Thursday, February 28, 2013

It's the Recession, Stupid.

Many conservatives and other critics of the Obama Administration have made much of the President's "spending binge." As regular readers of the blog no doubt remember from earlier posts of mine, I've pointed out that most of this so-called spending was basically out of the president's hands--that is, most of the increase in the deficit was due to the recession, rather than anything the President specifically did.

One way of demonstrating this is by looking at the structural deficit versus the cyclical deficit. For those of you non-wonks out there, the structural deficit is an estimate done that attempts to determine what the budget deficit would be given normal economic conditions, whereas the cyclical deficit is, well, just the plain old deficit. 

So let's compare them, shall we? Here's a handy graph I dug up from Evan Soltas
You'll notice that there's a pretty sizable gap there, right? So if we were in normal economic times, the (structural) deficit would be around what it was during the mid-1990s--right around 2% of GDP. Considering that in normal times, the U.S. economy grows on average around 2.5-3% a year in real (inflation-adjusted) terms, a deficit of this size would basically mean that our total debt levels would hold steady or maybe even slightly decrease. For a more detailed look at it, here's the structural tax revenues and spending levels vs the actual spending and tax revenue levels:

I don't see much of a marked change in structural spending or tax levels after Obama took office, so what does that tell you?

Now, you shouldn't draw any unwarranted conclusions from this--I'm not trying to say we don't have a long-term debt problem. We definitely do, thanks in large part to ever-increasing health care costs, and that will definitely have to be dealt with in due time. My point here is that there really has been no so-called Obama-era spending binge--it's the recession, stupid!

Wednesday, February 20, 2013

Sticking it to the American Medical Association

I don't like the American Medical Association. I don't like them because they've spent most of the past 20 or 30 years lobbying state medical licensing boards to restrict the number and size of medical schools due to a supposed over-supply of doctors (which was controversial in the first place). Moreover, they've also worked to significantly limit the number of foreign doctors who can come practice in the U.S. With a restricted supply of physicians, doctors have higher salaries, thus we pay more for medical care. Worse yet, most of the already limited supply of physicians coming out of medical schools, for a variety of reasons, want nothing to do with primary care, which is arguably the most important form of health care. So what can we do about this? Matt Yglesias presents a  possible solution--nurse practitioners:
"In 18 states (disproportionately but not exclusively rural ones) and the District of Columbia, a nurse practitioner can examine, diagnose, and treat patients in a primary care context. Nurse practitioners also get paid less than doctors. Medicare reimburses them at 85 percent of the doctors' rate, for example, but they also charge less to insurance companies and out-of-pocket patients. And since the "blue states" in this sense are a pretty diverse lot, we can get pretty good quasi-experimental data as to whether cheaper nurse practitioners are actually any worse than primary care doctors in this regard. The answer is a resounding no."
Here's a map of where NPs can and cannot practice independently, by the way.

Granted, nurse practitioners aren't able to replace specialist doctors, but since newer physicians are heavily skewed away from being primary care doctors in the first place (and have been for about a decade), allowing more nurse practitioners to step in seems only too logical. This is especially true given the scope of our primary care shortage and the fact that it takes a lot less time to train new nurse practitioners than it does to train new doctors. The Affordable Care Act sought to remedy this shortage by raising primary care physician payment rates under Medicare and Medicaid, but that's a modest and insufficient solution to such a daunting problem. 

Friday, February 15, 2013

The Public Financier's Case for More Government Spending

I'm sure that it comes as no surprise to regular readers of this blog that I'm advocating for more government spending--specifically for more infrastructure spending. There's a catch today, though. In the past, when I've called for more government spending, I've argued for it in the context of fiscal stimulus to boost the economy. Fiscal stimulus, the idea that government spending during a recession can boost the economy, is something of a controversial subject among both economists and policy-makers at the moment, so I won't get into that again. But there's another, much less controversial case to be made for more infrastructure spending right now--in terms of pure public finance, it'd be a good long-term investment, so we should spend more regardless of whether or not government spending can boost the economy.

In public finance, much like in private finance, costs and benefits to projects and programs are compared to see if they are, in fact, worthwhile investments. For example, if the costs of borrowing funds for a private firm to build a new factory are 4% per year and the estimated rate of return--basically the amount of money the firm expects to get back--on that investment is 5% per year, then it'd be prudent for the firm to make such an investment. 

Now, public finance works in much the same way, except that calculating the rate of return on most projects is a great deal more complicated. For example, how do you calculate the amount of non-monetary value a whole society derives from a new system of public schools? The monetary returns are easier to calculate, but those can sometimes over- or under-state what's known as the "social internal rate of return," which takes into account those non-monetary benefits to society as a whole. Since that's nearly impossible to calculate accurately, weighing the costs and benefits of a new project can be tricky, to say the least, making it far more difficult to determine whether a project is worthwhile or not.

This may seem like I'm undercutting my own argument for more infrastructure spending, but there's an important point I've been waiting until now to make: leaving aside the benefits of more infrastructure spending for now, the costs of infrastructure at this point in time are negative. That is to say, after adjusting for future inflation, the cost to the government of borrowing money to finance this investment are negative. For you visual learners out there:

So even though we can't truly know with absolute certainty the rate of return on an infrastructure investment, the chance that the rate of return on such an investment would be negative is incredibly small. Especially if you consider the fact that the American Society of Civil Engineers gave us a D on our Infrastructure Report Card. In fact, knowing this makes it more likely that the rate of return on infrastructure investments is actually pretty high. 

