Charles Blahous simultaneously gets and misses a point

The graph after the jump doesn’t paint a pretty picture as a somewhat likely scenario of future budgetary behavior.

Is the federal government incentivizing a lack of education?

According the the chart below from a recent CBO report, the answer may be yes.

From the evidence in this chart, it appears that the private sector relatively significantly discounts education less than a bachelor’s degree and offers a relatively significant premium on professional and doctorate degrees. Conversely the federal government is much more consistent in pay differentials for different education levels.

- Tyler

CBO projects decreased deficit in 2012 but still over $1 Trillion

The CBO released today it’s budget outlook for 2012 to 2022. More to come on this later, but I wanted to highlight that the deficit is expected to be the smallest since the recession began (in amount and percent of GDP) but will still be around $1.1 trillion.

The Great Gatsby Curve: The Economics Debate Du Jour

The world of economics debating, blogging, and discussing is alive this week with a debate involving what the Chairman of the Council of Economic Advisors, Alan Krueger, referred to in a January 12 speech at the Center for American Progress as the “Great Gatsby Curve.” Everyone is getting into this debate; first it was Scott Winship, then Miles Corak, then Tyler Cowen, then Scott Winship again, then Miles Corak again, then Scott Winship once more and at some point Paul Krugman and Matt Yglesias added some commentary.

More on the gold standard

Not to beat a dead horse, but I just read a great post at The Economist on the gold standard. A highlight

Of all paper money systems ever devised, the vast majority are still in existence and haven’t collapsed yet. One could argue that “all previous bipedal apes have become extinct” on the grounds that Neanderthals and australopithecus are no longer around. But that would ignore the 7 billion humans still walking around.

A Fair Look at Capital Gains Taxation

From David Frum’s article on capital gains taxation:

A capital gains tax is a tax on the transfer of control of assets. If that tax is set too high, it can discourage even the most glaringly urgent transfers of control. Under Joe’s management, the value of the company may rise 30%. But if the capital gains rate is set at 50%, then the transaction from Jane to Joe will not occur—and everybody will be worse off.

He goes on to say:

That said, there are problems with the capital gains system of the United States, and two seem especially pressing right now…

I’ll let you read the article to get the two problems he references. This is a great example of reasonably analyzing an issue, and, for that reason, I wanted to share it with others.

“I mentioned gold because it has a long and unquestionable record of being a commodity and currency with perceived intrinsic and stable value.” Does it really?

I have been delighted by one of our regular readers reliable commentary on my centrist politics. Yesterday when I posted a link to Barry Eichengreen’s essay on currency I was not surprised by Richard’s comments. And as promised I want to reply to his statements on gold as having “intrinsic and stable value.”

I did some quick research on gold prices (from the World Gold Council) and USD values (from the Atlanta Fed) and found that gold appears to be quite volatile.

This first chart shows the monthly change in USD value versus the monthly change in the price of an ounce of gold since 1995 (gold is shown net of USD fluctuations since it is denominated in dollars).

To further illustrate the impact of this volatility I indexed these values to 01/1995 to show how different they are as of 12/2008.

Truthfully currency isn’t my main interest, but I find the dollar to be a much more stable currency than gold and from a philosophical perspective I believe fiat currency is much more free market minded. Why limit the dollar to a single commodity? And if you do that why gold? It just doesn’t make sense. This limits monetary policy needlessly.

Regarding gold’s “intrinsic” value. I see none. Gold to me is not worth very much at all. I have little use for it and am not a fan of much jewelry (neither is my wife). Intrinsic would suggest there is something special about gold that makes it valuable in all contexts. It simply isn’t, but in all fairness nothing is except people (People denominated currency? That would put a spin on the population boom?); so I don’t see how “intrinsic” value even gets into this discussion.

Addendum: For further information on the pro-cyclicality of a gold standard you can read Tyler Cowen’s recent post on the topic at Marginal Revolution (he also links this earlier post as well).

Two very different views of inequality – Some additional AM Reads

It just so happens that I read these two articles back-to-back. They are strikingly different in their views of inequality, and for that reason are worth reading in tandem.

First, from the Washington Post Charles Lane is concerned with the negative impact on productivity incentives when policies actively reduce inequality.

In contrast, on the Freakonomics blog, Ian Ayres and Aaron Edlin argue for a Brandeis tax and want to change the framework for the discussion about inequality.

A Response to Roun McNeal

On his blog, Roun McNeal, recently gave our humble blog a shout-out, which is appreciated, in a post about a balanced budget amendment. Specifically, he proposes linking a balanced budget to individual Congressmen and Congresswomen’s ability to remain in office. He suggests:

Hence, the only novel idea I have really come up with, fire them all if they run up the debt. I am very serious, and I am not speaking electorally. I’m talking about Total Recall. Enshrine in the Constitution a rule that automatically removes every sitting member of Congress and disqualifies them from further service in the event that our books go so far in the red as to violate the Balanced Budget Amendment, however it be written. The primary obstacle to imposing order upon our growing public debt is the Congressional re-election incentive to think short-term. Think about it: if the penalty for Super-Committee failure had been the wholesale recall of Congress (instead of some measly $1.2 trillion) would a deal have been cut? Our Congressmen need a more pronounced personal incentive to consider our fiscal house in the long-term. Putting all their jobs at risk sounds right.

Now I tend to be somewhat of a fiscal hawk. I think we can and must get our fiscal house in order to remain strong and relevant going forward. However, I am not a fan of a balanced budget amendment, especially one the further skews incentives members of Congress already have to think about reelection over the best interests of the country. At its heart, such an amendment assumes balanced budgets to be preferable to any other policy option at all times; thus, making it a Constitutional issue. It simply is not worthy of such high regard. Fiscal responsibility is important and is definitely something on my mind when I go to the ballot box, and the ballot box is where it should be handled. Voters should make the decision on how the country’s preferences are ordered at any given time.

Beyond the question of Constitutional appropriateness of a balanced budget amendment, is the question of economic appropriateness. In theory, any balanced budget amendment would include a process for not having a balanced budget (both deficit and surplus); practically of course a balanced budget would almost always exist (even when a surplus was due) because of political stagnation. Also a balanced budget requirement ignores the budgetary impact of inflation. If the government can borrow (i.e. sell treasuries) for a 1% yield and inflation is around 2% per annum, it is extremely logical to borrow money since the real borrowing cost is negative (interest rate minus inflation).

Overall a BBA is probably not preferable policy. It could easily increase the partisanship in Congress by forcing significant budget fights every year. There is no clear mechanism for determining the level of spending available in a given year. Pro-cyclical fiscal policy becomes more likely. And it becomes almost impossible to manage the national debt. The sentiment behind the policy is respectable, that being responsibility, but as a mechanism, I find a BBA to be lacking.

Commentary on E21′s Medicare Proposal

Recently James Capretta at the Economics 21 blog posted a compelling case for premium support as a new structure for Medicare. The author notes:

Medicare was designed in 1965 to be compatible with the prevailing Blue Cross-Blue Shield-type insurance that was prevalent in the marketplace at that time. Quite a lot has changed in last 46 years, so it should not be surprising that the program is due for an update.

More after the jump.