What Should Government Do?

What Should Government Do?

On the Fox News Channel the 6 pm – 7 pm show is “Special Report with Bret Baier.”  The last twenty minutes or so is a roundtable discussion called the “Fox All-Stars.”.   It has four individuals including Mr. Baier as moderator.  On a show in May the discussants were Tucker Carlson, Kirsten  Powers, and Charles Krauthammer.  Mr. Carlson made an observation about the proper role of government in our lives.  His position, as I recollect, was that it should be reduced because it is philosophically wrong to say nothing of its abysmal track record.  Ms. Powers disagreed, believing that government can be a force for good.  They went back and forth on this issue for a few minutes.

It got me thinking about the proper role of government and  at which level: local, state, or federal;  any such activity should take place.  My belief, similar to Mr. Carlson’s, is that the influence and intrusiveness of government in our lives should be drastically reduced.  The incentives facing government employees are to expand its sphere of influence.  They need to have people in distress, the more the better.  This translates into bigger budgets and more control.  On the other hand, private charities engage in a form of triage.  They rank order those in need so that resources tend to go to those in the most dire straits.  They do this because their resources are limited; simply put,  they can’t print money.  In order to induce people to contribute they must show that the funds are well spent.  At the same time, their approach causes the  demands on them to be smaller than those on government agencies because they “size up”, if you will, those who request help.  Government agencies are notoriously lax in doing so.  A pulse is usually all that is required, sometimes that isn’t even necessary.  Today, there are close to eleven million people on disability in this country, even as the economy becomes more service-oriented and manufacturing has become safer.  Would these same people who have no qualms about taking funds from the ‘government’ be as likely to take money from their fellow citizens if they had to get it via the Red Cross, the Salvation Army, Catholic Charities, etc.?  I doubt it.

Even if one believes that government should do many of the activities it does the question arises as to which level of government should do it. Again, it is my belief that as much as possible should be done at the local level.  Welfare reform in the mid-1990s resulted in major programs being transferred to the states.  By all accounts this reform of the welfare system was a resounding success.   On the other hand we have the spectacle of FEMA and not just Katrina’s debacle.  If a tropical storm trashes beach houses built in areas that are susceptible to storms like coastal beaches, FEMA will rebuild homes in the same spot as they went down.   There are instances of houses being rebuilt at taxpayer expense multiple times.  Why should someone from Montana or the Upper Peninsula of Michigan which get snow storms and manage to take care of themselves subsidize this behavior?    Does anyone think that a program overseen and funded locally would be as generous as a federal government bureaucrat is in enabling that sort of behavior?  Of course not.  They are close to the scene and recognize risky behavior.  Folks at the federal level don’t have the same incentive because it isn’t their money in any meaningful sense.  As Milton Friedman has pointed out: I would spend your money on a third party with minimal regard for the results.

While doing things at the state level are superior to doing them at the federal level, it still leaves much to be desired.   I live in Western NY.  The politicians in Albany are predominantly from the New York City area since the bulk of the state’s population lives there.  Policies enacted in Albany are standardized for application across the State.  Seems reasonable, however, in practice this means one size has to fit all.  Needless to say, this can lead to serious waste as officials follow the playbook irrespective of the logic of doing so.  They don’t have the flexibility of adapting to local circumstances.

We, also, have the spectacle of state officials around the country signing up people for food stamps because they view that as a way to bring federal funds into their state.  The long-run implications of making people less independent seems to be irrelevant to them.  It is doubtful that this would occur if the funds were taken solely from one group of residents in the state to hand over to another.  Or, even better, from citizens of the same county to others in the county.   Again, local agencies and, especially, private ones are much more cognizant of the harm that will be done by subsidizing people , making them dependent on handouts, to say nothing of the disincentives they are creating for those taxed to continue producing at the same rate.

As a taxpayer, one has little real influence on how tax dollars are spent doing “good”.  On the other hand, if one doesn’t like the way a certain charity is spending the funds entrusted to them, it is very easy to stop supporting them.  They know this and, invariably, spend their funds as judiciously as possible.  If they don’t their reputation will be tarnished and contributions will dry up.  Private institutions more closely reflect the values of the community they serve.  Funds will be spent most wisely.  The only thing one can say about government programs is that they will spend lots and lots of money, with outsized portions on overhead.  Because of that one can be sure the government programs will be wasteful in the extreme when compared to a private sector provider.

