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The Economist Magazine Misses “McCain One”

August 31st, 2008 . by economistmom

This week’s cover story in The Economist magazine:  “Bring Back the Real McCain.”

They argue that McCain has been “too polite to the right,” and as a result has been led to propose some pretty misguided economic policy–or maybe I should say “purely guided by (bad) politics” economic policy.  My emphasis added, here’s The Economist’s critique:

…[I]t is on domestic policy that Mr McCain has tacked to the right more disquietingly. Doubtless he feels he needs to shore up his support among the conservatives who mistrust him. But the result is that he could easily alienate the independent supporters who are his great strength. Mr Obama will sensibly hope to woo them away. 

Mr McCain used to be a passionate believer in limited government and sound public finances; a man with some distaste for conservative Republicanism and its obsession with reproductive matters. On the stump, though, he has offered big tax cuts for business and the rich that he is unable to pay for, and he is much more polite to the religious right, whom he once called “agents of intolerance”. He has engaged in pretty naked populism, too, for instance in calling for a “gas-tax holiday”. If this is all just a gimmick to keep his party’s right wing happy, it may disappear again. But that is quite a gamble to take.

Two months remain before the election, more than enough time for Mr McCain to allay some of these worries. He needs to spend less time reassuring evangelicals that he agrees with them about abortion and gay marriage, and more time having another look at his tax plans. The old John McCain attacked Mr Bush for his tax cuts, which he said were unaffordable. The new John McCain not only wants to make the Bush tax cuts permanent, but wants to add to them by virtually eliminating estate tax (something that would benefit a tiny number of very rich families, like his own). He also proposes to slash corporation tax. People on middle incomes would see little benefit. Independent analysts agree that Mr McCain’s plans would increase an already huge deficit.

Hawkish foreign policy, irresponsible tax cuts, more talk about religion and abortion: all this sounds too much like Bush Three, the label the Democrats are trying to hang around the Republican’s neck. We preferred McCain One.

That McCain’s excessive politeness to the far right will hurt his chances of attracting the independent vote–or at least independent voters who have centrist views on economic policy–is surely true.  (That’s what I mean by it being guided by bad politics.) …And to think that The Economist thought this even before Sarah Palin was added to the ticket!  (This is the print edition’s cover story that arrived in my mailbox this weekend.)

Women Don’t Vote for Women Because They Are Women

August 30th, 2008 . by economistmom

I just have to echo what Kiki McLean, a Hillary Clinton advisor, says about McCain’s VP choice in today’s Washington Post:

Women don’t vote for women because they are women. Women have high expectations — and have always had to meet them…

The dramatic increase in female voters this year wasn’t just about a woman being on the ballot. It was driven by an intense debate on a broad agenda of bread-and-butter issues and national security…

Yes, and even mid-40s, 20-years-married, working moms of several children don’t vote for mid-40s, 20-years-married, working moms of several children because they’re, you know…

That the choice would be considered a great one, for the reasoning given by Lisa Schiffren, Dan Quayle’s speechwriter (see the same Washington Post article, toward the bottom…I can’t even bring myself to cut and paste for fear someone will think I’m saying that, so you really must go read it), is proof enough that this choice isn’t going to attract any voters who weren’t already supporting McCain’s candidacy…it just gives people like Dan Quayle’s speechwriter something (shallow) to be “giddy” about.

Geez– please don’t insult the intelligence of middle-aged working mothers that way!

***UPDATE, 9/1:  I am stunned… I just read the news about Sarah Palin’s announcement that her 17-year-old daughter is five months pregnant.  (And that this was announced to “rebut the rumor” that the daughter was actually the mom of Sarah Palin’s infant son?!!…)  That would make Palin a 44-year-old grandmother, as well as mom of a Down’s syndrome infant, as well as mom to four other kids (one who is serving in Iraq), by inauguration day.  As a working mom with far less on my plate who nonetheless made the choice to leave the demands of a Capitol Hill job, I honestly don’t know how Palin can possibly handle being VP–let alone being ready to step into the presidency at a moment’s notice–unless she’s really not going to be there very much for a family that obviously needs her. 

I wonder…Is this the kind of role model Dan Quayle’s speechwriter, Lisa Schiffren, really wants for her daughters (and for herself)?  (I guess I’ll need to go visit the momblog on WorkingMother.com about this…)***

***and UPDATE #2 (9/3):  see what “TrueNorthMom“, Erin Kirkland–another working mom from the Working Mother blog, but one from ALASKA–has to say about Sarah Palin as the Republican’s VP nominee.***

More on Warren Buffett’s Growing Economic Pie, As Quantified by CBO

August 29th, 2008 . by economistmom

Having combed through Warren Buffett’s post-I.O.U.S.A.-movie words on how the growing “economic pie” means we don’t really have to worry about our economy’s inability to handle the fiscal challenges ahead of us, I promised I’d try to quantify his point.  So today’s first attempt comes entirely from the Congressional Budget Office (CBO) and their long-term macroeconomic and budgetary projections.

Faithful EconomistMom.com reader, “Brooks”, had pointed out to me that CBO’s long-term budget projections don’t account for the macroeconomic feedback effects associated with the different fiscal scenarios, and that’s indeed true.  CBO assumes a path of real economic (GDP) growth that derives from their longer-term macroeconomic projections but is independent of the potential economic effects associated with the different tax and spending policies that are implicit in the different fiscal scenarios they consider.  So in considering different fiscal scenarios, the budgetary projections CBO presents are based on the same assumed path of real GDP, which you can find here in these CBO data sheets (see the “real GDP” last tab).

Yet CBO doesn’t actually believe that policies that would lead to much larger deficits (such as their ”alternative fiscal scenario” compared with the baseline) would have no feedback effect on the macroeconomy.  CBO just chooses not to model this feedback in making their long-term budget projections.  (It’s really quite a major pain to model and requires an iterative, “general equilibrium” approach.)  They do still discuss these macroeconomic effects in their long-term budget report

On pages 11-15 of this report, CBO answers the query “How Would Rising Federal Debt Affect the Economy?”  They explain it this way:

CBO’s two long-term budget scenarios would have different effects on the economy. Under the extended-baseline scenario, outcomes early on would be considerably more auspicious, but under both scenarios, the growth of debt would eventually accelerate as the government attempted to finance its interest payments by issuing more debt—leading to a vicious circle in which it issued ever-larger amounts of debt in order to pay ever-higher interest charges. In the end, the costs of servicing the debt would outstrip the economic resources available for covering those expenditures.

Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of savings and reducing investment in the domestic capital stock and in foreign assets. As capital investment dwindled, the growth of workers’ productivity and of real wages would gradually slow and begin to stagnate. As capital became scarce relative to labor, real interest rates would rise. In the near term, foreign investors would probably increase their financing of investment in the United States, which would help soften the impact of rising deficits on productivity in the United States. However, borrowing from abroad would not be without its costs. Over time, foreign investors would claim larger and larger shares of the nation’s output, and fewer resources would be available for domestic consumption.

To be sure, budget deficits are not always harmful. When the economy is in a recession, deficits can stimulate demand for goods and services and bring the economy back to full employment. But the deficits that would arise under CBO’s long-term scenarios would occur not because the federal government was trying to pull the economy out of a recession but for a more fundamental reason: because the government was spending more and more for health care programs and for interest payments on accumulated debt. Over time, those deficits would crowd out productive capital investment in the United States.

When CBO gets into comparing the macroeconomic effects associated with their two main scenarios, their “alternative fiscal scenario” (where the Bush tax cuts are permanently extended via deficit financing and Medicare spending grows more rapidly than under current law) and their “extended-baseline scenario” (where the Bush tax cuts expire at the end of 2010 according to current law or any extensions are offset, and where Medicare growth is restrained by current-law rules), they explain they are ”comparing [macroeconomic] results under the scenarios with those from another set of assumptions under which the deficit in the long run is stabilized at roughly its percentage of GDP in 2007.”  So it is a relative comparison, which obscures the Warren Buffett point that the “absolute” economic pie is growing over time.  The question Warren Buffett left us asking at the end of I.O.U.S.A.:  would our children’s economic pie still be larger than ours, no matter how or when we decided (or not) to take action to treat our fiscal imbalances?

It turns out that CBO’s underlying macroeconomic assumptions and their long-term budget analysis provide some answers to the Buffett question.  Take the macroeconomic effects CBO quantifies on pages 14-15 of their report for their two fiscal scenarios, and use them to adjust the real GDP projections linked above.  Under both scenarios, CBO describes the effect on the level of real GNP in 2040.  (Note, that’s gross National product based on output produced by U.S.-supplied capital and labor, rather than the gross Domestic product (GDP) concept based on output produced within U.S. borders, used in the base projections, but I think it should be close enough.)  Applying those relative declines in real economic output to the real GDP (base) projections (which correspond to what would be achieved under a stable deficit/GDP ratio), and comparing to the starting point of real GDP (in 2000 dollars) in 2007 (which is $11.7 trillion), here’s what you find:

“Base case” real GDP growth assumed by CBO (consistent with stable deficit/GDP), from 2007 to 2040:  108%  (real GDP goes from $11.7 trillion in 2007 to $24.3 trillion in 2040–i.e., more than doubles).  (This is the strong growth in the economic pie that Buffett is happy about.)

This GDP growth consistent with a stable deficit/GDP ratio is basically the same amount of real growth (108%) CBO expects over the same 33-year period under the “extended-baseline scenario”–because the deficit as a share of GDP is fairly sustainable within those first 33 years, even accounting for the potential negative feedback effect of higher tax rates (from scheduled expiration of the Bush tax cuts) on the macroeconomy.  As CBO explains:

Although under the extended-baseline scenario, the higher tax rates in 2040 would reduce that growth, real GNP would still be 101 percent to 108 percent higher than it is today, CBO estimates.  [implying real GDP in 2040 between $23.5 trillion and $24.3 trillion]

The modest effect that taxes have on the economy in those simulations stems largely from the fact that under the extended-baseline scenario, marginal tax rates would not increase very much between 2007 and 2040; instead, most of the additional revenues generated under the scenario would stem from a broadening of the tax base. If revenues were raised mainly through higher marginal tax rates, the economic effects would be more negative.

But the economic outlook under even the baseline-extended scenario becomes “more problematic” beyond 2040-50 as projected federal health spending rises dramatically (from around 10% of GDP in 2040 to more than 18% in 2080)–even with the lower growth rates scheduled under the “sustainable growth rate.” mechanism in Medicare.

Under CBO’s “alternative fiscal scenario” (deficit-financed extension of the Bush tax cuts and faster Medicare growth), the economic outlook is not nearly as good.  CBO explains that the capital stock would be 25% smaller than under the base case and real GNP would be “about 13 percent” lower.  Reducing 2040 GDP by 13% implies a real level of $21.2 trillion (in 2000 dollars), implying…

Real GDP growth under the alternative fiscal scenario, from 2007 to 2040:  81%.

…So even under the rather dire alternative scenario, a “stay the course” scenario of sorts where debt to GDP reaches nearly 200 percent by 2040, the economy is still larger in real terms.  It’s smaller than it would be under the extended-baseline, current-law scenario, but it’s still larger than it is today.  The economy my children will face when they are my age and in the prime of their working lives would still be 81% larger than the economy I live and work in today. 

So, what’s the problem?  Is this what Warren Buffett was getting at — 81 is bigger than zero?

Two questions then came into my mind:  (i) how does this translate into per capita terms? –after all, the real economy has to grow in dollar terms just to keep up with population growth, otherwise people won’t be better off at all…  and (ii) how does an 81 to 108% growth in real GDP over the next 33 years (a “generation”) compare with the growth in real GDP that has been experienced over 33-year periods in the past?

