Everything is Awesome and the conservative id.

Anyone who’s watched Lego Movie knows that Everything is Awesome is not just an obnoxiously catchy tune that one can sing during a day of hard work on the construction site. It’s also the anthem for a dystopian, totalitarian regime bent on keeping its subjects in a state of excited servility.

With that in mind, I offer this, via vox.com:

You’ll want to go to about the 3:00 minute mark in that video.

I submit that what Andrea Tantaros is displaying here is the part conservative id, in all its glory. For Tantaros, the release of the report on CIA bad deeds over the past decade and a half is bad because… America is awesome.

This is, of course, crass nationalism, of the Team America variety. America is good. America… Fuck yeah! There’s not a lot of thought or really any thought to it. It’s just Go Team USA type stuff. And note that we can extend this kind of Everything is Awesome reasoning to any number of modern day issues. We shouldn’t talk about racial inequality and the plight of the urban poor because America is Awesome and people who want to talk about poverty just want to talk about things that are Not Awesome. We shouldn’t talk about wealth inequality and the rise of a new class of patrilineal wealth dominating the economic and political scene because America is Awesome and talking about the degree to which inherited wealth is going to screw us is a major downer. And etc.

Really it’s quite a thing. And of course it’s depressing as all hell.

Tyler Cowen Gets Freaky

I don’t like Freakonomics.

The occasion for this outburst of ire is a post by Tyler Cowen in the New York Times Upshot titled “The Lack of Major Wars May Be Hurting Economic Growth.” The article is a pretty fine example of everything I dislike about Freakonomics. The game looks something like this:

  1. The economist (all aspiring freakonomists are economists) picks a field in which she is not an expert. The field is one in which she can feel confident in having superior statistical training relative to the median practitioner of said field. Any social science is a pretty good choice. So are the humanities. The aspiring freakonomist will never choose a field like computer science, physics, or biology; it is too likely that the practitioners in these fields have the requisite training to expose the freakonomist as a buffoon. In the case of Tyler Cowen’s article, he chose history.
  2. Find an obvious correlation. This is pretty easy; there are lots to be had. In this case the correlation is between incidence of war and GDP growth in the developed world.
  3. Spin up a plausible story that explains the correlation. Tyler’s story is of course not the typical Keynesian story about warfare spending spurring economic growth. Instead he claims that war creates high stakes for government policy makers, causing them to make better economic decisions. He cites both R&D investment and economic liberalization policies.
  4. Act confidently that the story you have spun up is the story. After all you are an economist; you have the kind of statistical training necessary to spot these things. Bask in your superior insight. Freakonomics is a cousin of mansplaining. Noah Smith suggests Freakonomics may be a form of of derp.

In the case of the article I linked it’s pretty easy to poke holes in the story. Cowen restricts his analysis to a very small swathe of history, specifically the period from WWII to the end of the Cold War. While it is true that this period exhibited a correlation between GDP growth and incidence of war, there were-needless to say-other things happening. And while it is also true that the post Cold-War era has witnessed both a decline in the rate of economic growth and violent conflict, there are other plausible explanations for the relatively low growth rates of the past twenty or thirty years. Tyler Cowen has even written a book on them. Further, his analysis does not consider the entirety of pre-industrial human history, in which there was both a lot of violent conflict and very little productivity growth.

I am an aspiring economist; I wouldn’t be engaged in that project if I didn’t believe that economics is a powerful tool with which to understand myriad important social problems. However I think it ‘s also important to employ these tools with a sense of humility and with an appreciation of their limits. Normally Tyler Cowen is someone I look up to in that regard; in that sense his Upshot piece is a disappointing outlier.

Reality-Based deficit reduction: an alternative mode of thought

Based on a conversation I’m having elsewhere, I offer the following alternate way of thinking about our current deficit, and why the preferred Republican theory of deficit reduction (cut entitlements) is so fundamentally dishonest. This gets ever-so-slightly into the weeds of how the US budget works, so bear with me.

