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I have no idea, but the Congressional Budget Office took a crack at that question today, releasing a letter to my former boss, House Budget Committee Chairman John Spratt.  CBO concludes that while there’s a small probability that the direct cost to the government could turn out to be around $100 billion, the “expected federal budgetary cost” is just $25 billion (over fiscal years 2009-10)–because there’s a better than 50-50 chance that the proposed new Treasury authority (what can be thought of as an available ”line of credit”) would not be exercised.  (Here’s a nice report by Jeanne Sahadi at CNN-Money.)

Whatever the officially estimated budgetary cost or the actual effect on the level of the federal debt turns out to be, however, these figures grossly understate the financial commitment implicit in this effectively unlimited “line of credit”–that is, grossly understates the value to Fannie Mae and Freddie Mac in being able to say to the market, “don’t worry, we’re good for it.”  As CBO Director Peter Orszag explains on his blog (emphasis added):

CBO’s estimate reflects the current budgetary treatment and existing scorekeeping conventions for federal credit assistance and equity purchases and does not necessarily measure the underlying change in the federal government’s financial condition as a result of this legislation. On the one hand, the acquisition of financial assets like equities is recorded as an outlay in the budget even though such purchases may not change the government’s underlying financial condition. On the other hand, even if enacting this legislation would not result in outlays over the near term, it might effectively strengthen the linkages between the GSEs and the federal government and thereby increase the government’s underlying exposure to the risks associated with the GSEs’ activities.

In other words, the unlimited line of credit is worth a lot even if it’s never tapped into.  And I say it’s effectively an unlimited line of credit, because just like anything else in the federal budget that we’re willing to deficit finance (borrow to pay for), the line of credit defined by the “statutory debt limit” (currently set at $9.815 trillion, which we’re about $360 billion away from today) can be increased at any time by act of Congress, at the request of the Treasury Department.  Congress routinely (albeit reluctantly) votes to increase this limit whenever the existing limit is about to be breached.  So this Politico story (by David Rogers, no relation) about the “bonus” of an increase in the debt limit that might be hastened by the passage of a Fannie-Freddie rescue bill, is a bit misleading, in saying:

From Paulson’s standpoint, [Congress raising the debt limit] would solve another problem of appeasing Congress’s concerns about his rescue plan. To be effective, the secretary has argued that no cap should be put on his new authority, nor should it be subject to the debt ceiling [i.e., count as debt subject to the debt limit]. 

But Paulson appears willing to accept that condition now, since he would be assured that the ceiling will be raised to a level giving him enough room to assist Fannie and Freddie if needed.

Secretary Paulson and David Rogers make it sound as if the statutory debt limit is a binding constraint or a real limit, when it’s not.  It’s a sort of self-discipline device–an acknowledgment and reminder of the debt problem which gives understandable heartburn to the members of Congress when they have to vote on it.  But regardless of whether this legislation adds to the “debt subject to limit” or the debt not subject to limit, any eventual outlays will add to the real public debt.  And regardless of the budgetary impact of this legislation, we know the debt limit will be increased later this year (whether before the election or during a “lame duck” session), because it will have to be, with or without this legislation.

Fascinating story in the Washington Post this morning, coming a day after a very related conversation I was having with a friend regarding how economists analyze environmental policy.  We humans have been devalued/marked down! 

Last week, it was revealed that an Environmental Protection Agency office had lowered its official estimate of life’s value, from about $8.04 million to about $7.22 million. That decision has put a spotlight on the concept of the “Value of a Statistical Life,” in which the Washington bureaucracy takes on a question usually left to preachers and poets.

This value is routinely calculated by several agencies, each putting its own dollar figure on the worth of life — not any particular person’s life, just that of a generic American. The figure is then used to judge whether potentially lifesaving policy measures are really worth the cost.

A human life, based on an economic analysis grounded in observations of everyday Americans, typically turns out to be worth $5 million to $8 million — about as much as a mega-mansion or a middle infielder.

Now, for the first time, the EPA has used this little-known process to devalue life, something that environmentalists say could set a scary precedent, making it seem that lifesaving pollution reductions are not worth the cost.

As I was explaining to my friend, who was asking why we typically see estimates of the economic costs of climate change policy but not estimates of the economic benefits, it’s never really possible to get a true ”apples to apples” comparison in the cost-benefit analysis of environmental policy, because the costs of policy are usually much easier to measure (via actual market values/prices) than are the benefits (which usually involve valuing things where no market exists).