So I went back into the historical real GDP data (from the BEA) and the historical population (Census) numbers, and here’s what I found, going back 33 years to 1974 (when I was a child), and back another 33 years before that to 1941 (when my parents were children):

(***NOTE: GDP per capita growth rate calculations below have been corrected, 8/30.***)

  • From 1941 to 1974, real GDP grew by 257%, and the U.S. population grew by 60%, so real GDP per capita grew by about ((257+100)/(60+100) = 2.23-1 =) 123%.  In other words, as my parents’ generation went from childhood to the prime of their working careers, real GDP per capita more than doubled. 
  • From 1974 to 2007, real GDP grew by 167%, and the U.S. population grew by 41%, so real GDP per capita grew by about ((167+100)/(41+100) = 1.89-1 =) 89%.  In other words, as my generation went from childhood to the prime of our working careers, real GDP per capita almost doubled.

In contrast, looking forward from now to 2040, as my children grow out of their childhood and into the prime of their working lives:

  • From 2007 to 2040, real GDP would grow by just 81% if current policies were extended, and the U.S. population is projected to grow by 30% (according to Census projections), so real GDP per capita would grow by just ((81+100)/(30+100) = 1.39-1 =) 39%.  That’s the increase in real GDP per capita that our kids (or grandkids) will face as they grow up.

Now, intergenerational fairness is certainly ”in the eye of the beholder,” and perhaps Warren Buffett might point out to me that 39 is still bigger than zero.  But in my opinion, if my parents enjoyed economic growth of more than 100%, and if I’ve enjoyed growth of almost 100%, then it’s not fair that my kids would get growth of not even 40% –which is not even half of what I’ve enjoyed, and not even a third of what my parents enjoyed.  And it’s not just because 40 is less than 100, but because that 40 could be closer to 60 maybe, if my generation just did the right thing and tried to be fiscally responsible–by, for example and for a start, paying for our own tax cuts that we want to keep after 2010.  (Under the baseline-extended scenario, real per capita GDP growth over the 2007-2040 period would be 101 to 108%, and 208/130 = 1.60.)

A 40 percent larger economic pie for my kids, in my opinion, isn’t big enough, and isn’t “fair.”  Not given past history, and not given how big it could be if we just stopped sneaking some of our kids’ pie for ourselves.

“Obamanomics” in Six-Minute Sound Bites

August 28th, 2008 . by economistmom

Sunday’s New York Times Magazine contained an excellent article by David Leonhardt on Obama’s economic philosophy and policy strategy.  It’s a very long article (14 pages when you print it out), and that’s because it really does take that long to try to explain Obama’s thoughts on economic policy.  Obama’s approach is not stark, rhetorical, and uncomplicated; it’s nuanced, compromising, and thoughtful.  Or as Governor Ed Rendell of Pennsylvania explained to the Washington Post’s Jonathan Weisman:

“With people who have a lot of gifts, it’s hard for people to identify with them,” Rendell said. “Barack Obama is handsome. He’s incredibly bright. He’s incredibly well-spoken, and he’s incredibly successful — not exactly the easiest guy in the world to identify with.”…

“He is a little like Adlai Stevenson,” Rendell mused. “You ask him a question, and he gives you a six-minute answer. And the six-minute answer is smart as all get-out. It’s intellectual. It’s well-framed. It takes care of all the contingencies. But it’s a lousy sound bite.”

In other words, Obama’s economic philosophy isn’t quite as easy to explain as McCain’s–which lately seems to be quite straightforward (I think I can paraphrase in a dozen words):  “cut taxes and grow the economy; cut spending and shrink the deficit.”  As David Leonhardt puts it:

John McCain’s economic vision, as he has laid it out during the campaign, amounts to a slightly altered version of Republican orthodoxy, with tax cuts at the core. Obama, on the other hand, has more-detailed proposals but a less obvious ideology…

Some of the confusion stems from Obama’s own strategy of presenting himself as a postpartisan figure…“My core economic theory is pragmatism,” he said, “figuring out what works.”

…Invoking pragmatism doesn’t help the average voter much; ideology, though it often gets a bad name, matters, because it offers insight into how a candidate might actually behave as president. I have spent much of this year trying to get a handle on what is sometimes called Obamanomics and have come away thinking that Obama does have an economic ideology. It’s just not a completely familiar one. Depending on how you look at it, he is both more left-wing and more right-wing than many people realize.

Here are some of the passages that were of the most interest to me from the Leonhardt piece (but the whole thing is very interesting, so please read it if you can)…

On why Americans are so gloomy, despite the not-so-bad condition of the economy (in aggregate at least):

The fact that the economy grows — that it produces more goods and services one year than it did in the previous one — no longer ensures that most families will benefit from its growth. For the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.

Americans have still been buying such things, but they have been doing so with debt. A big chunk of that debt will never be repaid, which is the most basic explanation for the financial crisis. Even after the crisis has passed, the larger problem of income stagnation will remain. It’s hardly the economy’s only serious problem either. There is also the slow unraveling of the employer-based health-insurance system and the fact that, come 2011, the baby boomers will start to turn 65, setting off an enormous rise in the government’s Medicare and Social Security obligations.

Most of these problems aren’t immediate, which helps explain why they have gone unaddressed for so long. And the United States remains a fabulously prosperous country, relative to almost any other country, at any point in history. Yet Americans seem to realize that something has gone wrong.

On how an Obama Administration might approach deficit reduction a little differently from the Clinton Administration (emphasis added):

To understand where Obama stands, you first have to know that, for 15 years, Democratic Party economics have been defined by a struggle that took place during the start of the Clinton administration. It was the battle of the Bobs. On one side was Clinton’s labor secretary and longtime friend, Bob Reich, who argued that the government should invest in roads, bridges, worker training and the like to stimulate the economy and help the middle class. On the other side was Bob Rubin, a former Goldman Sachs executive turned White House aide, who favored reducing the deficit to soothe the bond market, bring down interest rates and get the economy moving again. Clinton cast his lot with Rubin, and to this day the first question about any Democrat’s economic outlook is often where his heart lies, with Reich or Rubin, the left or the center, the government or the market…

Among the policy experts and economists who make up the Democratic government-in-waiting, there is now something of a consensus. They agree that deficit reduction did an enormous amount of good. It helped usher in the 1990s boom and the only period of strong, broad-based income growth in a generation. But that boom also depended on a technology bubble and historically low oil prices. In the current decade, the economy has continued to grow at a decent pace, yet most families have seen little benefit. Instead, the benefits have flowed mostly to a small slice of workers at the very top of the income distribution. As Rubin told me, comparing the current moment with 1993, “The distributional issues are obviously more serious now.” From today’s vantage point, inequality looks likes a bigger problem than economic growth; fiscal discipline seems necessary but not sufficient.

