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Yesterday’s Washington Post contained an interesting “Department of Human Behavior” column by Shankar Vedantam, called “When Play Becomes Work.”  It points to yet another unfortunate feature of “growing up” (and getting old):  that as grownups we start to expect to be paid for any exertion of effort, which can sap our internal motivation when the effort is no longer “just for fun” but instead is primarily for financial reward.  Shankar explains the scientific evidence behind the (perverse-to-economists) theory that suggests at least some of us might work “harder” if we were actually paid less:

Psychologists have long been interested in what happens when people’s internal drives are replaced by external motivations. A host of experiments have shown that when threats and rewards enter the picture, they tend to destroy the inner drives. Paychecks and pink slips might be powerful reasons to get out of bed each day, but they turn out to be surprisingly ineffective — and even counterproductive — in getting people to perform at their best.

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

…

Beliefs about the utility of rewards and punishments in motivating human behavior are deeply ingrained, and most people don’t know that more than 100 research studies have shown that motivating people in this manner can have the unintentional effect of undermining their internal drives.

The striking thing about the research, said Roland Benabou, an economist at the Woodrow Wilson School of Public and International Affairs at Princeton University, is that it is so starkly at odds with bedrock economic principles.

“A central tenet of economics is that individuals respond to incentives,” Benabou noted in one research study. “For psychologists and sociologists, in contrast, rewards and punishments are often counterproductive, because they undermine intrinsic motivation.”

This pure, potentially adverse psychological effect of making rewards “too financial” in nature definitely is something new for economists to consider, as “starkly at odds” with what we are taught in our microeconomic theory courses.  (In economist’s lingo, it offers the rather startling possibility that the wage rate doesn’t just affect our budget constraint, but our utility function as well.  It sounds a bit like a case where the free market can transform us into “monsters”–or at least lazy “Pavlovian” humans.) 

But don’t get us economists wrong–we already understand that people get “utility” from (value) things other than what money can buy (yes, really).  When it comes to what people choose to do for a “living”, most people at least implicitly weigh the costs (pecuniary or not) versus the benefits (pecuniary or not) of accepting certain employment and do not just go work for the highest bidder.  (I’d even like to think that not everyone who earns gobs of money is doing it just for the money–and hence won’t be subject to the bad psychological transformation–but simply enjoys the good fortune of getting paid so much for doing what they would be willing to do for much less.)  It’s the economist’s concept of “compensating differential” that tells us that we often choose a job with lower pay but higher “quality of worklife” (assuming we can’t find that job with both higher pay and higher quality of worklife, that is). 

(Tip to employers:  don’t go throwing this “compensating differential” term around when trying to sell a potential employee on your lower-pay-but-higher-quality position you’ve offered him (unless the potential employee is a US-trained labor economist), lest you be misunderstood as offering to match the higher salary some other employer has offered him…. This advice is based on a true experience of my husband.)

Working mothers (UPDATE:  ok, maybe some working fathers, too), especially, understand the concept of “compensating differential” and often make the conscious tradeoff of accepting a lower salary for greater flexibilty and quality of (work and home) life.  (In fact, I just made that tradeoff in leaving Capitol Hill for the Concord Coalition.)  Because we have responsibilities to our families, it’s not simply a case of ”do what you love, and the money will follow” (which would say “don’t worry about how much you’ll get paid”)–but instead “can I afford to do what I love?” (which says “I want to do what I love, but I need to be able to pay the bills”).  In EconomistMom terms, the “income effect” of how high or low are the wages we command probably matters as much or more than the incentive (or “substitution”) effect, in terms of the positions we choose to accept, the tradeoff between the higher and lower paying jobs we’re willing to make.  The “price” of a higher-quality-but-lower-wage job is the differential between that lower wage and our higher wage alternatives (so the smaller the difference, the more attractive the lower-wage job), but the better quality job is a “luxury” good that we are better able to afford and more likely to choose the higher our overall household income (including our own (lower) wages).  And just like luxury goods, sometimes people see a higher price as a signal of higher quality (whether real or not), so that a higher price can sometimes create more demand, not less, for the product–or in this case, for the lower-wage job.  So both the incentive effects and income effects suggest that a higher wage offered on the higher-quality-but-(still) lower-wage job would make one more likely to choose such employment.