Cycling back to Ms. Powers’ view, while we can see the “fruits” of government spending that doesn’t tell the whole story.  Five or six years ago the Congress was embarrassed into not funding the so-called “bridge to nowhere.”  This was a very expensive bridge to an island in Alaska that was home to a few hundred people (who had made the decision to live there knowing it didn’t have bridge.)  If the bridge had been built people would have admired the engineering prowess involved.  They wouldn’t have stopped to think about all the things that weren’t built which represent the true cost of the bridge.  Government officials loves to build things because they can put plaques with their names on it.  I believe the only plaque on any government building that isn’t dedicated to the members of our armed forces should read: paid for by the taxpayers.

In the final analysis the only reason to do something through government is that it can do it less expensively than the private sector. On this basis, government’s role in our lives would be reduced dramatically.  As it should, in my opinion.

Gun Control: Be Careful of What You Wish for (with an update).

Wilson, NY, is a rural community located on the southern shore of Lake Ontario about 70 miles west of Rochester and 12 miles east of the Niagara River.  It was the scene of a tragedy on July 24, 2012.  A home blew up and was totally destroyed.  It looked as if a tornado had come through.  It hadn’t.  The cause was a propane leak.  The 14-year old daughter of the owners died.

What does this have to do with gun control you may ask; a lot, actually.  Some of the worst incidents: the April 20, 1999, Columbine, CO, shooting which left 13 dead and the July 20, 2012, Aurora, CO, which left 12 dead, in particular; were done by individuals who were bound and determined to cause as much carnage as they could.

At Columbine, Eric Harris and Dylan Klebold used a TEC pistol, a shotgun, 99 explosives, and 4 knives.  One of their weapons was a propane tank that had nails taped to it.  Fortunately, it didn’t function as planned and didn’t explode.   As I pointed out above, propane can create quite an explosion.  From Harris’ writings it was clear he intended to kill and maim as many as he could.  If had been unable to get hold of the pistol and the shotgun he would have devoted more effort to ensuring that the propane alternative worked.  In the school cafeteria where the shootings took place the death toll would have been much greater if the propane tank had exploded.  While no one, least of all me, wants minimize the loss of life caused by these disturbed individuals, it is fortunate that they had obtained the pistol and the shotgun: these are lousy ways to kill lots of people.  Propane tanks are far more deadly.

In Aurora, the alleged perpetrator used tear gas to cause confusion.  He had also booby-trapped his apartment.  The apartment held more than 30 homemade grenades, wired to a control box in the kitchen, and 10 gallons of gasoline. The bombs themselves weren’t sophisticated but the layout was.  Ten gallons of gasoline exploding in the apartment would have brought the whole building down with a consequent loss of innocent life.  Here, again, we find an individual who was determined to kill and maim as many as possible.  He used a rifle with a 100 round magazine.  It jammed, fortunately. He wasn’t aware that those drums are really designed so you don’t have to reload as often when shooting at a rifle range.  Attempts to fire rapidly cause them to jam.  The intricate trap set in his apartment is clear evidence that he would have opted for explosives if he couldn’t have obtained a rifle.

If we go back in time to May 18, 1927, we can see the slaughter caused by explosives.  A Mr. Andrew Kehoe was annoyed about rising property taxes (join the club!) and his deteriorating financial position.  First, he blew up his farmhouse, then turning his attention to the local school he detonated dynamite and hundreds of pounds of pyrotol, an incendiary explosive used by farmers at the time, which he had secretly planted inside over a period of time.  Thirty-eight people were killed, mostly children, in this blast.  As people rushed to the school, Kehoe came in his car which he had filled with scrap metal, shrapnel, and detonated a bomb that was inside his vehicle, killing himself and others. During rescue efforts searchers discovered an additional 500 pounds of unexploded dynamite and pyrotol planted throughout the basement of the school’s other wing.

