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I well remember the last time the Republicans rode into town to get our fiscal house in order and curb the growth of government. That was in 1994. Twelve years later, when our Republican heroes were themselves ridden out of town, they still hadn’t managed to eliminate the goddamned National Endowment for the Arts.
They did, however, cut its budget for a while — from $170 million to under $100 million, though it’s crept back up since then. The moral: If you want a lasting impact, don’t cut budgets. Cut agencies.
The NEA is, of course, small potatoes, but my point is that these guys never made a permanent debt in the small stuff, let alone the big stuff. This time around, maybe — just maybe — things will be different, especially if the Tea Party continues to hold some feet to the fire. With that in mind, here are a few bits of advice for the freshman class:
1. Like I said, cut agencies. And cut them in bunches, to dilute opposition. As I’ve said before on this blog, the department of commerce steals from workers and farmers to subsidize businesses; the department of agriculture steals from workers and businesses to subsidize farmers, and the department of labor steals from businesses and farmers to subsidize workers. Eliminate them all at once and every American will lose one friend and two enemies.
2. Do not let the deficit commission (or anyone else) snow you or the public into thinking that raising taxes is the moral equivalent of cutting spending. It’s not. It’s the moral equivalent of moving money from your savings account to your checking account. The taxpayers are the polity. Collectively, we own the U.S. Treasury. When you raise taxes, you move money from the private bank accounts we own to the public bank account we own. That’s not fiscal responsibility. It’s flimflam.
3. Quit using the tax system to encourage rich people to consume more. They consume enough already. In other words, quit taxing capital income. Not in dribs and drabs, but in one fell swoop. The quickest and cleanest way to do this is probably to eliminate all limits on IRA contributions (as well as eliminating the corporate income and inheritance taxes). (Other relevant posts are here, and here, here, here. )
4. ObamaCare sucks. But the old system was pretty sucky too. Don’t repeal ObamaCare until you’ve figured out what you’re going to replace it with. And get cracking on that.
5. I’d love to see some major changes in the Social Security system but do not mistake social security cuts for spending restraint, any more than you should mistake tax increases for spending restraint. Like a tax increase, a social security cut just moves money back and forth between private and public accounts; it doesn’t staunch the flow of government resource consumption.
6. Don’t get hung up on recession-fighting. I realize this is probably bad political advice, but it’s good policy advice. Certain pundits believe they’ve got a surefire recession cure, but even if they’re right, it doesn’t follow that the cure is worth the cost. And the fact that these pundits never (as far as I can see) address that question should make their advice quite irrelevant to policymakers. There are good reasons (I might blog about them soon) for thinking that most recession-fighting isn’t worth the cost, even when it works. The consequences of this year’s policy choices will be with us for a very long time. In the long run we’re all dead, but we’ve got a lot of living to do in the meantime.
7. Try not to nationalize any banks or auto companies. You’ve got the advantage of having a pretty easy act to follow.
8. Read what my commenters have to say. I feel sure they’ll be brilliant.
The white guy in the dark suit looks like he’s beholden to nobody and rarin’ to take some Internet advice.
Regarding #4, any proposed alternative system (or even an argument against ObamaCare) should weigh costs and benefits properly.
I just roll my eyes when I hear people saying government health care would “cost too much” by estimating the government total expediture, because obviously that ignores the fact that much of that consists of expenses that we no longer have to pay privately, so that’s not a “cost increase”. A proper argument that government health care would drive costs up, would specify that people will consume more health care when it’s free. On the other hand, some problems will be cheaper in the long run to take care of under government health care, if people take care of problems earlier when they’re cheaper to deal with, rather than waiting until they have to go to the emergency room. Plus, some health care measures have positive externalities (like flu shots), so free flu shots for everyone might save money by reducing the number of flu victims. So it’s not obvious that the net effect would be to drive costs up or down.
Finally, even if costs do go up, they may go up for reasons that many taxpayers would be happy to live with (for example, if the poor can now access necessary health care services that they couldn’t access before).
At #3: I hope this isn’t off topic.
Up to this point, I had convinced myself that the inheritance/estate tax was an excellent way to take extra money from rich people. I read the posts you linked, and I’m about to support throwing the estate tax out the window. But
The following statement seems valid to me:
If I were to insist that the estate tax has a positive effect on the social welfare, I would have to then insist that, relative to people’s behavior before the tax, a decrease in the amount of money rich people leave for their kids (and an increase in their spending elsewhere, including consumption) helps someone else in a way that outweighs the hurt done to the rich people (and their children).
…and now I’ve convinced myself that every sound economic argument for the estate tax must have a corollary about how the rich ought to put their own needs/desires aside and give less money to their children.