My very first economics publication was during my first government job at the Interior Department during the Reagan Administration in the mid 1980s (remember James Watt?).  My boss and I worked with the U.S. Fish and Wildlife Service to try to come up with an economic measure of the costs of allowing the Army Corps of Engineers to dredge and fill wetlands for conversion to agricultural land.  The benefits of destroying the habitat were easy to quantify, based on the profits that could be earned in farming the land.  The costs, up until then, were demonstrated by the Fish and Wildlife Service’s photos of dead ducks.  My boss and I tried to quantify the value of avoiding the habitat destruction by, rather ironically, measuring the value that sportsmen placed on being able to hunt for (i.e., kill) the ducks on that habitat.  Obviously that’s not the only value people would have attached to preserving the habitat, but it was the most reliable market value we could gather.  You can hold up photos of dead ducks and ask people what they’d be willing to pay to avoid those ducks dying, but it turns out it’s hard to know whether those answers would be honest (when we wouldn’t actually go back to those people and ask them to pay up once the habitat was saved).  So the costs of habitat preservation always seem more concrete than the benefits.

I told my friend that with climate change policy, it’s SO much tougher than that small wetlands issue, because the already wide range of possible estimates on how much people value avoiding too much climate change has to be multiplied by the (even wider?) range of uncertainty on the science of climate change.  And while it’s clear that images of the polar bears stranded on floating ice rafts evokes strong emotions from people, I’m not sure economists have translated those feelings into dollars yet.  (I’m sure John Whitehead on the Environmental Economics blog knows the latest on this.)  If we have a hard enough time keeping the value of a human life straight, could we value a polar bear life with much confidence?

Of course, all these policies with benefits that stretch very far into the future are difficult for policymakers to deal with–not just because politicians are understandably nearsighted, but because the value we place on such policies is not just sensitive to how much we value a human life, but on how much we value the well-being of future human lives relative to the well-being of current human lives–what economists like to call the “social discount rate.”  In policy evaluation, gains to future generations are usually “discounted” relative to gains to current generations, and how the cost-benefit calculus works out is very sensitive to the choice of this discount rate.  But this is a whole can of worms that I don’t want to open up right now, fearing it could lead to another heated discussion about Social Security.

(photo of son Johnny, by daughter Emily)

The Wall Street Journal blog, “Real Time Economics“, points to a new economic analysis that is very interesting to me–more from my “mom” perspective than from my “economist” perspective.  The NBER working paper on “The Lengthening of Childhood”, by David Deming and Susan Dynarski, suggests that delaying the start of kindergarten might actually reduce overall human capital accumulation in the U.S., because, as WSJ blog paraphrases:

Kids who start school a year late have one year less schooling before they reach the age at which they’re allowed to drop out, decreasing their average educational attainment and widening the gap in learning between rich and poor. (Low-income teenagers are more likely to drop out.) And those who do stay in school enter the labor force a year later — decreasing their average lifetime earnings as well as their contribution to Social Security.

I am one of those who “redshirted” a child from school–having chosen to delay my son’s entry into kindergarten until he had turned 6 (in late July).  (The cut-off in Fairfax County, VA is September 30.)  Given my “mom” experience going through a decision process that was heavily influenced by my son’s preschool teacher (who made the compelling case that my son was not emotionally ready having been the youngest in his preschool class and the youngest, and only boy, at home–and didn’t I want to give him some chance of being a leader instead of a follower somewhere in his life?…), and then seeing the benefits of having given him that extra year (he’s been a strong leader in school ever since), I have to think that the NBER analysis, at least as described by the WSJ above, is missing a couple important factors in the suggestion that delaying school is a bad thing:

1. It assumes the annual productivity of schooling for the kid is independent of the extra year of maturity (or other psychological benefit from being an “older” kid rather than a “younger” kid in one’s grade)–so the kid might get one year less on a path that’s otherwise the same.  I would argue that there’s evidence (ok, at least my casual evidence) that a given amount of education provided to a more mature kid leads to a larger amount of “human capital” accumulated in that kid (higher quality “learning”), so that the human capital production function gets a sort of technology boost when kindergarten is delayed.
2. It assumes that the decreased years of schooling caused by drop out is caused by allowing the delay on the front end, rather than allowing the truncation on the back end.  In other words, if the problem is drop out, why can’t the rules for minimum drop-out age be changed to correspond to a minimum number of years of school–so that kids who delay kindergarten until age 6 would not be legally permitted to drop out of school until the usual age plus one? 