Broadly speaking, US taxes get go into three buckets. Medicare and Social Security have their own dedicated funding sources (if you have a look at your paycheck, you’ll see these), and these represent the first two buckets. The other bucket is the general fund, which pretty much covers everything that isn’t Medicare or Social Security; this is where your income taxes (as well as things like capital gains and corporate taxes) go. The deficit we have today – the trillion dollar shortfall that Republicans like to talk about ad nauseum – is in the general fund. Neither Medicare nor Social Security are currently running a deficit, though the trustees of these programs predict that in the future they will (more on this in a few moments). The general fund deficit is – as I’ve mentioned previously – almost entirely due to the output gap and the Bush tax cuts. Fix those two things, and you don’t have much of a general fund deficit at all.

Thus, observe the fundamental dishonesty of Republican attempts to fix the deficit: blow a giant hole in the general fund (via the Bush tax cuts and two off-budget wars (paying for the wars in Afghanistan and Iraq were never included in the budget; for PR reasons these were covered by separate appropriations so that their cost could be divorced from the actual budget)), and then after creating the hole insist on making cuts to currently solvent social insurance programs to close it.

It is true that on a multi-decade time horizon, both Social Security and Medicare are projected to be in deficit. This is owing not to these programs generosity (by first world standards Social Security is quite stingy), but rather due to a) a change in the proportion of retirees to workers, exacerbated by a trend toward labor’s share of income decreasing (payroll taxes apply only to wages, capital gains are exempt. There is evidence that capital is earning an increasing share of income, which means that tax revenue based on wages will necessarily decline) and b) healthcare cost inflation. With regards to a, fairly modest changes to the payroll tax and slight adjustments to benefits solve Social Security’s problems in perpetuity; with regards to b) no amount of cuts saves us; eventually the healthcare system devours the entire domestic economy. This is why we need real healthcare reform.

Furthermore: it probably does not make sense to address problems that are decades away. On a multi-decade time horizon, the economy (both macro and political) will be dominated by unpredictable events. Pick any year in the twentieth century, and imagine trying to predict where the US would be thirty years later. It’s impossible to come up with anything that represents where we ended up. There’s a very compelling argument to be made that we shouldn’t move to try and fix Social Security and Medicare until they’re actually facing a shortfall, because there’s a decent chance that random events will erase or postpone the shortfall, whereas if we fix it there is a (probably rather high) chance that Congress cocks up the fix anyway in the future. Remember, there’s nothing Congress can do today that tomorrow’s Congress can’t undo!

What to think about the Fiscal Cliff deal: a reality-based conclusion

For the tl;dr crowd: it sucks and will get suckier.

Right now the country faces several problems. As of December 2012, there are 12.2 million unemployed people in the US, with another 1.1 million so-called discouraged workers who have given up looking for a job. The output gap – the difference between how much stuff our country is producing and how much stuff we could be producing (and, thus, the difference between how much money we’re making and how much we could actually make) – currently stands at about $890bn, which is $7,800 per household, per year. The national debt is about $16tn, and has been growing by about a trillion dollars a year for the past four years (though that pace is slowing dramatically). Long-term projections have the debt exploding as our country ages. The only sunlight poking through these fiscal clouds is the fact that the US government can borrow at very low nominal interest rates (negative real rates, once inflation is taken into account).

Solving our economic problems is the subject of quite a bit of debate; unfortunately none of it is in Congress. With many notable exceptions, the consensus opinion is that the output gap is a demand shortfall. What that means is that the bursting of the housing bubble and the financial crisis left households with debt-overhang: a bunch of debt they have to pay off before they can spend money again. Because households aren’t spending as much money, firms don’t feel the need to invest in new hiring. Unemployment exacerbates this into a sort of vicious cycle: unemployed people don’t spend much money, which means businesses don’t feel the need to hire more people, which means nobody gets a job, so they don’t spend any money… We’re in an unfamiliar situation because this kind of economic problem hasn’t occurred since the Great Depression, but if you go back before that to the late 19th and early 20th century, you see the pattern play out with some frequency. In order to break the cycle, we’ve got to figure out a way to get more money into the hands of people who are likely to spend it. There are a lot of ways to do this; the Federal Reserve is doing its level best (within its institutional constraints) via its Quantitative Easing programs. The US government could help by stepping up and providing more stimulus (a dirty word, I know).