My point is that more onerous gun control laws will not stop the carnage.  Ninety-nine plus percent of gun owners are law-abiding who would never consider doing anything like these acts.  They are outraged by them.  People intent on doing these types of abominable acts, though, will find a way to do them.  Guns have been around for hundreds of years.  They were made mainly by hand up until the mid-1800s.  Any tool and die maker worth his salt can make one in a garage shop.  Gun control laws, then, will only impact those who would never use who would never use them irresponsibly in the first place.

Let’s assume we do enforce draconian gun control measures, then what.  There will still be individuals who have some perceived gripe against society.  They will find a way to “get even” as we can see by the Columbine killers’ diaries or the actions of Mr. Kehoe in Bath.  What then? Are we going to outlaw gasoline or propane next?

Earlier this year an individual bought a knife in a store in Salt Lake City and started stabbing people.  A bystander who had a concealed carry permit witnessed the attacks.  He drew his pistol and challenged the knife-wielder who decided bringing a knife to a gun fight wasn’t a winning proposition.  He was arrested.  Are we going to outlaw steak knives, too?  How about cars?  They have been used before and probably will be used again to mow down people the driver has a grudge against. Where will it stop?

We have learned that Harris and Klebold had been rather explicit about their intentions and attitudes on their website.  The authorities were knowledgeable about the increasingly deranged and deadly postings.  Nothing was done.  On January 8, 2011, U.S. Rep. Gabby Giffords was shot and injured while six people were killed by Jared Loughner.  It is clear that Loughner had serious mental problems but the authorities did nothing.  James Holmes, the alleged Aurora killer, also has serious psychiatric issues.  The common thread is that we, society as a whole, have made it extremely difficult for mental health professionals to inform authorities of their concerns without violating the rights of their patients.  The threshold for committing someone to a psychiatric hospital is quite high these days.  We believe that this is a good thing; we don’t want unscrupulous individuals getting rivals incarcerated just to be rid of them.  This stance, though, has a cost.  Every so often someone will commit a heinous act.  There needs to be a mechanism whereby a medical professional can relate their concerns to the proper authorities similar to getting a warrant.

Today, we have NYC’s mayor, Michael Bloomberg, the representative from the nanny state, posturing for more gun control laws.  NY senator Charles Schumer, never one to pass up any TV exposure, wants more laws.  Layering on more ineffectual gun control laws by preening politicians who are urged on by sanctimonious, self-righteous, and ignorant editorial page writers and even less-informed letters-to-the-editor writers will not make a dent in the problem, much less solve it.  There will always be evil people.  Don’t disarm the good people thinking it will make a bit of difference, it won’t.  If the laws are passed, what do you tell the families of future victims, as there assuredly will be,  after it is clear that the laws did nothing.  Rest assured, a sense of complacency will set in with people thinking  “now we are safe.”  Why?  Because the government said so.  Oh, Gertrude!.  More competent regulations in the treatment and control, if you will, of the mentally  disturbed need to be enacted regardless of whether or not they offend the ACLU?  Results matter, not sophomoric symbolism.

Update 8/7/12

Sunday we awoke to the news that a white supremacist had killed six people at a Sikh temple.  The shooter who was killed by a police officer was a member of a neo-nazi rock band.  Described as a “frustrated neo-Nazi,” Page started a “racist white-power” band called  End Apathy in 2005, according to the Montgomery, Alabama-based Southern Poverty Law Center, SPLC.  It said it had been tracking Page for a decade.

Of course, we also witnessed NYC mayor Michael Bloomberg frothing at the mouth, demanding more gun control.   (There have also been reports of killings and maiming with knives but we don’t hear calls to ban knives.)

These killings are a tragedy.  Before we succumb to the mayor’s vision of a more perfect world, though, we need to reflect on the implications.

Drugs are illegal and have been for 75 or more years.  The result has been to spawn a thriving illegal business in importing them and manufacturing them illicitly.  Turf wars between drug dealers account for most of the shootings in America.  When alcohol was illegal in the 1920s the results were similar.