Oh, I know I should read the full paper and all the other analyses by education experts before I leap to these conclusions, but like I said at the start, I’m talking more from my “mom” perspective than from my “economist” one here, and I need to get home to my redshirted son, who I’m sure will graduate from high school (and hopefully, even more schooling) and be a very productive worker some day–I’m convinced even more productive than had I started him in school a year earlier.

At Senate Budget Committee Chairman Kent Conrad’s request, CBO just issued an analysis of the long-term budget outlook under deficit-financed tax cuts–answering the following:  What happens to budget deficits and the economy over the longer run (or even over the not-so-long run) if we go along with repeated violations/waivers of PAYGO as has been insisted on by the Bush Administration and many members of Congress (most recently, the Senate Republicans in the report I cited yesterday)?

Check out Table 1 on page 3 of the report.  Under current law (with expiring tax cuts OR with extended tax cuts that comply with PAYGO), the deficit as a share of the economy (GDP) would actually fall from 1.2% in 2007 to 1.0% in 2030, but would then start to grow (even with expired tax cuts) to 4.6% by 2050, and to 18.1% by 2082.  (The dramatic rise of the deficit in later years, despite revenues as a share of GDP growing from 18.8% in 2007 to 25.5% by 2082, shows that the longer-term problem is much more from rising health care costs than from deficient revenue.)  But under the scenario where extension of the Bush tax cuts and AMT relief is entirely deficit financed, deficits/GDP rise to 6.1% in 2030 (more than 6 times the 1.0% when paid for), 15.0% in 2050 (more than 3 times the 4.6% when paid for), and 39.3% by 2082 (more than 2 times the 18.1% when paid for).   (Note the difference shrinks over time when health costs become the far largest challenge.)

What difference do these deficits make for the economy?  CBO Director Peter Orszag lifts a couple paragraphs from the analysis onto his blog:

…simulations using one model—a textbook growth model that incorporates the assumption that deficits affect capital investment in the future as they have in the past—indicate that the rising federal budget deficits created by deficit financing of the indexation of the AMT would reduce real GNP per person by 6 percent in 2050 and by about 37 percent in 2080. If both the AMT were indexed and EGTRRA’s and JGTRRA’s personal income tax provisions were extended, and those changes were financed by additional borrowing, the economic costs would be even larger. By CBO’s estimates, real GNP per person would decline by 13 percent in 2050. Beyond 2073, projected deficits under those tax policies would become so large and unsustainable that the model cannot calculate their effects.

Despite the substantial economic costs generated by deficits in that model, such estimates may significantly understate the potential loss to economic growth under deficit financing of the tax changes…

Just as with CBO’s earlier analysis at Congressman Ryan’s request (my commentary on that posted here), the analysis focuses on the macroeconomic effects of budget deficits, rather than the potential microeconomic effects of the particular tax or spending policies on household or firm behavior.  In this particular analysis of deficit-financed vs. paid-for tax cuts, Peter Orszag explains that the microeconomic, incentive effects are the same under both scenarios for the tax cut in question…

To assess the economic effects, CBO compared a scenario with the tax changes financed through deficits with an alternative scenario in which the tax changes were financed fully from the start via changes in other policies. Because the analysis assumes that the tax changes are enacted in either case, the difference between the two scenarios highlights the effects of using deficits to finance them.

…although it should be pointed out that the microeconomic, incentive effects of the mix of policies used to pay for the tax cuts in the paygo-compliant (extended baseline) case are not simulated, just as in the CBO analysis for Congressman Ryan, the potential micro-behavioral effects from the drop in health care spending were not simulated.

Yesterday I was home with the kids (and dogs), and it went like this:

8:00 am:  take kid #1’s car to drop kid #2 off at her summer arts program (cost, $200+/week for 4 weeks, for $800+);

8:30 am:  drop kid #1’s car off at the Ford dealership for badly-overdue tune up/maintenance (initial quote, about $1500; later find out the alternator’s bad, so $2000 (but refuse to raise that to $3500 to get the AC fixed));

10:00 am:  bring kid #3 to her ballet camp (cost, $250+/week for 4 weeks, for $1000+);

10:30 am:  bring kid #1 to the oral surgeon to get 4 impacted wisdom teeth removed per our regular dentist’s orders (cost, $2745 out of pocket before our insurance, which the dentist does not participate in);

