows that we can stop that expansion and, indeed, reverse it. If Australian, Canadian, Dutch, New Zealand, and Spanish lawmakers can shrink the relative sizes of their governments, then we can to. We just need to elect policymakers who support that goal. That is a tall order, but entirely doable.
FDIC Plan to Borrow from Banks Just Back-door Way of Putting the Taxpayer on the Hook
With the declining balance of the Federal Deposit Insurance Fund, and more bank failures likely in the days ahead, the FDIC is looking for novel ways to avoid borrowing from Treasury to cover its expected shortfalls. One proposal being floated is to have the FDIC borrow from healthy banks to cover the costs of bank failures. Without borrowing from either the Treasury or the banks, FDIC would likely have to raise insurance premiums on all insured banks.
While the scheme is imaginative, it is in reality no different than borrowing from the Treasury. Banks, in exchange for a loan, would receive a government bond. Does anyone doubt that these bonds would not simply be backed by the FDIC, but also backed by the Treasury? In effect the plan is no different than FDIC borrowing from the Treasury and the Treasury selling bonds to the banks to cover the FDIC’s borrowing. Why the FDIC and Treasury would prefer a direct FDIC borrowing from banks is that it hides the real cost of the borrowing from the American taxpayer.
If we are going to continue to put the taxpayer on the hook for the behavior of the banks, let’s at least be honest about it.
Tire Tariff Decision Won’t Soon be Forgotten
The good folks over at Freedom to Trade recently filmed an interview with me about the implications of the China tire tariffs:
And if you just can’t get enough about the ramifications of the tire tariff, check out this Canadian Business News clip from yesterday, or this one from CNBC today.
Cutting Health Care Costs
Ezra Klein, the young Washington Post blogger who writes a lot about health care, contributed an article to the paper’s Sunday Business section in which he made this compelling point along the way:
The surest way to cut health-care spending would be to make people shoulder more of the burden directly, as opposed to hiding it in taxes and lost wages.
Bingo! Exactly! So why does Klein want government to get more involved, to wrap our health care in a web of mandates and subsidies and regulations and gatekeepers and monitors? When, as he says, making the cost of health care clear and direct would be “the surest way to cut health-care spending”?
Michael Cannon’s proposal for “Large HSAs” would move us in the right direction. It would allow workers to receive the full amount that they and their employer spend on their health benefits as a tax-free cash contribution to the worker’s health savings account. That would give consumers control over their health care dollars, giving them an incentive to shop around, ask questions, and generally hold down costs as consumers do in normal competitive businesses.
You can’t say it enough:
The surest way to cut health-care spending would be to make people shoulder more of the burden directly, as opposed to hiding it in taxes and lost wages.
Congress should stop moving in the other direction.
The International Relations Academy and the Beltway “Foreign Policy Community”–Why the Disconnect?
Glenn Greenwald uncovers a very interesting sentence in Les Gelb’s Democracy essay [.pdf] on the Iraq war and the media:
Les Gelb on Charlie Rose
My initial support for the war was symptomatic of unfortunate tendencies within the foreign policy community, namely the disposition and incentives to support wars to retain political and professional credibility.
I had to read that two or three times to unpack all that’s going on in there. The question obviously being begged is where does the disposition, and where do the incentives “to support wars to retain political and professional credibility” come from?
Consider: There are two groups of people, the Foreign Policy Community (FPC) in Washington and New York, centered around the national-security bureaucracy and think tanks that produce orthodox foreign policy hands like Brookings, AEI, and CFR. There is a second group of people, international relations academics. The two groups have, in most cases, similar training (PhDs from top schools) and in the course of obtaining such training have been exposed to many of the same theories and topics.
Yet the two groups have been wildly at variance in terms of their views on important public policy issues. Take the Iraq war, for example. As anyone who was in Washington at the time knows, the FPC was extremely fond of the idea of invading Iraq. To oppose it was to marginalize oneself for years. Indeed, those who promoted the disastrous adventure have prospered, while those who (bravely or stupidly, depending on your point of view) opposed it remain huddled in the chilly, dusty alcoves of popular debate.
In the academy, meanwhile, there was hardly any debate over Iraq–almost 80 percent of IR academics opposed the war. [.pdf] To the extent academics did enter the public debate on the issue, it was to pay for an advertisement in the New York Times warning against the war. [.pdf] The only academics who spoke out in favor of the war (to my knowledge, anyway) were IR liberals like Anne-Marie Slaughter, who sought policy positions in Washington. (Slaughter, of course, was rewarded with a spot as Director of Policy Planning at the State Department, while to my knowledge none of the academic opponents of the war have gained Washington policy jobs.)