Today, the U.S. has no problem with contraband guns entering the country or the illegal manufacture of them here.  Does any sentient person believe that we could stop the flow of guns if it became lucrative for the bad guys to do so?  Of course not.  We can’t stop the flow of illegal aliens into the U.S.   Guns, especially handguns, can be disassembled and brought over piecemeal and reassembled here.  The costs of trying to interdict this would blow even bigger holes in our budget.  As noted above, any tool & die maker can make guns in his garage.

There is an alternative.  Encourage more people to obtain concealed carry permits.  Most of the thugs who are killing people would think twice if there was the possibility that a potential victim would shoot back.  John Lott’s book, “More Guns, Less Crime, 3rd ed.” documents this.  The police can’t protect us all of the time, in fact, they can’t protect us very much, at all.  It’s not their fault; it is just reality. By making more people able to defend themselves, we are  increasing the amount of effective security.

Again, we need to think before we jump onto the “more gun control” bandwagon.  It will make things worse.

Posted by Jim

Whither Oil Prices?

Every time there is an oil price spike as there is today, two things happen. First, various government agencies launch investigations to see if there has been something nefarious going on.  Second, despite the clamor for more drilling in the US, it is said that doing so won’t affect oil prices today.  This is always used as the argument to allow the rabid environmentalists to continue to keep the most likely places to find oil off limits.  The first is a silly waste of time.  Not once has manipulation of the markets been discovered.  The second deserves closer scrutiny, though.

Let’s say that is autumn and the wheat crop is in for the year.  You have bought it all up with the intent of releasing it into the market in such a manner as to maximize your profits.  With interest rates being positive the most will be released in the first month and the least in the final month before the next harvest.  (I’m assuming that there isn’t any seasonal variation in the consumption of wheat.  If there was the amounts would be adjusted accordingly.  Ignoring it doesn’t change the qualitative results, though.)  But now something terrible happens.  The Argentine and Australian wheat harvests are expected to their best ever.  They will have sufficient quantities to sell into the US market.  This wheat will come onto the US market in six months.

Clearly, you won’t be able to sell the wheat you had planned to sell in months 7 – 12 for as much as you had planned.  What to do?  Being rational, you will want to increase the quantities you sell in the first six months, even though it will result in a lower price.  You will do this because it will enable you to maximize your profits (which will now be lower than they had been expected to be before the bumper crops elsewhere) under the new price-quantity combinations that are expected to prevail.  Note that while the Argentine and Australian crops haven’t arrived yet the implications of their impact on prices have been factored into the plans of the holder of the US wheat.  The rational response is to recognize that the inventory is now less valuable and the needs to be sold sooner even though it means receiving a lower price.

Wherever you see (U)S wheat replace it with OPEC oil.  Wherever you see Argentine and Australian wheat replace it with US oil.  The analysis is exactly the same.  If the government allowed our oil firms to explore in the currently off-limits areas where we know there is plenty of oil, the current price of oil would decrease.  It would do so as OPEC realized that its inventories of oil are now less valuable than they were before.  In order to maximize their profits they will supply more oil into the world markets today.  This is a critical insight.  The expectation of more oil (or wheat) will cause the current price to fall from what it would have been.

The lower price of oil will be an enormous increase in the discretionary incomes of Americans, far greater than any targeted tax reduction would be.  It would reduce our Balance of Payments deficit.  It would employ, at rather handsome wages, many people.  It would reduce the incomes of some of the most unstable and mischievous regimes on the planet.  It is difficult to see why our political leaders continue to allow a small but vocal minority negatively impact our lives.

Posted by Jim

How Could We Have Missed These Uprisings?

This is a question that has been asked numerous times over the past three weeks as, first, Tunisia, and, then, Egypt exploded in the streets with thousands demanding freedom.  The US’s intelligence agencies were faulted for not anticipating these events.  I think that this judgement is a bit unfair.  To know something is going to eventually explode is not the same as knowing the precise time.  Think of our ability to predict volcanoes.  We know where they are, which ones are most likely to blow, but not when.  Similarly, we know that societies that have large, young, educated, and unemployed populations with minimal political and economic freedoms are powder kegs.  Depending upon the ruthlessness of the regime uprisings are more (Tunisia) or less (Iran) likely.