1:00 pm:  bring groggy kid #1 home to pick up kid #4 (who’s been home alone for awhile because I couldn’t get him to come with me for kid #1’s appointment), and bring kid #4 to the (same) oral surgeon to get 2 baby molars extracted per our orthodontist’s orders (cost, a mere $490, also out of pocket before insurance);

3:00 pm:  go out to fill prescriptions for kids #1 and #4 (out-of-pocket cost for the generic antibiotics, pain killers, and anti-nausea medicine, a shockingly low $4-$5 TOTAL);

3:10 pm:  while prescriptions are being filled, go to grocery store to buy lots of liquid and otherwise soft foods and somehow end up spending $150+ on juices, yogurt, applesauce, canned soup, and ice cream.

Let’s see, that’s about $7200 worth of family infrastructure spending!  Not exactly a “typical day” for our family, but it’s proof that one really has to be rich these days in order to have kids (especially that many kids).  (At least I didn’t really spend anything on the dogs yesterday, although my old beagle made sure that I spent time cleaning up his evening “accident”–to make it a pretty typical day in that regard…) 

Fortunately, it turns out our very generous dental insurance (courtesy of the Federal Reserve) will reimburse us for 90% of those dental expenses I paid up front, even though the oral surgeon “does not participate” with any insurance plans.  I didn’t find out the high reimbursement rate until this morning when I called our insurance company.  Yep, I had made and gone through with the appointments knowing in advance that the surgeon did not accept insurance, knowing the cost was estimated at $3000-$3500 for the two kids, and yet not knowing how much our insurance would cover for us.  Why?  Well, the “mom” in me was obviously more in charge than the “economist” in me, going through that simple, irrational, two-question test:  (i) is there any possible benefit associated with the expenditure (is marginal benefit positive)?, and (ii) do I have the money to pay for it? 

A week ago I was at my regular dentist for a checkup and mentioned that our favorite oral surgeon (and the one our dentist had referred us to) was no longer participating in any insurance and how much we had to come up with in advance to pay for the treatments.  My regular dentist said she knew of other oral surgeons that she thought did still participate in insurance that she could refer us to instead.  But then when I mentioned that we already had appointments (with nonparticipating oral surgeon) for the following week (and which I had easily scheduled just the week before) and how both kids were already overdue and could not afford to wait until August when cheerleading and fall baseball started (so it seemed they had to have it done ”now or never”), my dentist said “oh, well, you’ll never get an appointment with that little notice with [that oral surgeon who takes insurance].”

Plus, we already knew and liked this (nonparticipating) oral surgeon–we’ve been his patients for many years.  He’s got such a pleasant chairside manner for someone who’s putting you through torture…

And there you have it–back to my earlier point about why health care will always be unreasonably expensive.  I can’t shop for my family’s health care the way I love to comparison shop for other things.  There will always be people like me who are willing to pay unreasonably high prices for high quality (good and fast, and familiar) health care, even without the reality or awareness of third-party payments to hide the true prices.  And for the others who will not, or cannot, pay those unreasonably high prices– well, they just have to wait an unreasonable amount of time for an appointment.

Lots of attention on Fed Chairman Bernanke’s testimony today.  I don’t understand much about the mortgage market mess and how we’re trying to get out of it, because it’s more about financial vs. real economy stuff.  (Someone from the press tried to interview me about it yesterday before the AARP event, and I declined, admitting my ignorance.)

But I did understand the part where Chairman Bernanke explained that oil prices have risen because of good ol’ supply and demand:

…Our best judgment is that this surge in prices has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets.  Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil.  Moreover, growth has been concentrated in developing and emerging market economies, where energy consumption has been further stimulated by rapid industrialization and by government subsidies that hold down the price of energy faced by ultimate users.  

On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.  Much of the subdued supply response reflects inadequate investment and production shortfalls in politically volatile regions where large portions of the world’s oil reserves are located.  Additionally, many governments have been tightening their control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production.  Finally, sustainable rates of production in some of the more secure and accessible oil fields, such as those in the North Sea, have been declining.  In view of these factors, estimates of long-term oil supplies have been marked down in recent months.  Long-dated oil futures prices have risen along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come.

The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices.  The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions.  However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices.

Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices.  Certainly, investor interest in oil and other commodities has increased substantially of late.  However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell.  But in fact, available data on oil inventories show notable declines over the past year.  This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term.