Of course, stimulus would add further to the debt. Previously I’ve reviewed where our budget deficit comes from, but here is a brief reminder:
– A short-term deficit due to the output gap. This deficit is a combination of lower tax revenue (less GDP means less tax revenue) and more spending on automatic stabilizers like unemployment and TANF.
– A medium-term structural deficit created by the Bush-era tax cuts (which are now permanent).
– A long-term social security shortfall created by changing population demographics (old people are expensive).
– long-term Medicare armageddon created by endless healthcare cost inflation.

In the very short term, further stimulus would undoubtedly add to the first problem: the short term deficit would increase. In the somewhat less short-term, stimulus would help reduce the short-term deficit. By increasing output and putting people back to work, we’d close the GDP gap and increase tax revenues, which would help address the short-term deficit. There’s also something else to consider: as I mentioned, right now the US can borrow money at negative real interest rates. That means, in terms of inflation-adjusted dollars, the rest of the world will pay us to hold onto their money for a few years. If we were to engage in further stimulus – like moving forward much needed infrastructure repair and replacement – not only would we be able to close the output gap, but we’d be getting a bargain in the process. It’s like having a sale on bridges and highways!

Now, consider the fiscal cliff deal. Pretty much it does the following:
– Expires the Bush-era tax cuts for incomes above $400k per person/$450k per family.
– Makes the rest of the Bush-era tax cuts permanent.
– Raises some investment taxes (capital gains and taxes on divdidends) for income above $300k per person/ $350k per family.
– Allows the payroll tax cut holiday to expire, increasing taxes by about 2% for incomes below $110k per individual/$125k per family.
– Fiddles around with some rules to limit the deductions the very wealthy can take.
– Extends emergency unemployment benefits for another year.
– Permanently indexes the Alternative Minimum Tax to inflation.
– Continues various stimulus-related tax cuts for another five years.
– Extends various other tax cuts (these have been in place for ages).

So let’s evaluate this deal, in terms of the problems (and benefits) facing our country. Does it provide any economic stimulus? It doesn’t. The extension of unemployment benefits is helpful (both from a stimulus point of view, as well as from a basic human decency point of view), but above the current level it’s not a net increase. Neither is continuing the various tax cuts. If anything, the expiration of the payroll tax will be counter-stimulus, some analysts estimate this may reduce GDP by as much as half a percent over the next year.

Does the deal address any of the four deficits? Once again, the answer is no. While the expiration of the Bush-era tax cuts generates 600bn in revenue over the next ten years, that revenue is mostly eaten up by the extensions to other programs. Enshrining the vast majority of the Bush-era tax cuts into permanent law guarantees that the medium-term structural deficit will remain in place. The deal does nothing to address the imbalances in Social Security, and it does nothing to address the problems with our health care system. Finally, the deal does nothing to take advantage of the extremely favorable borrowing rates the world is offering us to hold onto their money.

In my previous post, I told you what a member of the reality-based community would think of this deal. Quite simply: we got rolled. Were Congress sane – or at least, were it staffed by responsible adults – our current economic policy would involve short-term stimulus spending paired with long-term deficit reduction. In order to ensure that the deficit reduction doesn’t have counter-productive effects, we’d gate it on economic performance (for example, by gradually phasing out all Bush-era tax cuts based on the unemployment rate approaching 6%). Unfortunately that’s not the world we live in; the world we live in has insane Republicans (who are simply in denial about how reality works) and milquetoast Democrats (who are intimidated by the frothing crazy Republicans) paired with a fairly broken governmental system. Instead of acknowledging and addressing our problems, we’re going to teeter on the brink of default while the Tea Party throws a hissy fit. Which forms a nice segue into my next post: on the ridiculousness of the debt ceiling and the near treasonous irresponsibility on display by Republicans who want to use it as a bargaining chip.

What to think about the Fiscal Cliff deal

A couple of days ago, the Senate and House of Representatives passed a deal to avert the so-called fiscal cliff (a combination of budget cuts and tax hikes that promised to cause economic armageddon). The actual deal that was struck has a lot of pieces and the typically facile coverage provided by most media sources doesn’t really help in clarifying matters. That’s where I come in: I’m here to tell you what to think of the deal!