Professor Timor Kuran, currently at Duke University, wrote a book, “Private Truths, Public Lies: The Social Consequences of Preference Falsification (Harvard University Press: 1995)” that explains how this toppling of the regimes came so quickly and unexpectedly.

I want to quote from his book, p. 250-251.

Imagine a ten-person society featuring the threshold sequence

A: Individual a b c d e f g h i j
Threshold 0 20 20 30 40 50 60 70 80 100

Person a, whose threshold is 0, supports the opposition regardless of its size, just as person j always supports the government.  The remaining eight people’s preferences are sensitive to the expected size of the public opposition.  Depending on its level, they will opt for one camp or the other. Initially, as in the geometric illustration [p.249], the opposition consists of 10 percent of the population, so Y=10 [where Y is represents the size of the opposition to the government].  Specifically, person a supports the opposition, and persons b through j support the government.  Because individuals other than a have thresholds above 10, a public opposition of 10 is self-sustaining [implying the regime maintains power].

Suppose now that person b has an unpleasant encounter at some government ministry [such as, for instance, the street vendor in Tunisia, or the person beat up by the cops in Egypt].  Her alienation from the regime deepens, pushing her threshold down from 20 to 10. The threshold sequence becomes

A’: Individual a b c d e f g h i j
Threshold 0 10 20 30 40 50 60 70 80 100

The new threshold of b happens to equal the existing Y of 10.  So she switches sides, revealing her decision by tossing an egg at the country’s leader during an official rally [or self-immolating oneself as the Tunisian did].  Y thus becomes 20.  The new Y is not self-sustaining but self-augmenting, as it drives into opposition.  The higher Y of 30 then triggers a fourth defection, raising Y to 40.  And the process continues until Y reaches 90 – a new equilibrium.  Now the first nine individuals are in opposition, with only j supporting the government.  A slight shift in one individual’s threshold has generated a revolutionary bandwagon.

__________

I believe that this analysis succinctly captures exactly what has taken place in northern Africa.  Once one individual shook his fist at the government other realized that they weren’t alone in their discontent.    Gone are the days when opponents of a regime could be locked away and the only means of communication with the outside world was on purloined sheets of toilet paper.  In the US, in the 1950s and early 1960s, the civil rights movement got started because decent-minded citizens saw on TV scenes that they never thought could happen in the US.  In the 1980s, the VCR brought news of freedom to the communist bloc.  Today, cell phones and the internet have all but eliminated a regime’s ability to suppress the news of their treatment of their citizenry.

The various intelligence agencies can only guess at the thresholds of the citizens of other countries.  They could only engage in some scenario exercises of the “what-if” variety.  It is doubtful that any of them would have been able to predict these topplings much less the speed, any more than they could have predicted the collapsing of the Soviet puppet states, one by one, in the late 1980s.  We must learn that no one is omniscient and that not every event can be forecasted with precision.  We shouldn’t look for a scapegoat. Instead, the lesson here is that the desire for freedom is innate in all human beings.  America needs to give moral support to those who stand up and defy the regimes.

Posted by Jim

To Extend or Not to Extend

As I write (Nov. 30, 2010) the Congress is about to start debating whether or not to extend all of the Bush era tax cuts or just a subset of them in order to deal with the deficit.  The Republicans want all of the current tax rates to be continued indefinitely, that is, until a real overhaul of the tax code could be tackled.  They appear to be willing to settle for a minimum of a two year extension.  The Democrats, led by President Obama, want the current rates continued except for those making over $250,000.  Senator Chuck Schumer, of NY, put forth the option to extend the rates for everyone making under $1,000,000.  The public, that is, us, prefer to extend them for everyone.

 

The reasoning underlying the Democrats views’ is suspect at best.  Obama says we can’t afford them, and it will only affect 2% of the taxpayers.  These 2% pay about 45% of all income taxes; the bottom 50% pay 3.5%.  Looked at another way the top 2% are paying 13 times as much as the bottom 50%.  As it stands the top 2% are certainly contributing heroically to funding the government.  Let’s look at the charge that we can’t afford not to raise the rates.  As is usual in government, when one is trying to make a point the cost/savings for multiple years are given because it balloons the figure.  We can’t “afford” maintaining the current rates for everyone else either, on their reasoning.   One factor, and it is a big one, that the Dems have overlooked is that those in the top bracket aren’t going to sit there to be shorn.  They will alter their behavior and reduce their taxable income.  In effect, the increased tax revenue will be less than estimated, by a long shot.  Further, in their efforts to reduce taxable income these individuals will spend resources to avoid taxes rather than devoting those resources to growing output.