And I found it interesting that in response to Bernanke’s testimony, the price of oil dropped today by a (second-largest) record amount, as Bernanke hinted that consumers were actually (what?!) responding to higher gasoline prices by purchasing less of it!–a supply-demand type lesson which apparently was news to at least some of those financial speculators!

Today’s New York Times poses this question in a nice article by Michael Cooper.  To which I say, isn’t it obvious?  I mean, have you been listening to him at the town hall meetings or being interviewed on CNN?  Or in the article itself, just pay attention to this McCain quote, which even seems milder than what he says lately:

[W]hen Mr. McCain first outlined his tax cut proposals shortly before the South Carolina primary in January, he highlighted his new enthusiasm for supply-side economics. “Don’t listen to this siren song about cutting taxes,” Mr. McCain said then. “Every time in history we have raised taxes it has cut revenues.”

But in the Cooper article, the best clue that McCain is indeed a “supply sider” now comes from this quote from Doug Holtz-Eakin, McCain’s economic advisor, that at least in my mind proves that even Doug, formerly known as the lonely deficit hawk among the rest of McCain’s advisors who are supply siders, is a supply sider now:

Deficit hawks believe that keeping the budget balanced will put downward pressure on interest rates, helping the economy. [I want to add that more importantly, we deficit hawks believe that reducing the deficit raises national saving and hence is good for longer-term economic growth.]  Many supply-siders believe that balancing the budget is a misguided goal, except to the extent that it shrinks government, which is a somewhat different goal. Supply-siders believe that lower taxes will spur economic growth, and that while lower taxes may lead to bigger deficits in the short term, they will eventually produce more revenue and lead to balanced budgets.

But one of Mr. McCain’s top economic advisers, Douglas Holtz-Eakin, who said on Monday that Mr. McCain’s “plan is to balance the budget by the end of his first term in 2013,” suggested that the two arguments are not incompatible. “You’ll never have successful deficit reduction,” he said, “without strong economic growth.”

Just because the McCain campaign says they plan to eliminate the deficit doesn’t make them deficit hawks, especially if the claim lacks credibility and is incompatible with the rest of their supply-side plans.  If Doug Holtz-Eakin sees any potential compatibility rather than incompatibility, his quote still reveals him to be (at least in his current incarnation) a supply sider more than a deficit hawk, through the causal relationship he describes:  strong economic growth reduces deficits.  How would I, a true “fiscal hawk,” put the compatibility differently?  This is what I would say:

“You’ll never have strong economic growth, without thoughtful deficit reduction” (EconomistMom says).

See the difference?

No time tonight to pour through the various media reports/blogs/interpretations of the McCain economic plan released today, but it doesn’t take long to go through the document itself (14 pages).  A few initial reactions, mostly from my fiscal-hawk perspective…

Even with the lack of specificity, it’s all too obvious that the plan offers far more ways of adding to the deficit than of trimming the deficit, in virtually every section of the report–including, most annoyingly, the fiscal responsibility section on pages 4-5.  Let me walk you through how I get to being so annoyed about that section…

First, there’s the gas tax holiday, proudly listed on page 2 with the validation of the press pointing out that they would have “immediate effect” and would “save motorists…taxes.”  (This reminds me of how the Bush Administration has repeatedly bragged about their tax cuts in the Economic Report of the President in terms of how much they have cost the Treasury, rather than what positive economic effects they’ve produced.)

Then there’s the “Lexington Project” (which unfortunately sounds like it could be related to the Concord Coalition, doesn’t it?…) for “energy independence” on pages 8-10, which is billed as a “comprehensive and integrated” strategy, yet instead seems to be a rather lopsided strategy of large subsidies to energy production and other subsidies (probably smaller) for consumption of cleaner technologies (i.e., policies that cost money), rather than a strategy based on policies that would discourage energy consumption (e.g., through a carbon tax that would raise revenue/reduce the deficit).

There’s the health care reform section on pages 11-12 that points out that “[w]ithin a decade, health spending will comprise twenty percent of our economy”–and yet offers no specifics and lists only vague options that sound largely focused on “waste, fraud, and abuse”-type savings, particularly in talking about the big programs of Medicare and Medicaid.  There’s one health policy mentioned that I think might actually be (or could be structured to be) a revenue raiser: the refundable tax credit for health insurance, on page 12–if it’s meant as a replacement to the current tax expenditure (the largest one in fact) for the exclusion of employer-provided health insurance.  (The McCain document doesn’t dare spell that out.) 