And naturally, you’d reach a similar statement about investment in capital assets if you make the same claim for the capital gains tax, etc.
a) Did that make sense? Did I overlook something?
b) Is there an iron-clad argument for why these corollary statements are false? Conversely, are there any sane arguments for why we should discourage those sorts of investment (the types affected by the given taxes)?
c) What’s the normative criterion behind “[rich people] consume enough already”?
n+1: Your arguments look basically right to me.
There are multiple normative criteria that could justify the statement that “rich people consume enough already”, but I had the criterion of economic efficiency in mind. If consumption is subsidized by the tax system (and it is, indirectly, as long as capital is taxed) then people — and especially rich people — will consume more than is efficient.
Agreed on all points except #4. The system was fixing itself through normal market forces. Some doctors were refusing to accept insured patients and were accepting cash only. This would have eliminated the 3rd parties that keep prices high. Repeal and do not replace ObamaCare.
Every other rich country in the world has health care outcomes about the same as the US and spends significantly less.
Just saying.
@neil: The difference in outcomes is certainly significant, and Americans pay more on health care firstly because they are richer (PPP adjusted) and healthcare demand is elastic, and second because we have partial government subsidies with almost none of the rationing of a fully socialized system. We consume more health services and our outcomes ARE better, many time by quite a bit; just not life expectancy.
@Ryan: I don’t think the system was fixing itself. Some doctors were rejecting insurance because of the high transaction costs of the bureaucracy. But overall, people were not turning down the essentially “free” health care the government was and is driving them to pay for with the tax exemption for employer provided insurance.
I agree with all points and think #1 and #6 are the most important considering our current situation. Deficit spending prolongs the recession and normal spending cuts into growth, which is what we really need to pay off our debts and solve the problems remaining in this country with poverty, etc.
Neil –
Indeed, and you should hear how that fact is spun outside the USA. To non-Americans, that fact is used to justify an increase in health care expenditure. (“Why aren’t we spending as much as the Americans, who don’t even have universal coverage!?”)
The problem with only measuring outcomes is that you don’t take into account the black stains on the floor, long waiting lists, and poor bedside manner found in public systems. Americans really don’t appreciate how good they have it.
Steve,
I think you’re a little cavalier about Social Security cuts. If social security is cut, people will have to save more themselves and they will save it better. I don’t think shifting government saving to individual saving is like shifting from a savings account to a checking account. How does cutting Social Security not cut government resource consumption? Outside of a bailout of people who don’t save, I don’t see it.
Pat
Pat:
If social security is cut, people will have to save more themselves and they will save it better.
Agreed.
How does cutting Social Security not cut government resource consumption?
By not cutting government resource consumption.
Social Security is funded by taxes, and taxes create dead-weight loss. Why doesn’t that count as government resource consumption?
neil wilson: Every other rich country in the world has health care outcomes about the same as the US and spends significantly less.
Singapore seems to have relatively inexpensive universal coverage (3% of GDP) with excellent results (ranked #6 as of 2000, according the the World Health Organization). Interestingly enough, two-thirds of the money comes from private sources, a higher percentage than in the U.S.
http://en.wikipedia.org/wiki/Healthcare_in_Singapore
The Tea Party likes the idea of small government, but name a specific government program, and they want it to be bigger. Here, for example, is Rand Paul promising to keep Medicare on its ever-growing path: http://www.youtube.com/watch?v=EEsaXJ7WAhI
Dan:
Social Security is funded by taxes, and taxes create dead-weight loss. Why doesn’t that count as government resource consumption?
Point taken, though I think it’s useful to distinguish between deadweight losses due to taxation on the one hand and direct resource consumption on the other hand. Of course the thing we’re most interested in, though, is the sum of the two.
4) Been through the US healthcare on previous discussions. USA gives a bit better service for lots more money. If you don’t measure on outcomes you are talking anecdote, and every single system has its horror stories. That is not to say that survival rate is the only outcome you should measure. I think one of the greatest dampeners on the US economy is fear: fear of ill health tying people into employment where their insurance is paid. If you want people to take risks they must have some level of security.
No. 2. There are many people arguing for cuts “to reduce the deficit” Krugman and others point out that this is not the main issue, and these people are using the deficit as a way to make palatable the cuts that they want for other reasons. It is pointless to argue that “economists” don’t think this – that is fine for the academic literature. It must be obvious that this argument is widely used politically, and if the deficit was the problem, then it could be reduced by raising taxes.
The whole point of moving money from your savings account to your checking account is to do something with it. If that thing is an investment that will leave you much better off in the future, then it would be very sensible to make that move. The point of the discussion must be this – i.e. is what you are spending it on a good idea.