Even if you don't buy into the idea that more government spending (fiscal stimulus) can boost the economy, if you view more infrastructure spending through the lens of public finance, it really is a good investment. I'd even go so far as to say that turning down a project with a negative borrowing cost and a (probably large) positive rate of return would be the height of foolishness.

Tuesday, February 12, 2013

Who's Afraid of a Balanced Budget Amendment?

Well, I am, for one. And you should be too. Republicans are again trotting out the idea that we ought to have a balanced budget amendment (BBA) to the Constitution. And no, this isn't some fringe member of the party either, this is being arranged by the GOP leadership and is to be unveiled later this week. At first glance, you might think this seems like a prudent and responsible policy, but in reality this couldn't be further from the truth.

First of all, the bill being proposed by the GOP this week would cap federal spending at 18% of GDP. There's a small problem with that, though. Federal spending hasn't been that low since the mid-1960s:

That is to say, Federal spending hasn't been below 18% since before we had Medicare or Medicaid. The logistical problems associated with meeting that 18% spending target have now made themselves abundantly clear. However, in order to fully understand why a BBA is such a dangerous idea, you've got to look beyond the unrealistically low spending target and at the bigger picture.

Imagine, if you will, that the economy is humming along at 5% unemployment with normal, healthy growth rates and government spending levels of 19% of GDP. Suddenly, the economy enters a recession and unemployment spikes to 9%. Tax revenues fall as the unemployed no longer pay taxes and instead begin to collect unemployment insurance. Now imagine that there is also a balanced budget amendment with a 20% spending target.

Government spending under such circumstances would easily spike above that target, which means that Congress would have to start cutting government spending as the economy is still shrinking. This would be akin to tying a piano to the leg of someone who is already drowning. Needless to say, it would be catastrophic if this happened, especially in an environment where the Fed, whether due to inability or incompetence, chose not to soften such a blow to the economy.

But that isn't the only problem with an amendment like this either. Not only would it aggravate the effects of recessions, but it would also--as Matt Yglesias sagely points out--increase the number of inefficient, ham-handed regulations we'd place on businesses:
"The key point is that eliminating the supply of money to finance politically popular public services doesn't eliminate the demand for those services. Instead, it pushes policy entrepreneurs to devise inefficient and non-transparent regulatory cross-subsidy schemes. Look at any really problematic element of the Affordable Care Act, for example, and what you'll see behind it is a kludgy effort to avoid a tax increase while still providing the service. That's how you get the threat to fine employers for not providing health insurance to their full-time employees. But of course it's not "fair" to apply that rule to small businesses, so the smallest employers are exempted from the regulation."
I think Yglesias hits the nail right on the head here. In case the quote above didn't explain it well enough, let me provide an example of my own: the minimum wage. The minimum wage, classic labor economics tells us, raises wages above what the market sets them at and thus leads to an increase in unemployment as more people supply labor while employers--not wanting to bear the higher costs--demand fewer workers. The real-world data on this are muddled and difficult to parse out, but the general consensus is that a minimum wage that is too high will increase unemployment. 

In any case, the point here is that the minimum wage is a regulation we place on businesses ultimately as a means of raising incomes. However, it is, as I've shown above, a ham-handed policy that does, on some level, kill jobs. The ultimate goals of the minimum wage could be realized far more efficiently if we instead used something like an expanded Earned Income Tax Credit or good old fashioned wage subsidies to employers. We would reduce poverty rates with the added bonus of having one less regulation on employers. However, with something like a hard 18% of GDP spending cap, tax credits and welfare programs are bound to be scaled down. Obviously the demand is still there for something to be done to alleviate the plight of the working poor, so policymakers turn to raising the minimum wage, which is a far less efficient way of fighting poverty.

The list of regulations could go on and on:
"Instead of spending money on food stamps, you could require supermarkets to give discounts to low-income families. Instead of taxing gasoline, you could have ever-stricter fuel efficiency standards. And the instead of using the revenue to finance deployment of clean energy technology, you could have a regulatory mandate on utilities to do it. We already do a fair amount of this kind of thing because it makes it easier to hide the ball in terms of who bears the costs. But because these policies are less transparent, they are much more prone to perverse, unintended consequences. Thoughtful people should be trying to move politicians off this incestuous blend of corporate paternalism and over-regulation  and onto the sweet terrain of paying for services with taxes. A constitutional rule barring spending in excess of 18 percent of GDP does just the reverse."
You get the point, I'm sure. Anyways, I'll end this post the same way I started it: by asking who's afraid of a balanced budget amendment? If you weren't before, I hope you are now.

Monday, February 11, 2013

Goodbye For Now?

Short post today, but I just wanted to inform readers that my blogging is probably going to have to be put on hold indefinitely, simply because there's a lot going on in my life right now and that's keeping me busy. Running this blog was probably one of the cooler things I've been able to do in the past year, not only because of the great feedback I got from many of my readers, but also because it allowed me to get my ideas out there in a way that I'd never been able to before.

I can't say for sure if or when I'll be back, but I have to say that the blog worked out better than I could have hoped. I'm proud of the things I wrote on here. Even the earlier stuff that wasn't so refined, because--let's be honest here--you have to start somewhere, right? But I digress.

Anyways, I just thought I ought keep you all updated. Maybe when things start to settle down for me I'll fire it back up, who knows? 

Until next time...