In practical terms, the new consensus means that the policies of an Obama administration would differ from those of the Clinton administration, but not primarily because of differences between the two men. “The economy has changed in the last 15 years, and our understanding of economic policy has changed as well,” [advisor Jason] Furman says. “And that means that what was appropriate in 1993 is no longer appropriate.” Obama’s agenda starts not with raising taxes to reduce the deficit, as Clinton’s ended up doing, but with changing the tax code so that families making more than $250,000 a year pay more taxes and nearly everyone else pays less. That would begin to address inequality. Then there would be Reich-like investments in alternative energy, physical infrastructure and such, meant both to create middle-class jobs and to address long-term problems like global warming.

All of this raises the question of what will happen to the deficit. Obama’s aides optimistically insist he will reduce it, thanks to his tax increases on the affluent and his plan to wind down the Iraq war. Relative to McCain, whose promised spending cuts are extremely vague, Obama does indeed look like a fiscal conservative. But the larger point is that the immediate deficit isn’t as big as it was in 1992. Then, it was equal to 4.7 percent of gross domestic product. Right now it’s about 2.5 percent.

During our conversation, Obama made it clear that he considered the deficit to be only one of the long-term problems requiring immediate attention, and he sounded more worried about the others, like global warming, health care and the economic hangover that could follow the housing bust. Tellingly, he said that while he admired what Clinton did, he might have been more open to Reich’s argument — even in 1993. “I still would have probably made a slightly different choice than Clinton did,” Obama said. “I probably wouldn’t have been as obsessed with deficit reduction.”

(Well, that’s why a future Obama Administration surely will be hounded by those of us who are “obsessed” with deficit reduction–just like a McCain Administration would be…) 

On how Obama likes to hang out with economists (weird, huh?):

From the beginning, Obama has sought out academic economists, rather than lawyers or former White House aides. His first economic adviser, Austan Goolsbee, is a young University of Chicago professor who shares Obama’s market-oriented Democratic views. This summer, Obama added Furman, who has a more traditional background, having worked for both the Clinton administration and the Kerry campaign. But he, too, has a Ph.D. in economics, from Harvard.

As anyone who has spent time with Obama knows, he likes experts, and his choice of advisers stems in part from his interest in empirical research. (James Heckman, a Nobel laureate who critiqued the campaign’s education plan at Goolsbee’s request, said, “I’ve never worked with a campaign that was more interested in what the research shows.”) By surrounding himself with economists, however, Obama was also making a decision with ideological consequences. Far more than many other policy advisers, economists believe in the power of markets. What tends to distinguish Democratic economists is that they set out to uncover imperfections of the market and then come up with incremental, market-based solutions to these imperfections. This helps explain the Obama campaign’s interest in behavioral economics, a relatively new field that has pointed out many ways in which people make irrational, short-term decisions.

On the Obama campaign’s thoughts on addressing global warming through carbon permits (which I agree strongly with, as do most economists, no matter their political persuasion):

The best example of [Obama's "market friendly"] approach, however, may be his climate policy. By last year, Democrats in Congress essentially agreed that to reduce greenhouse-gas emissions, the government should place a nationwide cap on these emissions and then issue tradable permits giving companies the right to produce them (thus the term “cap and trade”). Most Congressional bills envisioned giving away many of the permits to power companies. Economists, by and large, considered this giveaway to be the worst part of the plan. It would require Congress to decide how many free permits each company should get and would set off a frenzy of corporate lobbying.

The alternative was to auction off the permits — to let the market set their value. “If you don’t auction 100 percent of the permits,” Goolsbee told me, “this could be one of the biggest pieces of corporate welfare ever.” With Congress making the decisions, the power companies with the best political connections might get the permits. With a full auction, the permits would end up with companies willing to make the highest bids. Presumably, these would be the most efficient companies, the ones able to produce the most energy (and profits) for a given amount of greenhouse-gas pollution.

The auctions would have another big advantage too. They would raise billions of dollars for the government, money that could then be returned to taxpayers to offset the higher energy prices created by the emissions cap.

On the redistribution of the tax burden that is really the centerpiece of the Obama economic platform:

The most tangible way that today’s economy feels unfair is the lack of real income growth for most families…

What Obama blamed the current administration for, he said, was aggravating these trends with the tax code. To a large extent, Obama’s own economic agenda revolves around reversing Bush’s tax policies and then going a bit further in the other direction. Here, more than in his regulatory approach, Obama stands on the left side of the Democratic Party, but not exactly in the traditional tax-and-spend ways…

…All told, Obama would not only cut taxes for most people more than McCain would. He would cut them more than Bill Clinton did and more than Hillary Clinton proposed doing. These tax cuts are really the essence of his market-oriented redistributionist philosophy (though he made it clear that he doesn’t like the word “redistributionist”). They are an attempt to address the middle-class squeeze by giving people a chunk of money to spend as they see fit.

He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton…

…As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it was 15 or 30 years ago. It just wouldn’t be quite as wide as it is now. 

If all that talk about how well the rich have been doing (how fast the rich people’s “economic pie” has been growing) reminds you of Warren Buffett, well…

Warren Buffett, an Obama supporter…if anything, might argue that he wasn’t going far enough to change the tax code. “If you talk to Warren, he’ll tell you his preference is not to meddle in the economy at all — let the market work, however way it’s going to work, and then just tax the heck out of people at the end and just redistribute it,” Obama said. “That way you’re not impeding efficiency, and you’re achieving equity on the back end.” He continued by saying that he thought there was some merit in Buffett’s argument. But, he said: “I do think that what the argument may miss is the sense of control that we want individuals to have in determining their own career paths, making their own life choices and so forth. And I also think you want to instill that sense of self-reliance and that what you do will help determine outcomes.”