To me, the document doesn’t convince me that the McCain team has figured out how to “flat line” federal health spending as a share of GDP, which leads to my real peeve about the overall “plan” in terms of how it pitches its fiscal repsonsibility.  The most annoying passage is found in the so-called “Bi-partisan Fiscal Discipline” section on page 5 (my emphasis added):

Bi-partisan Fiscal Discipline: A McCain Administration will provide the leadership to achieve bipartisan spending restraint equivalent to that in the 1997 Balanced Budget Agreement between a GOP Congress and a Democratic President.

• In 1997, President Clinton and the GOP Congress agreed to balance the budget by restraining the growth in spending and cutting taxes over a ten-year period.
• With the same bipartisan effort today, with the federal budget that is now 70 percent larger, we could keep taxes low and still balance the budget by holding overall spending growth to 2.4 percent. Unlike Congress and the Executive branch in recent years, a McCain Administration will enforce the spending restraint to balance the budget and keep it balanced.
• A McCain Administration would perform a comprehensive review of all programs, projects and activities of the federal government, and then propose a plan to modernize, streamline, consolidate, reprioritize and, where needed, terminate individual programs. McCain could use the bi-partisan commission structure used for the Defense Base Realignment and Closure Commission (BRAC). Such a commission could be required to report to the President who would then submit the recommendations to the Congress for a straight up or down vote.
• A McCain Administration will review all special spending provisions to end subsidies to high-income individuals and corporations.

First, the Clinton Administration did not achieve fiscal discipline by restraining spending and “cutting taxes.”  The Clinton Administration made the tough choices (and earlier than 1997) to restrain spending and raise taxes in order to achieve meaningful deficit reduction through both the spending and revenues side of the budget. 

Second, how is it “bipartisan” to continue to take the hard line that all the fiscal restraint has to come from the spending side of the budget?  The basic budget math says that if you insist on keeping revenues as a share of GDP at its 40-year historical average (to “keep taxes low”), then “enforcing spending restraint” means you’re going to have to do even better than ”flat-lining” government spending as a share of GDP–and that’s with all that spending on health care we know we’ll be doing and have little clue about how to control.  (That 2.4% growth must be nominal?) 

(And by the way, a lot of the fiscal restraint achieved during the Clinton Administration can’t be repeated–we can’t end the cold war again, for example.  Plus, starting from the right policy foundation of fiscal discipline and the “virtuous cycle” that came from it, we also had at least a little good luck riding on some of that “irrational exuberance” that Greenspan used to talk about…  Again, not likely to be repeated.)

Third, in referring to those “special spending provisions” and “subsidies” to those high-income individuals and corporations, does the McCain team include tax expenditures–all the spending the federal government does through the tax side of the budget?  Somehow I doubt it, based on the language in the fiscal discipline section on “keeping taxes low,” and judging from the tax policy section of the plan (page 13) that doesn’t seem to include any plan to broaden the tax base but instead allows some tax rates to be kept Bush-Administration low and others to be made even lower.  In other words, the tax proposals don’t provide for revenue-neutral, efficiency-enhancing tax changes (the types of changes characteristic of fundamental tax reforms), only revenue-losing, deficit-increasing ones–i.e., a continuation of Bush Administration tax policy.

Yet curiously, nowhere in their economic document does the McCain campaign specifically mention ”permanent extension of the Bush tax cuts”–which we know to be a key part of their economic platform, at least as constantly explained to their “base,” if not spelled out to the general public here (wink wink).   Could it be that they don’t want to call attention to the fact that the “meat” of the McCain economic plan, when you get past the fluff (distractions?) of the waste, fraud, and abuse-type spending cuts (that don’t amount to “beans”), is really just continuing the Bush tax cuts?

There’s now a list of economists who endorse the McCain economic plan up on the Jobs for America website–including at least a couple whom I greatly respect.  I would love for any of them to explain to me how they believe this plan realistically, and wisely, would eliminate the budget deficit in four years, and how any of them who might be less than thrilled with the Bush Administration’s record on fiscal policy can read between the lines (and fluff) of this McCain plan and see anything substantially different.

Thanks to that NYTimes op-ed that Brooks had pointed out to me (mentioned in this post), I ordered the authors’ book from Amazon a few days ago, along with a couple other books, all focusing on various perspectives on how our brain works–the good, the bad, and the quirky.  The books arrived yesterday, and just skimming through them, they look like they’re so interesting and fun that I might actually have a prayer of reading them (unlike this one), and I’m sure they’ll inspire many new posts here at EconomistMom.com, as I try to relate their lessons to my everyday life as well as to fiscal policy.