First, a definition of the fiscal cliff, so we’re all on the same page: The fiscal cliff is a combination of three things: 1) the expiration of the Bush-era tax cuts, 2) sequestration, massive across-the-board budget cuts that are split about 50/50 between the military and other stuff, and 3) the statutory debt limit, which we hit on Dec 31 and will need to be raised in the next two months.

Now, a quick overview of the deal: 1) is resolved by making the bush tax cuts for income below 400k for individuals/450k for families permanent; taxes on income above those thresholds revert to their Clinton-era levels. Number 2) was delayed for three months. Number 3) was not dealt with at all.

So what should you think of the deal? That depends on who you are! Here’s what you should think:

Tea Partiers: You got rolled. Sucks to be you. Really though, you can’t be surprised: your political philosophy is equal parts nihilism and ignorance, wrapped up in the petty attitude of a spoiled five year-old. Pretty much get used to being rolled any time the grownups decide to actually cut a deal.

Deficit Hawks: If you truly, honestly, wholeheartedly believe that the most important problem facing the country is the deficit, then you should not like this deal. In a previous blog post I explained the four deficits that this country faces; the current deal does nothing to address any of them. The revenue raised by expiring the Bush tax cuts on income above 400k/450k (about $600bn over 10 years) was roughly offset by extending various other tax cuts, as well as emergency unemployment benefits. Of course if you truly, wholeheartedly believe that the most important problem facing the country is the deficit, then you should have been in favor of all of the Bush-era tax cuts expiring. For some reason very few people fall into this camp.

Unemployment Hawk: If you truly, honestly, wholeheartedly believe that the most important problem facing this country is long-term unemployment, then you should not like this deal. While the deepest austerity measures were either averted (expiration of all Bush tax cuts) or delayed (sequestration), and while emergency unemployment benefits were extended for another year, the payroll tax holiday was allowed to expire. This represents a 2% tax increase for pretty much everyone. Estimates are that this will reduce GDP by about 0.5% over the next year, slowing the already slow pace of recovery and thus the rate at which the unemployed return to work.

Liberal: This deal is a mixed bag. On one hand, the GOP lost on revenue. On the other hand, the vast majority of the Bush tax cuts are now permanent and there’s bipartisan consensus that taxes shouldn’t be raised on anyone who isn’t rich. Furthermore, from a strategic point of view the GOP has successfully stripped the President of his most powerful cards (taxes). Two major battles loom in the next three months: the debt ceiling, and sequestration. The President says that sequestration must be replaced with an equal mix of revenue and cuts, and that he won’t allow the GOP to demand cuts in exchange for raising the debt ceiling. I do not think there is any reason to believe him on either at this point; the GOP has a much stronger position. Which means that while they lost a tactical engagement here, they are making progress toward their broader goal.

Non-Tea Party Conservative: Congratulations, you are the big winners here. Yes you suffered a tactical defeat: taxes went up on a small portion of the population. I know that stings, but look at the broader picture: by cutting taxes in the previous decade, your political movement successfully created a massive budget deficit that it looks like you’ll be able to use to begin trimming the welfare state. Unless the President surprises us and sticks to his guns in the next three months, you’re coming away from this mess as the big winners.

The American Public: You got rolled.

Members of the reality-based community: I’m going to write a bit of a larger post on this subject. Suffice to say that we got rolled too.

The Constant Idiocy of US Deficit Reduction

Following: a reproduction of a forum post I wrote a few days ago.

Matt Yglesias has a very important piece up today. Everyone should read it, and keep it in mind when you listen to the Obama and Romney campaigns talk about the deficit, as well as when you hear about people complimenting the Ryan plan, or Simpson-Bowles, or whatever.