So what is going on here? Why is there such a profound disconnect between the two groups that look so similar on paper? The first, most obvious answer is that the academy tends to be more liberal (in the domestic political sense), so academics tend to have more peacenik-y views. The problem with that argument is that the domestic-political liberals in the FPC supported the war just as strongly as their conservative brethren, which means that domestic political views don’t work as a determinant of support for war.
My sense is that the giant national-security bureaucracy in Washington that has emerged over the last 65 years has shaped incentives in a manner such that it is next-to-impossible to “get ahead” by advocating for restraint. Put differently, restraint isn’t in anybody’s interest except the country’s, and there’s nobody in Washington representing broad national interests as opposed to their own parochial ones. Every neoconservative or liberal imperialist in DC has someone’s interests behind them. The Don Quixotes like myself and my colleagues here, by contrast, want to cut the defense budget, slow the opportunities for rent-seeking among contractors, etc, etc, etc. As Wall Street Journal editorial page editor Paul Gigot once derisively referred to us, we’re just “four or five people in a phone booth.” But we were right about Iraq, which is more than Gigot can say for himself.
For the legions of IR journal editors who are reading this post, I am completing an article draft examining this idea in more detail. But for now you can cast an eye on a Steve Walt blog post that makes an argument very similar to my own:
…America’s role in the world today is shaped by two imbalances of power, not just one. The first is the gap between U.S. capabilities and everyone else’s, a situation that has some desirable features (especially for us) but one that also encourages the United States to do too much and allows others to do either too little or too many of the wrong things. The second imbalance is between organized interests whose core mission is constantly pushing the U.S. government to do more and in more places, and the far-weaker groups who think we might be better off showing a bit more restraint.
I’m open to different theories on this matter, but I think we should agree that at the very least, it’s an interesting puzzle.
Use Only U.S. Law to Interpret the U.S. Constitution
This fall, the Supreme Court will hear two cases involving Eighth Amendment challenges to the sentencing of juveniles to life without parole (“LWOP”) – Graham v. Florida and Sullivan v. Florida — claims that these types of sentences are “cruel and unusual.” Cato takes no position on the wisdom of these types of sentences, but when evaluating their constitutionality the Court should only consider American law.
That is, regardless of the criminological or moral merits of juvenile LWOP sentences, the Supreme Court ought not consider non-binding provisions of international human rights treaties and customary international law in its analysis (as it has in cases like Roper v. Simmons and Atkins v. Virginia). To that end, Cato joined the Solidarity Center for Law and Justice, the Sovereignty Network, and 10 other groups in a brief urging the Court to limit its constitutional analysis to domestic law and the decisions of U.S. courts.
Our brief argues that the Court should leave to the political branches the decision of whether to transform international norms into domestic law and only allow duly ratified international agreements to override domestic law — in the way the Court has set out in cases such as Medellin v. Texas. It further contends that if the Court believes this is one of the rare cases where international norms are relevant, it should follow the test it laid out in Sosa v. Alvarez Machain, which addressed the (unrelated) Alien Tort Statute: The relevant norm must be widely accepted by the civilized world and as clearly defined as the historic “law of nations” norms regarding safe conduct permits, ambassadorial rights, and piracy on the high seas.
The brief also cautions that reliance on non-binding and indefinite international norms will undermine the democratic process and rule of law, casting considerable uncertainty over many U.S. laws.
More generally, while looking to foreign and international example is prudent when designing constitutions and drafting legislation — or even adjudicating complex international legal disputes — it is simply not relevant to interpreting the nation’s founding document.
Preemptive Regulation of the Internet
Julian Sanchez has already done a fine job of assessing FCC Chairman Julius Genachowski’s speech announcing his plan for federal regulation of the Internet. There was nothing really new in it. No substantial problems justifying regulation have emerged, and—Genachowski’s claims to modest aims aside—any ‘net neutrality regulation is likely to be a substantive morass. Says Julian:
[I]t absolutely reeks of the sort of ad hoc ‘I know it when I see it’ standard that leaves telecoms wondering whether some innovative practice will bring down the Wrath of Comms only after resources have been sunk into rolling it out.”
If the FCC goes ahead with regulating the Internet, the public will get a good look at what closed systems are really like. The FCC’s retrograde “Electronic Comment Filing System” doesn’t even allow full-text searches of submissions. This is but one failing the Internet’s engineers all over the country—and not just in big telcos—will run into dealing with the FCC. It’s laughable that this outdated telecommunications bureaucracy is trying to take over the Internet.