On the supply-side arguments that raising marginal tax rates on the rich would stifle economic growth (a favorite McCain, the presidential candidate, argument):

When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit. His successor, Bush, then did exactly what the supply-siders wanted, cutting upper-income tax rates, and the results were much worse. Economic growth wasn’t quite as strong or nearly as widespread, and the deficit returned. At the very least, Clinton’s increases did no discernible economic damage. Rubin, citing academic work on tax rates, made the case to me that rates under an Obama administration would not be nearly high enough to stifle innovation.

And on Virginia’s “success story” and how Obama’s economic view is influenced by it:

I came to think of this ["investments"] part of Obama’s agenda as the Virginia model, thanks to Tim Kaine, Virginia’s governor, who was one of the first Democrats to endorse Obama. Last year, Kaine began making the case to Goolsbee that the campaign should view Virginia as a model for the rest of the country. In just a few decades, the state has managed to transform itself in precisely the way that economists think the United States now must — to a higher-wage economy with a more-educated population, a place that has prospered even while losing many of its old-line manufacturing jobs. And it did so with a crucial shove from the government.

For much of the 20th century, Virginia was a poor state, but after World War II, with the cold war under way and the military growing, well-paying defense contractors began to sprout up around the Pentagon, in northern Virginia. By the 1970s, Darpa, the Pentagon’s research arm, began working on a computer network, which soon spawned a new form of communication: electronic mail. That computer system eventually became the Internet, and Northern Virginia suddenly had the beginnings of a brand-new industry. In recent decades, Virginia has also invested money in the port near Norfolk and has vastly expanded its colleges and universities. Today the state’s per-capita income is 7 percent higher than the national average.

The trick for someone trying to replicate Virginia’s success is figuring out which investments to make…  

So how does Senator Obama himself try to summarize his economic view to David Leonhardt, in what Gov. Rendell would refer to as a “six-minute sound bite”?  This way:

I asked Obama whether he thought he had been able to tell an effective story about the economy during this campaign. Specifically, I wondered, did he think he had a message that compared with Reagan’s simple call for less government and lower taxes.

[Obama] paused for a few seconds and then said this:

“I think I can tell a pretty simple story. Ronald Reagan ushered in an era that reasserted the marketplace and freedom. He made people aware of the cost involved of government regulation or at least a command-and-control-style regulation regime. Bill Clinton to some extent continued that pattern, although he may have smoothed out the edges of it. And George Bush took Ronald Reagan’s insight and ran it over a cliff. And so I think the simple way of telling the story is that when Bill Clinton said the era of big government is over, he wasn’t arguing for an era of no government. So what we need to bring about is the end of the era of unresponsive and inefficient government and short-term thinking in government, so that the government is laying the groundwork, the framework, the foundation for the market to operate effectively and for every single individual to be able to be connected with that market and to succeed in that market. And it’s now a global marketplace.”

“Now, that’s the story. Now, telling it elegantly — ‘low taxes, smaller government’ — the way the Republicans have, I think is more of a challenge.”

It strikes me that Obama trying to talk about his economic philosophy is a lot like my trying to define “fiscal responsibility”–what I consider one of my “big projects” for this fall.  You can’t explain it in short and simple terms without short-changing and oversimplifying the issues.  Being honest about the tradeoffs and the nuances tends to require six-minute lectures–not just 20-second soundbites.  Like the movie I.O.U.S.A. warns at its conclusion:  beware of politicians that talk of policies that sound too good (and simple) to be true–they probably are.

On Bribing (I Mean Motivating) Kids to Do Well

August 27th, 2008 . by economistmom

An editorial in this morning’s Washington Post talks about the DC public school system’s fascinating new experiment designed to motivate middle-school students to do well in school–asking the question:  is this “bribery” or “motivation”?…

IN A PERFECT world, children clamor to go to school for the sheer exhilaration of learning. No one is ever late, homework is always completed on time, and everyone knows that success in the classroom can mean success in life. A starkly different world exists for many D.C. children, and too often the reality is one of failure. It is therefore worth exploring whether different incentives — even an unorthodox offer of cash — can motivate students to excel.

Last week, D.C. Schools Chancellor Michelle A. Rhee unveiled a pilot program in which middle school students will be paid to meet academic and behavioral goals. Starting in October, 3,000 students — half of the middle school population — will be able to earn as much as $100 every two weeks (officials expect the average will be $50 every two weeks) as part of a $2.7 million program being offered with Harvard University.

Announcement of the program was met with predictable, even hysterical, criticism. It’s bribing children to learn! It’s patronizing — and racist — to suggest that African American children must be paid to go to school!

As an economist, and a mom, I don’t see the problem in this–it’s giving the kids that extra, external incentive and reward, and don’t parents who can afford to give their kids these kinds of pecuniary rewards do this all the time?  What’s the difference between bribery and motivation, after all, other than the negative connotation that the word “bribery” has because it’s often illegal when offered to people who aren’t family?  This program seems like a natural way to help offer such rewards/incentives to kids whose parents can’t afford to offer them themselves.  And if the money gets deposited into college savings accounts, even better.

The editorial goes on to mention the Harvard professor who is leading this pilot study:

The goal makes sense: to provide tangible rewards to students who may dismiss school as irrelevant to their lives. Harvard economics professor Roland G. Fryer Jr., who will run the program, says it is easy for middle- and upper-class students to see the benefits of education; they experience the comforts on a daily basis. Not so poor students…

Professor Fryer is a great success story in himself.  See this NYTimes article on him from a few years ago, and this link to his Harvard page.  His research (under “papers”) is fascinating.  (And his Ph.D. in Economics is from Penn State(!)–where I taught for several years, but unfortunately, before his time there.)

Talk About Traffic Congestion!

August 27th, 2008 . by economistmom

Hey–Is it coincidence that I’ve had so much trouble getting onto my own blog this morning, and that I’ve heard from friends that they can’t get into it either?  Could it be that there’s an unusual amount of congestion out here in the blogosphere this morning (the morning after Hillary’s big speech)?  Is that how it works?….