Once we’ve placed ourselves somewhere on the high wage vs. high quality employment possibilities frontier (chosen our job), the level of wages one receives on the job can matter as well for how “hard” we work at the job.  Whether the job is high paying or low paying, there’s a positive correlation between wages and effort.  If we’re ever cognizant of the fact that we’re earning less than our full market potential, then our wage rate can still matter for our on-the-job morale (”is that all I’m worth to them?”), and we might take advantage of opportunities to boost our ”effective wage” by effectively working fewer hours, for example, or by expending less effective effort by, for example, babysitting one’s son at the office.  (Not that I’d ever do that here at Concord…) 

That some people in fact choose their employment based on the “do what you love (as long as you can afford it)” model might in fact comfort employers who cannot afford but lower wages, but who want to know they’re recruiting a committed workforce.  It’s great from both the employer’s and employee’s perspectives if it’s true that the employee has so much passion about their work that they’d be willing to do their job for free or at least a lot less money–i.e., that the work feels like play.  …Well, as long as the boss doesn’t take you up on it. 

Not my “allowance trust fund” daughter, but my Baskin-Robbins daughter–as Virginia “observes” the federal minimum wage, which went up yesterday from $5.85/hour to $6.55/hour.  With the 15-20 hours/week she works, that’s at most $14 extra/week, which is still nothing in terms of the “true value” our family places on her B-R employment from getting that family discount on the ice cream…and even the occasional flubbed-up ice cream cake we get for free!  Which goes to show you that sometimes the biggest work incentive effects–perverse or otherwise–are unrelated to the wage rate. 

(By the way, that’s not my daughter in the costume, but she’d definitely wear one of those if they boosted her wage rate another 70 cents or just hired more fun people to wear such costumes with her.)

UPDATE:  That’s my daughter, Allie, in comment #3 and the photo below (…wow! she’s making good money this week…the $400 is her guess for two weeks work)… She’s the one in the middle here:

OK, so continuing where I left off on the “Obama’s Net Tax Cut” post last night, here are some observations on the level of federal spending that Senator McCain and Senator Obama are (at least implicitly) proposing–as implied by what we know about their tax plans (via Tax Policy Center estimates) and their deficit targets (via the words of the candidates’ advisors).

From the CBO baseline, take outlays as a share of GDP in fiscal year 2013:  19.5% ($3.53 trillion; GDP is projected at $18.077 trillion).

From the same CBO baseline document, see the table on “the budgetary effects of selected policy alternatives not included in CBO’s baseline” (on pages 9-10 of the pdf file); this is the update of the usual “table 1-5″ in CBO’s January report.  From that table, add some more war spending ($25 billion in 2013) and a more realistic assumption about the growth of discretionary spending ($135 billion in 2013) to get a more realistic projection of outlays in 2013 of ($3.53 trillion + $160 billion = $3.69 trillion, which is):  20.4% of GDP.

McCain’s revenues in 2013, according to the Tax Policy Center estimates:  17.4% of GDP.  McCain’s claim for the 2013 budget deficit under a McCain Administration:  0.0%.  So, the implicit level of outlays in 2013, under a McCain Administration:  17.4% of GDP–or a cut from the realistic path worth 3.0% of GDP ($542 billion, or a 14.7% cut from the realistic level of outlays under current policy extended). 

Note that not only is 17.4% way below both the current and the 40-year historical average of federal outlays of about 20 1/2% of GDP, but in fact, it’s so low that over the past 40 years shown in CBO historical tables we have never had a single instance of such low federal spending.  (The lowest in 40 years was 18.4% in fiscal year 2000 and 18.5% in FY2001–i.e., at the end of the Clinton Administration.)  So I had to look to the historical tables in the FY2009 budget to find that the last time outlays were below 17.4% was in 1965 (at 17.2%).  Back then revenues were a lot lower as well, by the way–at only 17.0% of GDP–but still the gap (deficit) that year was only 0.2% of GDP.

Is a 3% of GDP cut in government spending below a “realistic baseline” realistic?  Of course, I think not, but that presumes that with an aging population and rising health care costs, as a society we wouldn’t be so cold hearted as to “cut the old people off” (…you’d think, especially if the President is one of those people).  But, paraphrasing Doug Holtz-Eakin who yesterday mentioned the two reactions he gets to the McCain balanced-budget-in-2013 claim:  (i) skepticism, and (ii) fear, he warned: “look out.”  (You can go back to the audio to get his exact words… **UPDATE:  looking back at my notes, what Doug said was that the “horrified folks better get ready.”)

In contrast, the Obama campaign’s decision to have a much less ambitious deficit reduction plan affords them a more realistic path for federal spending, at least as implied by the estimates of their tax proposals: 

Obama’s revenues in 2013, according to the TPC estimates:  18.2% of GDP.  Obama’s claim for the 2013 budget deficit under an Obama Administration:  if we interpret Austan Goolsbee’s remarks yesterday as suggesting a $400 billion deficit, that’s 2.2% of GDP.  If we take the Financial Times’ interpretation of a 2.5% of GDP deficit, that’s a $450 billion deficit.  So, the implicit level of outlays in 2013, under an Obama Administration:  somewhere in the 20.4-20.7% of GDP range (that’s 18.2% plus 2.2 to 2.5%).   Note that (coincidentally?) this is just about or slightly higher than where the realistic outlays projection takes us.