I’ve often said – and this isn’t original analysis on my part – that we don’t have one budget deficit, we have several. They are:

- A short term budget deficit related to the Great Recession. When the economy is shit all sorts of automatic stabilizers (unemployment, AFDC, &c) kick in while tax revenue declines. As a result the deficit increases. You can also lump TARP and the various stimulus programs in here, but as they’ve mostly run their course at this point they’re not really a part of the deficit.
– A deficit created by Bush-era policies that created a revenue/expenditure imbalance: tax cuts, Medicare Part D, &c. You can lump the Iraq and Afghanistan wars in here as well; though the former is basically done with and the latter is winding down.
– A long-term deficit created by the retiring of the baby boomers causing a one-time increase in Social Security and Medicare outlays, as more beneficiaries are added to this program.
– A long-term deficit created by Medicare cost expansion as a function of overall healthcare cost growth in the US.

Discussions about the deficit tend to focus overwhelmingly on the final two, and almost totally ignore the first one. Democrats like to talk about the second, but Republicans refuse to acknowledge it exists The thing is, it’s the first two that Congress can reasonably deal with. Today Congress could improve our long-term fiscal picture by passing stimulative policies that increase the short-term deficit in the interests of boosting long-term growth. Congress could also work to address the imbalances created by the previous GOP administration and Congress.

What politicians really like to do is talk about the latter two. And they do it in a totally asinine way: rather than come up with actual ways of containing Medicare cost growth, they just tell CBO to make an assumption. Assume that Medicare costs grow at GDP + 0.5% for example. CBO has to do this because they have to do what they’re told, and as a result you get plans that seem to reduce the deficit.

Here’s the thing: Congress can make no law binding future Congresses. There is literally no possible way for the Congress of today to mandate what the level of Medicare spending will be in 2040. That’s up to the Congress and President in 2040. So even if Congress passes a law saying Thou Shalt Not Grow Medicare Faster Than GDP, short of an actual Constitutional amendment that law is totally, completely useless. Example: the Sustainable Growth Rate, passed by Congress in the nineties to limit the growth of Medicare reimbursement rates to providers. Pretty much ever since then, like clockwork, Congress passes an exemption to the SGR.

That’s not to say that you can’t do long-term deficit reduction today. It’s just that such reduction is really difficult and it’s politically poisonous. Take Social Security, for example: SS faces a medium-term increase in outlays as the baby boomers retire. There are various ways we could address this, suggestions range from raising payroll taxes (perhaps by removing tax cap on high incomes) to reducing benefits to raising the retirement age. The problem is that these are all changes that have various constituencies aligned against them, so they don’t happen. Notably what won’t work: passing a law declaring that SS outlays between now and 2040 will go up by only some percentage. That’s just a waste of time.

Medicare is an even more difficult problem, because its problems are linked to the problems of our health care industry, and you all remember what happened last time politicians tinkered with that system.

The reality of deficit reduction is that it’s going to be politically poisonous. Taxes are going to have to go up (and not just on the wealthy), and outlays will probably have to decline somewhat. From a political economy perspective the only way this is going to happen is if you get massive buy-in from both sides of the aisle; you need a situation where neither party can run against the other based on whatever policies end up being enacted. Politically Democrats seem to get this, it’s why you see them offering proposals that pair spending cuts with tax increases. Most of these policies are inadequate, but at least they’ve got their heads in the right place. Unfortunately Republicans are off in their fantasy land where tax cuts increase revenue and we can solve our budgetary problems by cutting funding for NPR. Until that changes, don’t expect any progress to be made on this issue.

Summary of my point for the tl;dr crowd who just scroll to the bottom of the post: When you’re evaluating any discussion about the deficit, you should pay attention to the specifics. Anything that boils down to a mandate on a price level or rate should be totally ignored. Once you’ve done that, see what’s actually left and then judge that on the merits.

PS: it occurred to me that we can kill two birds with one stone with an immigration reform plan that increased the number of foreigners we allow into the US. The third deficit I identified – the retirement of the baby boomers – is mostly a function of shifting age demographics. Put simply: relatively fewer young people paying for the retirement of relatively more old people. It turns out that the planet has a pretty huge supply of young people who would love to come and pay for our parents’ retirement, if only we’d let them.l

PPS: It turns out that the Center on Budget and Policy Priorities has updated its visual depiction of where our deficits come from. Find it here.