 

We have the spectacle of columnist, Froma Harrop, shrilly saying  that;

“And what business is it of the chairmen — Erskine Bowles, a Democrat, and former Wyoming Sen. Alan Simpson, a Republican — to set an arbitrary (and low) maximum percentage on the tax revenue relative to gross domestic product that our society is allowed to collect? Their job is to find ways to bring down deficits. Period.”

She then goes on to say,

“For all the talk of the painful, painful(!) sacrifices needed to achieve the chairmen’s goal of reducing the federal deficit by $4 trillion through 2020, one thing should be kept in mind: Simply ending all the George W. Bush tax cuts would do the same thing. No one starved in the Clinton era. In fact, people did darn well then. That’s something for Democrats to think about now, before Republicans take over the House and start the fiscal voodoo dance all over again.”

You can’t make this stuff up.  I’m always amused by liberals/ progressives belief that 50.1% of us should be able to tell the other 49.9% what to do when it suits them.  The Bill of Rights were enacted precisely because the Founders recognized that the likes of Ms. Harrop were lurking out there.  Survey after survey shows that most Americans, 70% or more, believe that an individual’s total (State, Local, and Federal) tax burden shouldn’t exceed 25%.  These results hold for every subgroup out there .  Well, almost all.  I’m sure that the polls don’t have subgroups for: clergy (of any denomination); college English professors; carping liberal columnists; or unionized government employees.  These would demand expropriation of all income from those who made more than they did.  This is typically their definition of “the rich”.

 

Turning to Ms. Harrop’s comparison with the 1990s.  It is a totally inappropriate comparison.   Ms. Harrop confuses correlation with causation. To start with, the economy was still in the glow of the Reagan years.  The benefits of increased investment were still accruing.  Lawrence Meyers, who Clinton appointed to the Federal Reserve Board, had an economic consulting firm that analyzed the Clinton tax increases.  Their conclusion was that the economy grew slower and total taxes collected were lower than they otherwise would have been.  So, in fact, the Clinton higher tax rates weren’t a boon to the economy.  They didn’t appear to be a bad thing because of other decisions that were being made.  The two most important were the election of the Republican majorities in 1994 that slowed the growth of government spending and the slashing of the capital gains tax rate, against Clinton’s wishes, by the way.  These two events, against the backdrop of the Reagan growth agenda of the 1980s more than swamped the negative effects of the Clinton tax increases.

 

Sen. Schumer defends his proposal by falling back on the most naïve version of Keynesian economics.  He still believes in the concept of the marginal propensity to consume out of current income, fifty some years after Milton Friedman showed that people consume out of permanent income.  He seems to believe that if we just put more money into the pockets of people with high average propensities to consume the economy will grow.  Two problems with that: first, most obviously, we have been doing that for two years and have nothing to show for it; and second, what is being discussed by the Congress is not a tax cut but the prevention of a tax increase, which even Schumer realizes would be a disaster.

 

The Republicans push for maintaining the current taxes for everyone reflects the understanding that investment and job creation come from those making more than $250,000.  From a supply-side approach, the response to incentives is very disproportionately from the higher income small businessmen and other entrepreneurs.   Lowering marginal tax rates typically doesn’t cause a bank clerk, say, to increase their level of economic activity while it will to a business owner, or potential business owner.

 

Obama’s attitude was put on display during the campaign when he responded to Joe the Plumber, saying that he was for redistribution.  Raising rates for the so-called rich (m any two income families in NYC would fall into this definition of rich) appeals to his political orthodoxy which trumps his obligation create an environment in which the economy can grow.