5. What is Government resource consumption (GRC)? Sorry if this is not clear to me. Giving money to poor people as social security is not GRC. Is this because the recipients are not displaced from any other activity by the payment? Is spending on wages for government employees GRC? Just what is the resourch the Govt can consume? I am sure this is basic stuff, but a little help would be useful.
Here’s an idea for the incoming congress which I would happily bet any amount of money on them studiously avoiding discussing:
If you want your pose of fiscal rectitude to be taken seriously for even a millisecond, how about reconsidering your heretofore cheerful endorsement of open-ended escalation of a trillion-dollar and counting series of foreign wars of choice? Seriously, it’s time to re-engage with your paleo/isolationist wing here: money spent on soldiers and bombs is just as much deadloss as money spent on farm subsidies.
I would certainly read with great gusto any commentary you provide regarding whether the gov should try to help bring us out of the recession. Macroeconomics confuses me greatly. Admittedly, I don’t have the brain or the time to try to learn it like I should, but I think one of the reasons macro confuses me so much is because the notion of “currency management” and its goals seem very vague to me. How does anybody come up with the optimal amount of currency to print every year? Or destroy? How much $ should I (the central banker) spend on long term bonds vs short term? Does it matter if I (the central banker) lie about my money growth intentions? What would or could happen if we decided not to have a central bank?
#6) Eh?
I understand that in the medium-run once we are at the natural rate of output and unemployment that the price level is higher than before, but that shouldn’t be a concern for not using recession-fighting policy mix. This problem could be countered if the US gov. would take austerity measures to slow the damn economy down, in which case your drastic cuts would be appropriate.
#3) Ditto, but it ain’t going to happen here in California :(. Stupid excessive entitlement programs!
#4) Obamacare may suck but I’ll choose it over what we had. In my experience, any insurance company’s or hospital’s accounts receivable department is pure crap and will try any trick to collect what is not owed. Little less worse than extortion.
On #2: It seems to me that a lot of government spending is also a lot like moving cash from the checking account to the savings account. When the government spends money, unless this money goes directly to foreign entities (foreign countries or non-citizens), it is going right back to the polity. So it seems that a relevant question is, what % of government spending involves payments to foreign entities?
Would you say that it is more responsible to pay a U.S. construction firm to build a bridge than to pay a Chinese firm to do the same? (I’d be surprised if you took that position).
I’d like the Democrats and Republicans to find the areas where they can work together. The worst thing about congress is these long drawn-out stalemates that end in crappy ‘negotiation’ legislation (ex: healthcare).
For example, Democrats think we emit too many greenhouse gases, so they want to tax emissions and make minimum fuel efficiencies on cars… OR we could end some of the massive subsidies that go to the oil industry. This would make alternative energies more profitable and give car companies an incentive to be more efficient. It would also make the real price of industry more apparent.
A certain segment of liberals also think that we should tax corn syrup because sodas and unhealthy things are too cheap leading to poor diets… OR we could end the subsidies on corn!!
Naturally, the lobbies for the aforementioned industries won’t go quietly and politicians get tons of campaign money from them… but it’s fun to dream. Campaign finance reform would be great, but I don’t see it happening any time soon.
Lastly, I think that all congressmen should be forced read the works of Bastiat (get the president a copy too). His works aren’t too long, and it’s refreshingly easy to understand. Fiscal responsibility is not a ‘Republican’ idea, fiscal responsibility just *is*. Congress needs to understand that before anything will get done.
Yawn.
I really enjoy your math blogs. Can you provide more of these? These “I’ve thought about another Libertarian Manifesto” blogs are so boring. There are some well-paid know-nothings who provide the public with daily libertarian wisdom like Cafe Hayek. These people are perfectly positioned to satisfy demand. Unfortunately they are not able to supply the really interesting stuff. That’s your niche!
I’m shocked to find we agree on any of these points but I’ll agree with #4. The Republicans’ inability to produce anything better than a powerpoint presentation (and that after the bill was already drafted) is a sign of their complete intellectual and moral turpitude.
And I mostly agree on #5 except I would like to see an absolute prohibition re-established on Congress being allowed to touch the social security trust fund. If that is left alone the system is solvent for about 65-75 years, which ought to be enough time to figure out what to do about it. It’s only the rampant theft of those funds for budget-balancing shenanigans that makes social security look like it’s going to go tits-up in a couple decades.
What does Prof. Landsburg have against the National Endowment for the Arts? Turning urban, suburban, and rural football-watching beer-drinking savages into civilized people surely has a positive externality and must be subsidized.