Let’s see if I can hang onto my space here long enough to post something else this morning…

DC-Area Commuters Are Pretty Unusual

August 26th, 2008 . by economistmom

Two stories in the Washington Post over the past few days highlight why those who live and work ”inside the Beltway” here in the DC-area are pretty darn weird.

In policy wonkish, rational style, we can discuss the wisdom of more flexible work schedules (such as the four-day work week) as a great way to save energy, money, and commuting time–what seems to be a win-win for employers and employees (and the environment) alike.  From Saturday’s story by Lori Aratani:

…a growing number of businesses and state and local governments from Fairfax to Detroit to Salt Lake City are pondering a strategy for saving on utility costs and being kind to the environment: telling their workers, stay home.

Congress, too, is weighing in on the merits of flexible work schedules. This month, House Majority Leader Steny H. Hoyer (D-Md.) proposed that more federal workers shift to a four-day, 10-hour-a-day workweek to help eliminate unnecessary commuting and reduce road congestion. He asked the Office of Personnel Management to analyze whether such a shift would be possible and report back by the end of this month.

And while it may be true that “flextime” has growing appeal all over the country, because Americans all over the country feel the pinch of higher transportation costs, and Americans everywhere value their leisure time, the DC-area is notorious for our mega-dose combination of affluence, elitism, and impatience.  Where else would people be willing to pay maybe $40/day to drive on new “high-occupancy tolls” (HOT) lanes–to save a few minutes time?  From Monday’s story by Eric M. Weiss:

Builders of new high-occupancy toll (HOT) lanes on the Beltway are betting $2 billion that there are enough drivers in the Washington region willing to pay tolls that could add up to $40 a day.

Construction started last month on 14 miles of HOT lanes that will stretch between the Springfield interchange and just north of the Dulles Toll Road. Tolls will fluctuate based on traffic — the heavier the traffic, the higher the tolls — to ensure that the lanes remain free-flowing.

But what the builders of the lanes are really selling is time. They are counting on frustrated commuters who have missed Little League games, scrambled to pick up children at day care or are forced to leave home two hours early for a commute that should take an hour.

The question is whether there will be enough of those people when the lanes open in five years.

“This is a crapshoot,” said Robert Poole, director of transportation studies for the Reason Foundation and an early proponent of HOT lanes. “You just never know until the road is open.”

Commuters in the Washington region are affluent enough and time-pressed enough to make it work, according to two internal traffic and revenue studies sent to potential investors in the project.

The studies, commissioned by Transurban and potential investors, say the HOT lanes will be so successful that tolls could be increased 25 percent above levels needed to keep traffic moving and there would still be enough takers, even in a tough economic climate.

“If it saves me time, then I don’t care about paying the toll,” said Nikhir Kumar, 35, of Reston, who commutes to Tysons Corner and can spend up to two hours in Beltway traffic. “You can’t put a dollar price on spending time with my wife and 18-month-old.”

Using an average rush-hour toll of $1.54 a mile, as projected in the studies, a 6.3- mile morning commute between Route 29 and Braddock Road in Fairfax County would cost $9.70 and save 90 seconds over the Beltway’s “free lanes.” That translates to $6.47 for each minute saved — an hourly rate of $388, which would make some K Street lawyers jealous.

That’s crazy! — an hourly rate of $388 is equivalent to a salary of over $800,000/year!  (Most of us are not nearly that affluent.)  With DC-area workers willing to spend that kind of money, with little care, it’s no wonder we can’t get a handle on our federal budget deficit.  (And that crazy Mr. Kumar–he must really love his wife!)

A couple other observations of mine regarding how DC-area commuters are unusual (let me know if you agree or have other observations): 

(i) Despite all the congestion and slow traffic on the roads here, many drivers somehow feel they’re “entitled” to having several car lengths of open space in front of them in their lane.  (If you cut into their “open view”, well, you deserve a horn and maybe even a finger thrown in for good measure–especially if they were unable to speed up fast enough to close you out of the lane change.) 

(ii) People here don’t seem to know how to drive in the snow–or the rain, or too much sunshine, for that matter.  Anything but sort of overcast but dry weather, and the roads turn into parking lots.  Maybe it’s because so many people who live and work around here did not grow up around here, so not very many people have a lifetime of DC-driving experience.  Or maybe folks here are just too caught up in themselves to worry about the negative spillover effects of their bad driving skills and behavior on others.

Brad DeLong: For Fiscal Responsibility, Raising Taxes Is Not Optional

August 25th, 2008 . by economistmom

I just read this post over on Brad’s blog and had to share it here, even though I’ve already posted today on how Warren Buffett feels many of us can afford to pay higher taxes (some like him, more than others), and of course, I’ve posted many, many times on my blog about how we need to raise taxes (in a thoughtful way) as a matter of simple logic and basic math.

By the way, by “raising taxes” Brad surely means (as I always do) raising tax revenues, not necessarily raising tax rates–just to respond to one of the comments on Brad’s site.  Here’s how Brad explains it (so well):

I believe that when we Americans look deep into ourselves and ask us what we want our government–because it is our government: it is our agent to do what we want with our money just as the guy in Florida we hire to keep grandma’s one bedroom condo in repair is our agent–to do, we conclude the following:

  1. We want to let the Bush tax cuts expire.
  2. We want to close the 75-year Social Security gap, half by raising the limit on earnings taxed by Social Security so that the upper middle class and the rich pay more for Social Security and half by reducing the rate of growth of benefits at retirement.
  3. We want to stop sending our soldiers–the best-trained and best-equipped high tech armed forces in the world–abroad to be military police in countries riven by sectarian conflict where they do not speak the language–and so return defense spending to its late-1990s share of GDP.
  4. We want to reduce but not eliminate the “excess” cost growth in Medicare and Medicaid: we believe our doctors, nurses, and druggists will learn how to do wonderful things over the next two generations, and we do not want those wonderful things in the way of medicine applied only to the rich but to the poor and old as well.
  5. Whether or not we decide to do (1) through (4) above, we want to raise taxes to cover whatever of the long-run fiscal gap remains, and so bring the federal budget back into balance over the long run.