So, while Senator Obama is probably proposing a small net tax increase relative to a “policy extended” baseline, Senator McCain is clearly proposing a huge net spending decrease relative to any baseline.  It’s a very stark difference in the candidates’ visions of the future role of government–and a very stark choice we voters have before us.

I attended a Tax Policy Center event today (audio recording available at that link) which featured Obama economic advisor, Austan Goolsbee and McCain economic advisor, Doug Holtz-Eakin, and at which Len Burman, director of the nonpartisan Tax Policy Center, unveiled the TPC’s latest analysis of the candidates’ tax plans.  Bob Reischauer, president of the Urban Institute and former director of CBO (another former boss of mine!), moderated.

Apart from showing slightly lower revenues (larger tax cuts) under the plans of both candidates, the updated TPC analysis is not much different from their earlier version released in June, which I have discussed previously here (the qualitative jist of that still applies).  The only more specific thing I learned at this event came when I was called on to ask the last question of the event (thanks, Bob), and I got Austan to more specifically discuss where the Obama campaign estimated the budget deficit would be in 2013 under an Obama Administration.  I interpreted his response to suggest an answer of around $400-$450 billion (or something smaller than the current fiscal year deficit, in nominal dollar terms), but you can listen and see how you interpret it. 

(Here’s a Financial Times story on the candidates’ deficit reduction plans, by reporter Krishna Guha who attended today’s event…note that $400 bil is about 2 1/4% of an $18 trillion 2013 economy, $450 bil is about 2 1/2% as cited in the article.)

But the question I found most interesting today was one that Doug asked Austan, because it was the second event where I heard Doug question a claim of the Obama campaign regarding their tax plans, and the second time I thought the Obama advisor’s response was less than crystal clear.   (The first event was that AARP event I spoke at, where the Obama advisor was Jeff Liebman.)  Doug questioned the Obama campaign’s claim that the Obama economic plans represent a “net tax cut”–that is, a reduction in total federal revenues collected.  Austan insisted that yes, the Obama tax plan is a net tax cut, and I think he said when you count the health care subsidies (the targeted, refundable tax credits to low-income families for health insurance), which I believe the TPC included in their estimates.  So just based on the TPC estimates, I want to take a crack at answering Doug’s question:  Is Obama really proposing a “net tax cut”?

The preface to the answer is another question–a “net tax cut” relative to what?  Because here is another case where the “baseline” matters, because of the bizarre specification of current tax law, with an ever-growing Alternative Minimum Tax and the Bush tax cuts expiring at the end of 2010, that makes the path of current law very different from the path of current policy extended (the Bush tax cuts and AMT relief going on forever).

So, for taxpayers as a whole, the answer is “yes” compared with current tax law.  TPC’s Table R3 shows that under current tax law (Bush tax cuts expiring), revenues as a share of GDP are 19.9% in 2013 and 19.8% over the next ten years (2009-2018).  Under Obama’s tax proposals, revenues as a share of GDP are just 18.2% in 2013 and 18.3% over ten years.  (Coincidentally, this is about or slightly below the famous 40-year historical average of revenues as a share of GDP.)

But the answer is “no” compared with current policy extended.  The same Table R3 shows that under permanent Bush tax cuts and permanently extended AMT relief, revenues as a share of GDP are 18.0% in 2013 and 18.2% over the next ten years.  So at 18.2% and 18.3% of GDP for 2013 and ten-year revenue levels respectively, Obama’s tax proposals produce a small net tax increase relative to current policy extended.

Now, it’s certainly true that under the Obama tax proposals, most households (all but those in the top 20%) would enjoy a tax cut compared to either baseline, so for most households individually, the answer is “yes”–President Obama would give them a net tax cut.  (For example, the average tax cut received by a household in the middle 20% of the income distribution is $2,132 compared with current law (see Table 2), and $970 compared with current policy extended (see Table 3).)  But for the richest of households (those with incomes in the top 1% or above around $600,000), the answer is clearly “no”–President Obama would raise taxes signficantly on these households, whether compared to current law or to current policy.  (For example, a top 1% household would pay $38,419 more in taxes compared with current tax law (Table 2), but $133,383 more compared with current policy extended (Table 3).)

Doug, does that help?

Later I’ll get to the kind of spending discipline implied by combining these TPC revenue estimates with the stated 2013 deficit targets of the candidates (those zero and $400 billion targets we heard about today). 

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!