 

When the dust settles where will we be?  I expect that the tax rates for all will be extended for at least two years and as a quid pro quo, unemployment benefits will also be extended for another 26 weeks. It is important to keep in mind that this will only prevent things from getting worse than they are.  In order for the economy to gain real traction, the plethora of mandates and regulations spewing out of the Executive branch must stop and many need to be repealed.  Simply put, regulations have the same effect as taxes but don’t get run through the government income statement.  The EPA, Health and Human Services, and the Dept. of the Interior are loose cannons that are circumscribing our daily lives to our detriment.  The Health Care bill needs to be rescinded and begun anew.  The financial reform legislation, another unread 2000+ page monstrosity, needs to be put in abeyance while cooler heads revisit every provision.   The energy drilling moratoria across the country need to be reassessed.

 

The vote on the tax rates will give a clear picture if the Congress got the message that the “Tea Party” sent on November 2.  If they didn’t the message , be prepared for another housecleaning in 2012.

 

posted by Jim

Stimulus II – Beyond Parody

The President has announced a second stimulus which, by the way, is not referred to as a stimulus, given the success of stimulus I. It is being referred to as an infrastructure rebuilding program, or some such thing. The purpose is not to stimulate the economy before the election; it is too late for that, but to get some positive ink portraying the Republicans as dyed-in-the-wool obstructionists. There are many good reasons for questioning this $50 billion largess.

I have always found it odd that Democrats, in particular, push for fixing roads and bridges during a recession. They quote studies that say our infrastructure is crumbling which, I’ll agree, is probably correct. However, it was crumbling even faster before the recession when it had more vehicles plying their way across it. Where was the concern, then? If the recession hadn’t occurred they would be in even worse shape. Obama also mentioned redoing airport runways. Are we to understand that planes are landing on crumbling landing strips. Where are the FAA and the transportation safety boards? The railroads are also being included in this spending spree. I thought they were privately owned.

Government bodies have done this for years: pushing off maintenance and repair because doing it would require either raising taxes or, shudders, restraining spending elsewhere. Runways, roads, and bridges are physical capital that need to be maintained and upgraded on a regular ongoing basis, not an episodic one whose primary goal is to obtain votes or campaign contributions.

Attempting to use infrastructure projects to boost the economy is doomed to utter failure. A critical complaint about government spending to counteract recessions is the lag between the approval of spending funds and the actual spending. Infrastructures are at the extreme end of this spectrum. By their very nature they are long-lived with the funds entering the economy relatively slowly. This round of projects is to be a six-year endeavor. The unemployed won’t be with us if they have to wait that long for the economy to turn around.

A second point is the question of whether or not we should put all of our stimulus funds into one sector: civil engineering projects. On the margin does the citizenry think this is the most critical area to devote resources to, today. I don’t know the answer, and it is doubtful we will ever find out. A third point is that these big infrastructure projects are not very good at getting people back to work. These projects tend to be very capital intensive so that for any given amount of stimulus dollars spent they increase employment less than many other activities would.

The upshot is that the politicians are continuing to treat the populace with callous disregard by their dereliction of responsibility to keeping the roads, bridges, and runways at acceptable levels of repair. (Would a private insurance company be willing to underwrite coverage on some of these roads and bridges?) The spending of the $50 billion won’t impact employment or GDP now. It may add excess demand for resources in three years when the Fed is trying to slow the economy. The only things that it can be assured of doing are increasing the national debt and giving politicians talking points. It would be funny if it weren’t so sad.

Posted by Jim

Are All Deficits Created Equal?

One of the ongoing debates in Washington and throughout the Land is whether we need a second dosage of stimulus. By all accounts the first one has been a colossal bust, Joe Biden and Robert Gibbs notwithstanding. Over $800 billion was budgeted: on top of the TARP, GM and Chrysler bailouts, and the never-ending Fannie Mae and Freddie Mac trips to the Treasury’s ATM to address the dramatic economic slowdown. This recession is the worst since the early 1980s. The responses to each are instructive.