A complex array of network protocols and business processes make up “the Internet.” The Internet’s end-to-end architecture is good engineering because it is naturally open, flexible, and conducive to communications freedom. The Internet empowers consumers to fend for themselves, such as in their dealings with Internet Service Providers. When Comcast degraded the Bitorrent protocol, it took just weeks for consumer pushback to end the practice. The FCC opened an inquiry long after the matter was settled.
But some politicians and the FCC’s lawyers think their slow-moving, technologically unsophisticated bureaucracy knows better than consumers and technologists how to run the Internet. The FCC’s “net neutrality” plans are nothing more than public utility regulation for broadband. With federal regulation, your online experience will be a little more like dealing with the water company or the electric company and a little less like . . . well, the Internet!
As Julian said, Tim Lee’s is the definitive paper. The Internet is far more durable than regulators and advocates imagine. And regulators are far less capable of neutrally arbitrating what’s in the public interests than they imagine either.
Obama Transparency Update II
An editorial in the New York Times the other day reminded me that it’s a good time for another look at the Obama administration’s record on transparency.
The editorial lauded a new policy of disclosure for the Secret Service’s logs of White House visits, naming the visitor, who set up the meeting, where it was held, and how long it lasted. The Times gushed: “[T]he administration is well on course to be the most open in modern times, with such earlier initiatives as the online Data.gov to allow citizen access to huge amounts of federal agency information.”
These things are good—and the White House certainly means well—but I’m a little less enthusiastic, and I think the Times set the bar at the wrong height: A ham sandwich is more transparent than recent administrations. Candidate Obama made some firm commitments about transparency that are better for gauging his performance.
Disclosure of White House visitor logs is a small step forward, but I agree with the Times that a three to four month delay in revealing visits is too long. Much of this information is computerized at the White House and could be revealed in real time or within 24 hours. Also, visits that are not revealed for security or diplomatic reasons should be noted as such so that the quantity of such visits can be tracked over time and misuse of this secrecy ferreted out.
It’s also slightly ironic to see the Times sing President Obama’s transparency praises while the White House flouts a transparency commitment made to the paper back in June. For a story called “White House Changes the Terms of a Campaign Pledge About Posting Bills Online,” White House spokesman Nick Shapiro told New York Times reporter Katherine Seelye, “[O]nce it is clear that a bill will be coming to the president’s desk, the White House will post the bill online.” It hadn’t happened yet when I wrote about it in July, and it still hasn’t happened, even though 22 more bills have passed into law since then.
Below the jump is an updated ”Sunlight Before Signing” chart, reflecting all the bills President Obama has signed to date. Still only one (of sixty-one bills) has been posted on Whitehouse.gov for five days before signing. (That’s a .016 average, baseball fans.)
Monday Links
- The health care plan now being debated in Congress is not reform. It’s an insurance-company bailout–and you’re going to paying for it.
- The true cost of financial regulation: “A detailed anatomy of the bubble shows that many of the policies and regulations meant to reduce financial risk actually increased it.”
- A great prep for the upcoming G-20 meeting: Here’s a quick crash course in global economics.
- Government: “Hey, let’s start meddling in the Internet business.” A better idea: Preserve net neutrality without regulation. Here’s how.
- Podcast: Do certain climate change policies threaten global commerce? More here.
New at Cato Unbound: Monetary Lessons from the Not-So-Great Depression
Accounting for the Great Depression and devising plans for preventing a sequel has been a major preoccupation of monetary and macroeconomics for over seventy years now. If the sometimes vitriolic infighting raging now within the economics profession is any indication, our recent recession and financial collapse may play a similar role for years to come. Did Bernanke display a virtuoso touch and keep a bad thing from becoming worse? Or did the Fed drive the economy over the edge by compounding prior errors with fresh mistakes?
Until the Milton Friedmans and Anna Schwartzes of our “great recession” emerge, try this month’s Cato Unbound for some preliminary answers. We’ve recruited a panel of top-notch money specialists to tease out some of the key monetary lessons from the present mess, and here’s a quick gloss on what they’ve said so far.
In our lead essay, Bentley University economist Scott Sumner, a specialist on the Great Depression, stands against conventional wisdom in arguing that monetary policy in the period running up to the carnage in the financial sector was disastrously contractionary. Easier money, Sumner says, might have prevented the worst. He proposes a new strategy for central bankers — targeting forecasts of nominal GDP — that might help avert future crises. Sumner warns of the political dangers of misdiagnosing the crisis: unless the record is set straight, free markets will once again take the fall for a flubbed central banking.