Note that (5) is not optional. As the late Milton Friedman liked to put it: to spend is to tax. If the government buys things, it must get the money to buy them from somewhere. It can get the money from three places. It can tax. It can borrow–but then the borrowing has to be repaid with interest, and the more is borrowed the higher the interest and the worse the value the taxpayers ultimately get for their money when they are taxed to repay the borrowing. Or it can print the money and so inflate the currency–but that too is a tax, and an especially unfair, painful, and destructive one, as lots and lots of people victimized by inflation find their wealth doesn’t buy what it used to and what they expected.

We can argue over whether (1) through (4) is what we want to do–that is what politics is about. But whatever we decide to do with (1) through (4), (5) is not optional–not, that is, if we want to continue to have a rich country in the long run. And the politicians who have told you that (5) is optional from Ronald Reagan to George H.W. Bush to Robert Dole to George W. Bush and now John McCain are not your friends, or America’s friends.

What Warren Buffett Means When He Says We Can Have Our Pie and Eat It Too

August 25th, 2008 . by economistmom

Well, a lot of I.O.U.S.A. moviegoers no doubt left the post-movie panel discussion on Thursday night a bit confused about Warren Buffett’s self-proclaimed “Pollyanna” view on the long-term fiscal challenges facing the U.S., when Buffett started talking “pie.”  From the written transcript (pages 8-10), emphasis added:

…there’s no question that the people in this audience, their children will live better than they do, and their grandchildren will live better than their children.  I mean, this is a marvelous economy…since 1982, we’ve added 25 million plus jobs in this country.  We are now exporting 12 percent of our GDP, which was five percent of our GDP in 1970…So…we will have a larger pie.  Now, we’ll have people fighting over who gets that pie.  I mean, there’s no question about it.  And we’ve made certain promises that promise away a portion of the pie.  But the wonderful thing is that the pie gets larger–even if one percent per year real productivity growth per capita, we double the GDP in per capita in real terms…[in] 75 years when the Social Security projections go up.  So even though seniors may get more of the pie, the pie will grow enough so that everybody will get more of the pie.

These words left the audience wondering:  was Warren Buffett saying we can have (i.e., keep) our growing “economic pie” and eat it (i.e., use it up, through growing demands for social programs and costs of debt service), too?  Was Buffett taking, in effect, a “don’t worry, be happy” attitude toward the terrifying trends just shown in the movie?  Was he saying, in effect, that “deficits don’t matter”?

Well, no, he certainly wasn’t saying that “deficits don’t matter”… this is the man who wrote the “Squanderville vs. Thriftsville” story and who once drove his car with the license plate “THRIFTY” on it (according to the Washington Post’s Frank Ahrens), after all.  What Buffett was expressing was the optimistic, but not ridiculously unrealistic (not really too Pollyannaish) view that no matter how and when we decide to take action on our fiscal challenge, we’ll do it before total economic disaster strikes, and that we’ll have a strong enough economy to be able to afford the adjustments needed to bring things back in order.  Buffett is saying that our longer term fiscal challenge will certainly “eat” more of our economic pie, but we’ll have enough of that (growing) pie to spare so that what we’ll be left with–or what our children will be left with–will still be an economic pie that’s larger than today’s economic pie.

But Buffett was not saying that putting off corrective actions isn’t costly–nor was he claiming that the kind of economic growth he describes could possibly keep up with compounded interest on the debt.  Nor was he failing to recognize the adverse feedback effects of unsustainable debt on the economy.  This was clarified in Buffett’s follow-up interview with CNBC on Friday morning, when he explained in part two of the interview:

…there’s nothing inappropriate about having debt in America. I mean, Berkshire has debt, and it’s helped us grow over time. And it’s when debt gets out of control that you worry. But the American democracy, it’s always fun to spend a little more than you take in, and that applies to individuals, it applies to governments. And in a $14 trillion economy, having debt that’s 60-odd percent of GDP is not inappropriate. It wasn’t inappropriate when we had 120 percent of GDP in debt after World War II, because we had to fight a war. …what you worry about is when the debt starts spiraling out of control, when it goes up year after year after year as a percentage of GDP, because eventually when that occurs people–if you try to borrow money around the world in your own currency, the world will say no. That’s what happened in South America in the past, it happened in the–in the Asian arena. We are able to borrow money in dollars. The world trusts the dollar. If we tried to run our debt up to 3- or 400 percent of GDP, nobody would want debt denominated in dollars.

And when he elaborated about that growing economic pie in part three of the interview (emphasis added):

…I think you should always be thinking about the future. I mean, I think you’re crazy if you’re not–if you’re not planning out where you’ll be in 10 and 20 or 30 years. You’ll get surprises in those plans… And frankly, American ingenuity will tend to surprise on the upside much of the time. I also think that it’s dangerous politically over time. It doesn’t endanger the economy in a huge way, but it’s dangerous politically over time to run very large current account deficits whereby there’s a massive transfer of assets or IOUs to the rest of the world from America. I think that will cause a lot of demagoguery and potentially some real problems 20 years down the road. We’d still have a more prosperous society… But it wouldn’t be–wouldn’t be as good as if we didn’t do it.

In other words, the economic pie left to our kids would not be as big as if we hadn’t run up so much debt.  In Buffett’s optimistic view, we won’t let it get to the point where our children’s economic pie would be smaller than our economic pie, but running persistent budget deficits is still a way that we parents choose to eat some of our children’s pie, today.