In the 1981-82 recession, President Reagan made two critical choices. First, he supported Fed Chairman Paul Volker’s efforts to bring inflation down from its, by US standards, outrageous rate of 13%. This courageous act extended the recession but helped lay the groundwork for a quarter century of prosperity. Secondly, he cut tax rates. More precisely, he slashed the tax rates. Individuals and businesses now kept a larger share of what they produced. The tax rates didn’t kick in until 1983 so people deferred activity from 1982 until then, thus making 1982’s performance worse than it could have been. Tax revenues rebounded over time even though the deficit rose initially. (To be sure, Congress couldn’t restrain the impulse to spend the gusher of revenues.) Over the 1982-1988 period, the American economy grew by one-third(!) – the equivalent of annexing West Germany. The key was that the government didn’t suppose it knew best as to what activities and actions would be the most productive. It left those decisions to the individual firms and citizens. Clearly, it worked well.

Fast forward to today. The President and the Congress have earmarked most of the funds to prop up profligate state and local governments and school districts. These funds were used to prevent layoffs. There were going to be layoffs because the public sector unions REFUSED to forego pay increases, even while 55% of all Americans had either lost their jobs or had their pay reduced in the past two years. Anecdotes are rife about the callousness of the union leadership when it came to adapting to the new reality or throwing some members overboard. The real issue is whether these subsidies to other government units will result in the economy growing. To date, they haven’t. Joe Biden is reduced to touting the fact that two hundred thousand homes have been weatherized. Wow! There are over one hundred million homes in the US. You do the math on when this will be complete. I don’t need to remind you that these weatherizing programs have been notorious for their shoddy workmanship and flagrant theft over the years.

The premise underlying the Keynesian models that are being used by the administration and the pundits supporting them, personified by Paul Krugman, is that it doesn’t matter where one puts another dollar into the economy as long as another dollar is put in. I doubt if Keynes himself believed this. Resources need to be put to their highest valued uses if an economy is to prosper. The Harvard economist, Robert Barro, has shown that the government multiplier effect is, at best, about 1 and often below 1. For those who remember their introductory economics, a multiplier greater than one is the holy grail of government spending: take a dollar from individual A and give it to individual B and, voila, there is now more than a dollar of output. This is alchemy at its best.

Current macroeconomic research shows that the problem with most advanced economies such as ours is not the lack of sufficient demand but the relative dearth of investment, productive investment. Building more homes barely qualifies as productive investment, especially when at the margin those who were induced to buy one can’t afford them. This is the 21th century version of digging a hole and filling it back in. Government policies: the tax subsidy to home ownership; the community reinvestment act (CRA); HUD policies in the late 1990s; low interest rates from the Fed; and congressional meddling (read: Barney Frank); all contributed to the massive over-investment in housing. This mal-investment, if you will, now needs to be wrung out of the system. Since houses are long-lived assets this will take awhile.

Another key component of current macroeconomic thinking is that expectations of what the future will bring matter. Markets do not like uncertainty, either. The expected return of higher income tax rates in 2011 has influenced decisions. Projects that look marginally profitable today will be under water with the higher taxes, so these projects get shelved. The quagmire known as the health care reform act continues to causes firms to cringe as more of its details become known. While many of its mandates aren’t direct taxes; that is, they won’t show up in the government’s financials; they act like taxes, thereby reducing economic activity.

Recoveries tend to mirror the decline: if the latter was sharp, the former also tends to be since there is significant slack that can be easily absorbed without creating bottlenecks. That is another reason this recovery is so troublesome. The economy hasn’t bounced back and has slowed precipitously so far this year, in spite of the massive injections of money that have ballooned the deficit. Increasing the deficit with no prospect for growth to generate the revenue to pay for it is a recipe for disaster.

Germany took the tack opposite that of the US. It lowered tax rates and reduced regulations and it did not spend itself silly. Its recent growth, as that of many other European economies, has dwarfed that of the US. It is said that Albert Einstein defined insanity as doing the same repeatedly and expecting different results. The Administration has obstinately clung to its approach, despite its abject failure. The failure is clear from the current results. A comparison to the 1981-82 recession, and the results coming in from elsewhere around the world indicate that the approach the US has taken is seriously flawed. We can have deficits either with increased government spending on projects that pass the political test but not necessarily the economic test, or we can have deficits resulting from reduced tax revenues due to lower marginal tax rates. The latter is the preferred approach if the goal is to return the economy to its long-run growth path.

Posted by Jim