In his reply essay, “It’s Harder than it Looks,” James Hamilton of UCSD and the popular blog Econbrowser disagrees with some, but agrees with much of Sumner’s diagnosis, including the claim that the Fed could have done better and might have limited the damage of the financial crisis had it pushed rates of nominal GDP growth higher than they were. But Hamilton points out that this is easier said than done and raises doubts about the practicability of Sumner’s preferred targeting strategy.
Cato senior fellow and University of Georgia economist George Selgin agrees with Sumner that “tight money was the proximate cause of the post-September 2008 recession” and that “a policy of nominal income growth targeting might have prevented the recession.” But Selgin encourages Sumner to acknowledge the role easy money played in the subprime crisis, and argues that Sumner’s favored five-percent nominal income-growth target is “unnecessarily and perhaps dangerously high.” Selgin favors a lower target and tolerance for some price deflation, a strategy he contends would be less likely to perpetuate boom-bust cycles.
In the last of this issue’s formal replies, San Jose State’s Jeffrey Rogers Hummel sees merit in much of Sumner’s account of the causes of the financial crisis, but he doubts a better rule for central bankers will keep us out of trouble in the future. Hummel contends that “only abolition of the Fed, elimination of government fiat money, and complete deregulation of banks and other financial institutions offer any long-term hope of bringing better macroeconomic stability.”
Stay tuned as our panelists continue to hash it out in free-for-all blog chat that begins Wednesday. And if this is the sort of thing that revs your engine, don’t forget about Cato’s annual monetary policy conference coming up in November.
Nobody Considers Health Insurance Mandates a Tax? Really??
As my colleague Jeffrey Miron noted earlier today, when grilled by George Stephanopolous on whether the so-called “individual mandate” is a tax increase, Obama replied, “Nobody considers that a tax increase….You can’t just make up that language and decide that that’s called a tax increase…My critics say everything is a tax increase.”
Where do Obama’s critics get these wacky ideas? From a bunch of nobodies, that’s who!
Princeton economist Uwe Reinhardt, quoted by Larry Summers (1987):
[Just because] the fiscal flows triggered by mandate would not flow directly through the public budgets does not detract from the measure’s status of a bona fide tax.
Economist Larry Summers, Obama’s National Economic Council chair (1989):
Economists have generally devoted little attention to mandated benefits regarding them as simply disguised tax and expenditure measures… Essentially, mandated benefits are like public programs financed by benefit taxes… [If] the mandated benefit is worthless to employees, it is just like a tax from the point of view of both employers and employees…There is no sense in which benefits become ‘free’ just because the government mandates that employers offer them to workers.
Columbia University economist Sherry Glied, Obama’s appointee to HHS Assistant Secretary for Planning and Evaluation, in the New England Journal of Medicine (2008):
The mandate is in many respects analogous to a tax. It requires people to make payments for something whether they want it or not. One important concern is that the government will provide insufficient funds for the subsidies intended to accompany the mandate. In that case, the mandate will act as a very regressive tax, penalizing uninsured people who genuinely cannot afford to buy coverage.
Congressional Budget Office (2009):
Under some proposals, firms would be required to make payments to the federal government if they chose not to offer health insurance to their employees, and individuals who did not comply with the requirement to obtain insurance would have to pay a penalty. Such payments would be equivalent to a tax or a fine, and the government’s receipts should be recorded in the budget as federal revenues.
Here’s a question: if an individual mandate is not a tax, why exempt anybody? If an employer mandate isn’t a tax, why exempt small businesses?
Filed under: Cato Publications; General; Health Care; Tax and Budget Policy
Trade Delivers Peace and Bargain Prices
For a fair and authoritative (and did I mention favorable?) assessment of my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, you can read William H. Peterson’s review in today’s Washington Times.
Dr. Peterson is an adjunct scholar with the Heritage Foundation and the Ludwig von Mises Institute who holds a Ph.D. in economics from New York City University. In his review he writes:
Daniel Griswold’s tour de force explores, reasons and documents how import competition benefits the American consumer, seeing him move ahead toward greater peace incentives, lower real prices, more choices, better quality. Mr. Griswold also tracks how the big-box retailers such as Wal-Mart, Home Depot and Best Buy deliver the world’s goods mostly by sea via millions of big, truckload-size containers. …
So Mr. Griswold would have the United States adopt or maintain trade policies best for most Americans, especially the poor and middle class, no matter what other nations do. Says the author: Let’s drop the remaining barriers separating us from ongoing growth and peace policies enhancing the global marketplace. Bully for him.
Information at the beginning of the review should have given the cover price of the book as $21.95. It is available with a nice discount at Amazon.com along with a peek inside at the table of contents and selected pages.
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