Good Observation Neil

We here at Blog of Rivals like reading what smart people have to say. Whether it’s a published work, blog post or in our comments thread, good discussion and debate makes better policy. One place to get lots of smart analysis is Money for People. The blogs writer, Neil White, offers great economic analysis of myriad topics, and his response to a link from one of my posts is no different.

It’s no secret that I’m no libertarian, nor is it that The Mercatus Center leans in that direction.

The core of Neil’s critique of the Mercatus piece (and maybe my linking it) is that he feels the piece is misleading when it says, “Yet, for more than half a century, these governments have continuously outpaced the growth of the private sector on which they depend.” He is right. That is not the case. Neil writes:

Yet state and local spending has not “continuously outpaced the growth of the private sector” for “more than half a century.” It did so between 1950 and 1975, when growth in spending outpaced private-sector growth in about 66% of all quarters. But between 1975 and 2012 growth in state and local spending and private-sector GDP moved roughly in line with each other, with the former being greater than the latter in only 53% of all quarters.

I still, however, think there is some legitimacy to reanalyzing state and local government spending. The fact that spending at this level of government has settled at ~14% of private GDP for the last 40 or so years does not mean that this level of government has not overextended itself. Look no further than the apparent impact of the end of the stimulus on state government trust in the Gallup poll I put up earlier today.

So while I may not think significant reductions to spending across all levels of government is going to boost the economy, there is evidence of overextension and of some lack of confidence in the sustainability of historical levels of spending (at least under the current system).

Bipartisan Policy Center on Health

The Bipartisan Policy Center released a report today called “Lots to Lose” that will highlight the economic impact of America’s obesity. The BPC writes in The Hill:

Apart from adverse impacts on quality and length of life, the economic costs of this epidemic are staggering: $147 billion per year in direct costs, and $300 billion if indirect costs like lost productivity are included.

Impact of Tax Cuts

From The Committee or a Responsible Federal Budget:

Extending the tax cuts by themselves will cost $2.8 trillion over ten years, while extending only the “middle class” tax cuts will cost $1.9 trillion. Assuming that Alternative Minimum Tax patches were already in place, the extensions would cost $3.8 trillion and $2.8 trillion, respectively, due to interactions with the AMT.

Step One for Mitt

Yesterday I wrote a post about the opportunity for a strong centrist campaign season between President Obama and Governor Romney. Step one, for Mr. Romney if he chooses to take a policy solutions campaign strategy ought to involve the tax code. David Leonhardt (whom I linked in yesterday’s AM Reads) offers an outline of the impending tax debacle debate in Washington. This piece of the puzzle will be central to both campaigns and is probably the best opportunity for Romney to distinguish his campaign and vision for America. This could be as simple as a clearly defined revision of the current income tax structure with lower rates, broader bases, and a clearer tax policy towards corporations and capital gains or as bold as a progressive consumption tax to replace much or all of the income tax. Either way it is a way to distinguish the Romney campaign from the Obama White House while increasing revenues to address the deficit in a pro-growth manner. If you need evidence of the ability of a centrist view of taxes to differentiate ideas, see this post by Reihan Salam on the progressive consumption tax.

Klein has Questions for Paul Ryan

Ezra Klein asks four questions about the upcoming Ryan Budget on Wonkblog this morning. He writes:

1) Ryan’s original plan avoided raising taxes by implausibly promising to hold spending growth in Medicare and Medicaid to inflation. If costs in either program exceeded inflation, then the beneficiary, or some other actor, paid the difference. Ryan-Wyden aims for the strict, but more achievable, goal of holding spending growth to GDP+1%, at least in Medicare. If Ryan’s budget adopts that goal, or something closer to it, a substantial portion of his long-term savings evaporate. So how does he handle that?

2) Ryan’s budget includes an ambitious tax reform proposal that takes the tax code down to two rates: 15% and 25%. But he’s not expected to say which income levels pay which rates. Moreover, he’s expected to say that the plan is revenue neutral because it will include closing tax loopholes, but he’s not expected to identify which tax loopholes will be closed. For obvious reasons, a tax reform plan that doesn’t explain who will pay which rate and how the lost revenue will be made up is not much of a tax reform plan, and it’s not an exercise in making tough choices. But perhaps Ryan will offer more detail than we think.

3) Ryan’s original budget cut miscellaneous domestic spending — so, both the categories contained in the “non-defense discretionary spending” bucket and the lesser known items in the mandatory bucket — down to a nubbin. That is to say, federal spending on things like education and infrastructure and research would be far, far, far lower than in the future than they are today. If Ryan has to make up savings from the Medicare portion of his budget, is this where he does it? And, if so, how does the government fund, say, roads, in the coming years?

4) Does anything in this budget seriously conflict with Mitt Romney’s plans? If Ryan moves to a variant of Wyden-Ryan, for instance, that brings the House GOP much closer in line with Romney’s proposed Medicare reforms, which broke with the previous Republican budget by retaining fee-for-service Medicare as an option. Romney has also made some very specific promises on defense spending and, though he hasn’t yet explained how his tax plan actually fulfills this condition, holding the tax burden on the top one percent steady. So keep an eye on whether this budget is moving the House GOP towards Romney, or whether it’s trying to lay out a more ambitious position that they can bring to budget negotiations with a Romney White House.

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.

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.

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.

A different debt crisis and the law of unintended consequences

Politicians of every stripe have warned us about the risks of running up the national debt. Some think the threat is more immediate than others, but everyone agrees that there will be a tipping point at which the United States can no longer meet its fiscal obligations.

It is all the more remarkable, then, that NPR just released a secret Clinton administration report from 2000 that raised the possibility of extinguishing the entire federal debt by 2012. Instead of a rosy scenario, the document predicted a frightening disruption of international banking and finance. Why? Because without U.S. debt, there would be no more Treasury bonds. Treasuries are an indispensable pillar of the world economy. Nearly all interest rates — from mortgages to corporate bonds — are tied to Treasury yields. They offer a better combination of safety and liquidity than any other asset in the world. Backed by the full faith and credit of the world’s largest economy, they bear almost no risk of default (despite Republicans’ best efforts), and worldwide demand is so great that any seller is virtually guaranteed of a buyer in seconds.

Treasury bonds are also the means by which the Federal Reserve conducts monetary policy. When the Fed is said to “set interest rates,” it is actually buying or selling Treasuries on the open market to manipulate bond yields. In a world without U.S. government debt, the Fed’s ability to fight inflation and stimulate growth would be severely hampered.

These outcomes were all explored in the government report, which will soon be featured in an episode of NPR’s wonderful Planet Money series. Not only is it a good reminder of how much the deficit-financed profligacy of the Bush years and the current recession have changed our fiscal outlook, but it should also be an instructive lesson for anybody interested in economics or policy about the law of unintended consequences. Too much debt can be a serious problem, but that doesn’t mean that the inverse will be any better.

Are promises to not raise taxes intrinsically said with an *?

When promising not to raise taxes, perhaps GOP candidates should actually say:

Read my lips, no current tax increases*…
* this of course guarantees higher future tax increases.

Tyler Cowen points this out in his recent New York Times column.

In addition to Cowen’s points, which used exclusively conservative economists’ research, there is of course the issue of compounding interest. Simply put, refusing to pay for current spending means interest and principal must be paid; compounding interest, as all good business-oriented Republicans know, erodes value.

This is just another reason I hate the “No New Taxes” pledge.