Defense. Am I the only peacenik on board here? Remind me to get sanctimonious in all my posts from now on…
Alice1987, what sort of externalities do you have in mind? Now I’ll leave aside your, um, interesting characterization of football watchers. And I’ll assume that the NEA really does make guys turn off Monday Night Football and head over to the art museum. What are the externalities? Maybe other art lovers have someone else to talk about art with. But then football fans lose someone to talk about the game with. Off the top of my head, I can’t think of anything else. What did you have in mind?
Steve Reilly: There are network externalities from watching football and appreciating arts, as individuals like to share their experiences and thoughts with others. According to my objectively subjective but subjectively objective calculus, an equilibrium with most people appreciating arts is superior to an equilibrium in which most “appreciate” football; the former turns one’s neighbors into a more intelligent life from, and creates something of lasting value for future generations to enjoy.
Alice,
What’s wrong with watching football?
I also like your idea to change Congressional representation from geographic districts to ‘last names that begin with the letter…” districts to get rid of earmarks.
On #4, it might help to understand why the old system was pretty sucky. I think it was pretty sucky because of previous government distortions in the market. The two biggest being the tax advantage given to employer paid health insurance and the encouraging folks to use emergencies room as a source for primary medical care.
I also think it took way too long for HSA’s to come about, but I’ve already seen them have a dramatic impact on 1) my own medical care purchasing behavior and 2) price transparency in the medical care market.
Great post btw!
Ug, I had hoped nobody would bring up the mythical SS “trust fund”. It is sad that a substantial percentage of the population actually believes in this.
Regarding health care, the Cato Institute has done a good job with free-market alternatives to Obama-care. One of the simplest fixes is allowing cross-state competition in health insurance.
So, if we summarily eliminate Commerce, Labor, and Agriculture, we eliminate about 9% of the Federal budget. That’s a pretty good chunk.
However, let’s look at the largest expense category in each department:
– in Commerce, the single largest expense is NOAA, e.g. the Weather Bureau, and the second largest is the Census.
– in Labor, the single largest expense is Unemployment Insurance.
– in Agriculture, the single largest expense is Food Stamps.
Are you suggesting that we shut down those programs overnight? That would create a significant dislocation in our economy. Also, eliminating the Census Bureau would require a constitutional ammendment, as taking a decennial census is required by the constitution.
And what would we do without the Weather Service? A lot of our economy (agriculture, shipping, etc.) depends on accurate weather forecasts. I guess we could privatize it, perhaps require that organizations that want access to the weather pay a subscription or something.
May I add, limit CEO bonuses to stock in their company only, that cannot be sold for ten years. No CEO should earn a bonus unless the company earns profits.
A couple of things on non profit charities and foundations. They are tax exempt for a reason, stop granting them tax funds to do their work on top of their tax exemption. Raise the minimum non profit expenditure from 5% to 50% of their annual income. If these guys spent the funds they raised each year on their mission and not stuffing in into their endowment funds, we would not need all the HHS programs to aid the poor. Citizens give billions of dollars to help the poor and it goes for salaries, fundraising and endowment funds. Get that cash out of the bank & markets and circulating do chairty work.
NEA? Defund!
Obamacare should be co-opted; make the mandatory insurance coverage catastrophic care, require high copay and deductibles. Make health care as close to a cash business as possible.
Al V.: good point
Typo: ‘debt’ -> ‘dent’
Re: #2 – Your right that raising taxes isn’t the moral equivalent of cutting spending, but not because “The taxpayers are the polity.” We have a relationship with the government, we get some degree of direction for it, but it still an entity separate from us. Raising taxes isn’t the moral equivalent of cutting spending, because raising taxes is taking more from people and decreasing freedom, while cutting spending isn’t. Also raising taxes isn’t the practical equivalent of cutting spending, because cutting spending is reducing costs, while raising taxes is not, its just a change in how the cost is financed (from debt or “printing money” to taking the money away from others through taxes).
Re: #4 – Yes what we had before wasn’t great, but that doesn’t mean that simply repealing Obamacare wouldn’t be an improvement. An actual improvement would be better than going back to the previous status quo, but the previous status quo is better than current law, if we could repeal Obamacare without replacing it, and if a good replacement isn’t likely, than simple repeal would be a good idea.
Re: #5 – I think this is the worst point of the post. Its silly to say “do not mistake social security cuts for spending restraint.” Social Security spending is spending. Cutting it is reducing spending. Reducing spending is spending restraint. Yes social security spending is transfer spending, only the overhead amounts to government consumption of resources, but transfer spending is spending. It is spending, and it has many of the negative effects of other spending. It contributes to fiscal problems like any other spending. It (indirectly through the taxes required to pay for it), distorts incentives, and creates more political control over the allocation of resources, just like other spending.