Have any of you out there read any of these books, and if so, would you care to share your thoughts on them?

Predictably Irrational: The Hidden Forces That Shape Our Decisions [Roughcut] [Hardcover]
By: Dan Ariely (Author)

Spark: The Revolutionary New Science of Exercise and the Brain [Hardcover]
By: John J. Ratey (Author), Eric Hagerman (Contributor) 

Welcome to Your Brain: Why You Lose Your Car Keys but Never Forget How to Drive and Other Puzzles of Everyday Life [Hardcover]
By: Sandra Aamodt (Author), Sam Wang (Author)

That last one is the book mentioned in the NYTimes op-ed–the reason I went looking on Amazon.com in the first place (it was the subtitle about losing ones car keys that sold me).  The first one (”Predictably Irrational”) I was drawn to buy because it seems to more specifically focus on economic decisions through the perspective of “behavioral economics”–a field I was first drawn to many years ago in graduate school as a small part of a financial economics course (“prospect theory”).  The “Spark” book says physical exercise is great not just for your physical health but for your psychological health as well–yet another reason why we should make physical fitness, as a form of preventative health care, a larger component of our overall national health care strategy.

Fun, fun, fun!!!

For a few weeks now, I’ve been meaning to write about CBO’s recent work on controlling health care costs, and this morning it was an article in the New York Times by Gina Kolata and Andrew Pollack (I think to appear in the Sunday paper) that reminded me.

CBO Director Peter Orszag has recently testified on the problem of rising health costs and the best policy strategies for pushing back on that trend (or as Peter puts it, “bending the growth curve”).  On his Director’s blog he summarized that (my emphasis added): 

• The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs, caused largely by rising health care costs per beneficiary.
• The significant geographic variation in per capita health care spending across the United States suggests substantial inefficiencies in health care today and an opportunity for reducing health costs without adversely affecting health outcomes.
• These inefficiencies are perpetuated, in part, by a lack of clarity as to what insurance costs and who ultimately pays those costs– especially with regard to employer-provided health insurance.
• Providing more information on the “comparative effectiveness” of alternative medical treatments, and changing financial incentives that encourage providers to engage in expensive treatments and procedures may help shift professional norms to improve efficiency and restrain cost growth.
• Increased transparency with regard to specific medical services may not lead to reduced health care expenditures, however, because consumers generally don’t make independent decisions about what services to purchase from whom, particularly in an emergency. In addition, many health care markets are relatively concentrated, and in those settings, increased price transparency may lead to higher, rather than lower, prices for specific services by facilitating collusion among providers.

I would add that even without the third-party payment problem (which obscures the true cost of health care from the suppliers and demanders of that health care), and even when consumers are making their own, “independent decisions” about their health care purchases based on really good, objective information on the benefits and costs of various forms of health care, there would remain a big reason why demand for certain types of health care, and hence the market prices for such care, would be irrationally high.  That is that people cannot dispassionately, objectively, make rational economic choices–weighing costs against benefits–when it comes to life-and-death decisions.

I think that a family making decisions about health care spending, particularly end-of-life health care spending, is a lot like a parent making decisions about spending money on their children towards activities that might be considered “investments” in their kids (music lessons, sports training, braces, SAT prep classes, etc.).  Instead of following economic theory and consuming the amounts of these goods and services that equate marginal benefit to marginal cost (thereby maximizing net benefit), parents tend to go through the following calculus… Question 1:  Is there any reason to believe there’s any chance of some positive benefit to this activity, however small or uncertain–i.e., is MB>0?  Question 2:  Can I somehow afford it–i.e., does buying it fit in my budget constraint?…

To think any other way than this “irrational” way–i.e., to think more “rationally” like an economist, comparing (equating) the marginal benefit to the marginal cost (stopping oneself from consuming any more of these services once the benefit seemed low relative to the cost), would seem immoral–or at best a big time shirking of parental duty.  Because if you are a parent, you want to feel like you’ve done everything you could have to give your kids the best life possible; you don’t want to think that your being “cheap” caused your child’s life to end up falling just short of their “potential.”  (I have done a lot of informal polling on this issue with many fellow parents, including usually-rational economist parents, so I know this phenomenon to be true.) 