I’m convinced by the rest of Buffett’s post-IOUSA discussion that what Buffett really means when he emphasizes our large and growing economic pie is that we can afford to fix this fiscal problem–and that we can afford to start fixing it even now.  I’m convinced because the next thing he emphasized in the post-movie discussion was that there is plenty of capacity, even in today’s economy, for some people (like him) to pay higher taxes:

…every line in the tax code is important to some constituency…you’ve got thousands of lobbyists there protecting each line in the tax code…The tax code is an attempt by various interests, income– divided by income, divided by– demographics, all kinds of things, for people to get more of the pie. Now, the question was raised about savings and taxation. I’ve been a compulsive saver all my life, as my children will tell you. But I am paying the lowest rate of taxes on my income which comes from investments. I’m paying the lowest rate of taxes that I’ve paid in my entire life, including when I delivered papers. I am paying a 15 percent rate on dividends. I’m paying a 15 percent rate on capital gains. And there’s no payroll tax attached to that. [The] Cleaning lady [who] comes into my office has a 15.3 percent payroll tax that she’s incurring…Investors have never had it better in terms of taxes. I mean, you’ve got 401(k)’s which you don’t pay till many, many years in the future. You’ve got the lowest rate on dividends, capital gains. I['ve] worked in environments where capital gains [taxes were] raised [to] 39.6 percent, [and] employment grew, the economy grew. Nobody told me to go home at 3:00 because they pay so much tax by 3:00, [that] they didn’t want me to work until 5:00 or anything of the sort. So investors have it extraordinarily good. And they have it good, frankly, because they’ve lobbied for it. I mean, they have a strong constituency and my cleaning lady doesn’t.

and ten minutes later Buffett reminds the audience that as a society we do choose to make certain commitments as to what we think is worth spending our resources on, but we’ve always found the capacity to afford to pay the bills–and we will continue to find that capacity, even as many of us will continue to kick and scream about our own individual shares of those bills:

We said we’d promise Medicare to everybody when they get to a certain age. We promised a monthly check from Social Security. But we promised all kinds of other things, too. We promised we’re gonna defend this country. That’s gonna cost us hundreds of billions of dollars a year. That’s a promise to the American people…We promised we’re gonna educate our children. That’s hundreds and hundreds, trillion– probably in the trillions a year. So we have all kinds of promises for the future. But, fortunately, we have all kinds of productive capacity for to the future, too. So to isolate these promises because they happen to be in a given statute and to say we don’t have a promise to defend this country which is gonna cost hundreds and hundreds of billions of dollars, that’s a promise of the government just as well. So I think people get very hung up, frankly, on the promises that relate to so much per month or something like that. And we will have more and more goods and services in this country to deliver in one form or another for the American people. And we’ll fight in Congress about who gets what and the seniors will wanna get more…And people– other people will care more about the young. And other people, you know, will care more about national defense or whatever it may be. But the fortunate thing always to remember is that the pie gets larger all the time. And there is more to divide up. And then we have to fight it out as to who gets it.

So who does Warren Buffett think should get more of the “economic pie” as we “fight out” who gets it?  From the follow-up CNBC interview, it’s clear he thinks that more people like him will need to pay more in taxes, made even clearer by the fact that he’s an Obama supporter.  Buffett also admits that neither candidate has been brave enough to speak much about fiscal responsibility during this campaign season:

The one thing you won’t find…you won’t find either candidate telling you that if we’re going to spend $3.1 trillion next year, the federal government will tell you how they’re going to raise 3.1 trillion. They just aren’t going to come up with it.  [from part 3]

…[and this exchange from part 4 (emphasis added):]

Unidentified Woman [call-in to CNBC]: Hi, Warren. Identifying the debt problem and coming up with a solution seems like an easier task than motivating Congress. What would you suggest that we do to help motivate a shortsighted Congress?

[Becky] QUICK [CNBC]: OK. That’s, again, going back to how do you motivate a shortsighted congress. What would you suggest?

BUFFETT: It’s very tough. I mean, in the end, can I name a politician in the last 20 years that said, `My campaign is I’m going to increase your taxes a lot and come close to closing the budget deficit.’ And since nobody wants spending cut–they all want the other guy’s spending cut…

QUICK: Mm-hmm.

BUFFETT: …and, you know, we’ll have to increase taxes. I–Walter Mondale tried it in 1984 without much success. Now, what I do with politicians is I ask them what they believe in and will work for that a majority of their constituents oppose. Now, if they give me an answer to that, I know they really believe that. I mean, I don’t get long answers to that question. But what they…

QUICK: I bet you don’t.

BUFFETT: Yeah, no. But that’s the real test of what they believe in. Anybody’s for anything that gets them elected, so if they–if they say, `I’m for lowering your taxes,’ or `I’m for bringing all kinds of things to my district,’ or `earmarking things,’ you know, of course they’re going to say that. And they’ll say that whether they believe in it or not because it keeps their jobs. Now, the question is what do they believe in that might endanger their job if in–if done?

QUICK: What did Barack Obama say when you asked him that question? You’re supporting him.

BUFFETT: Yeah. I’m not going to ask him that question.

QUICK: You haven’t asked him that question.

BUFFETT: No, I didn’t–I didn’t–I didn’t put that one to him.

QUICK: Why not?

BUFFETT: I didn’t feel like putting him on the spot that way.

QUICK: But he got your support anyways.

BUFFETT: Well, I have a choice of two candidates…

QUICK: Right.

BUFFETT: …and I support Barack and I think that on balance he will be better for America. Although I admire John McCain as an individual, but I think that Barack would be better. But I will–I can tell you that both candidates are not addressing things in the campaign that are important issues, because they feel it’ll cost them votes.

QUICK: What do you think is the most important issue that’s not being addressed by either campaign?

BUFFETT: Well, I think in the–certainly in the financial area. Now, they’ve both made certain proposals on taxes, but in terms of the realism of what would happen in terms of closing budget deficits or something of the sort, I don’t think they really want to get that specific about it now.

So I think Warren Buffett means we can have our pie, and eat it, too, but hopefully once the next President takes office, we can start to think more carefully about how much of the pie is worth eating now, versus having more of it to eat later.  Clearly, Buffett still believes that saving for the future can be consistent with enjoying life today, with enthusiasm and optimism.  And he’s certainly good testimony for the wisdom of that attitude. 

(Stay tuned for a more quantitative analysis of the Buffett “economic pie” point later this week.)

I Just Had Some Bipartisan Ice Cream

August 24th, 2008 . by economistmom

New at Baskin-Robbins, just in time for the conventions (thanks to my BR-employed daughter, Allie, for calling my attention to it)…  Click on the photo for a closer view of the descriptions…

They’re both really good, even together in one dish.  Go try some and practice bipartisanship!

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