The New York Times article highlights this phenomenon as it applies to health care spending (more specifically the demand for prescription drugs), in its story on the costly cancer drug, Avastin.  Here are some relevant passages:

If Avastin were inexpensive or if it cured cancer or even held it at bay, as the drug Gleevec does for blood cancer, few might care. But like a half-dozen or so new biotechnology drugs with a similar combination — alluring promise, high price and only arguable benefits — Avastin raises troubling questions:

What does it mean to say an expensive drug works? Is slowing the growth of tumors enough if life is not significantly prolonged or improved? How much evidence must there be before billions of dollars are spent on a drug? Who decides? When, if ever, should cost come into the equation?

For a patient like Ms. Reeh, fighting for her life, the cost is not the main concern. If her insurer did not pay, she said, she would go into debt, find a way to raise the money.

But some in the pharmaceutical industry worry that such prices will raise concerns about whether the drugs are worth it, leading to a backlash like price controls or restrictions on use.

Roy Vagelos, a former chief executive of Merck who is considered an elder statesman of the industry, said in a recent speech that he was troubled by a drug, which he would not name but which was a clear reference to Avastin, that costs $50,000 a year and adds four months of life. “There is a shocking disparity between value and price,” he said, “and it’s not sustainable.”

…

The problem is largely one of cost.

…

The drug’s price, as charged by Genentech, can be $4,000 to more than $9,000 a month, depending on a patient’s weight and the type of cancer. Avastin’s cost to patients and insurers can be much higher, though, because doctors and hospitals buy the drug and then sell it to patients or their insurers, often marking up the price. So the $2.3 billion that Genentech recorded in sales of Avastin represents only part of what Americans spent on the drug last year.

… 

Medicare requires that the doctor or hospital buying Avastin be paid an amount equal to Genentech’s average selling price plus a markup of 5 to 6 percent. Of that amount, Medicare pays 80 percent and the patient pays 20 percent. Doctors and hospitals typically do not make much money on Avastin for Medicare patients, and can even lose money if they buy the drug at a price that is higher than average. But patients can end up paying thousands of dollars a month. Some have supplemental insurance to take care of it; others do not.

…

Other countries have different views about whether Avastin is worth its price. An institute that advises the British government on which drugs to pay for recommended against it, saying that the drug was not cost effective based on its cost per year of life extended.

In the United States, Genentech argues that it puts patients first, with free drugs for those who have no way to pay for them and donations to charities that can help with payments. It also capped the price for a year’s supply of Avastin at $55,000 (not counting markups by doctors and hospitals) for patients with incomes of less than $100,000 a year.

But progress against cancer has a price, the company says.

“The quest is to eliminate the disease,” Arthur D. Levinson, Genentech’s chief executive, said at an annual investor meeting. “And, yes, there is going to be a cost to that.”

…

Dr. Winer says that when he is not sitting in front of a patient, he thinks about whether drugs like Avastin are worth it to society. But when facing a seriously ill patient, who, based on clinical trial results, might benefit — even if only a little — from Avastin along with chemotherapy, he has to think about his patient’s needs.

“I can’t say, ‘Let’s not use Avastin; it’s a very expensive drug and I am worried about the cost to society,’ ” Dr. Winer said.

And so, Dr. Winer said, the answer you get when you ask whether drugs like Avastin are worth it very much depends on whom you ask.

“A person who hasn’t been affected by cancer will say, ‘Gee, why should we pay for an expensive treatment that doesn’t extend life when we have other needs?’ ” Dr. Winer said.

A person like Ms. Reeh will have a different response. She does not want to give up Avastin.

…

Ms. Reeh says she knows her cancer may very well kill her eventually. But what is it worth to feel better again?

“It’s really about living and not waiting to die,” she said.

And what if 5 percent of Avastin patients live a lot longer than they would have without the drug?

“I might be in that 5 percent,” she said.

The other way to think of our irrational consumption when it comes to our health care and our children might be that we do think about equating marginal benefit to marginal cost, but the marginal benefit of these things is perceived as close to infinite–whether it’s because when you have very few days left, each day is worth so much more (take any positive number and divide by a number that approaches zero), or because when you’re spending on your children you feel as if you’re effectively facing an “infinite horizon.”

In any case, there’s plenty of reason to believe that even without markets distorted by third-party payments or government subsidies, there would be plenty of people in the free marketplace who would have virtually unlimited demand for such services (and the means to afford it), so there’s plenty of reason to believe that things like cancer drugs and SAT prep tutoring will remain very expensive.