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Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:

Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.

I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.

But there is a chicken-and-egg story here, as noted by Joseph Heath**:

…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.

The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.

This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?

Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.


*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61

Here’s a piece from David Leonhardt that has been getting some of play on blogs that I frequent. It’s definitely good to see that more of the profession are coming around to the “quasi-monetarist” view that monetary policy is not impotent at the zero bound, that it can do much more. Here’s David:

Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?

It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.

Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.

Indeed. Myself and others have been emphasizing that the passivity of the Federal Reserve in late 2008 (or, as I like to tell it, the Fed being hoodwinked by rising input costs) was indeed an abdication of its duties…but what duties are those? It’s unclear, because the nature of the Fed’s mandate allows it to slip between two opposing targets at will. Michael Belognia, of the University of Mississippi (and former Fed economist) makes a similar point in this excellent EconTalk podcast. The big issue, as I see it, is the structure of the Fed’s mandate. Kevin Drum (presumably) has a different issue in mind:

Hmmm. A big, powerful, influential group that obsesses over unemployment. Sounds like a great idea. But I wonder what kind of group that could possibly be? Some kind of organization of workers, I suppose. Too bad there’s nothing like that around.

I think this idea of “countervailing powers” needed to influence the Fed is wrong-headed. There is no clear-cut side to be on. Unions may err on the side of easy money…but then again, Wall Street likes easy money* too, when the Fed artificially holds short term rates low. It’s all very confusing. But that’s arguably great for the Fed, because confusion is wiggle room…however it’s bad for the macroeconomy, because confusion basically eliminates the communications channel, stunting the Fed’s ability to shape expectations.

Now here’s the problem as I see it: NGDP is still running below trend, and expectations of inflation are currently running too low to return to the previous trend. Notice, I said nothing about the level of employment. Unemployment is certainly a problem, but the cause of (most of the rise in) unemployment is a lower trend level of NGDP.

Given that you agree with me about the problem, which is the better solution:

  1. Gather a group (ostensibly of economists) to press to rewrite the Fed charter such that the Fed is now bound by a specific nominal target, and its job is to keep the long run outlook from the economy from substantially deviating from that target using any means possible.
  2. Find an interest group with a large focus on unemployment to back the “doves” in order to pressure the Fed into acting more aggressively.

I would back number one over number two any day. And the reason is that while I’m in the “dove” camp now, that isn’t always the case. At some time, I’ll be back in the “hawk” camp, arguing against further monetary ease. Paul Krugman has recently made the same point about using fiscal policy as a stabilization tool. My goal is to return NGDP to its previous trend, and maybe make up for some of the lost ground with above trend growth for a couple years. That would solve perhaps most of the unemployment problem.

But say it doesn’t. Say we return to a slightly higher trend NGDP growth level for the next couple years, and due to some other (perhaps “structural”) issue(s), unemployment remains above the trend rate we enjoyed during the Great Moderation. Would it be correct to say that monetary policy is still not “doing enough”? I don’t think so. At that point, we should look toward other levers of policy that can help the workforce adjust to the direction of the economy in the future.

I’m not say that is even a remotely likely scenario, I’m just trying to illustrate the complexity and possible confusion (and bad policy) that could come out of a situation that Drum seems to be advocating. Better in my mind to have a rules-based policy than an interest group-pressure based policy.

P.S. This was the first post I’ve ever written using my new Motorola XOOM tablet. It wasn’t the hardest thing I’ve ever done, but it was by no means easy. And I wanted to add some charts, but that would be particularly annoying.


*Which, of course, is not necessarily easy money, just low interest rates.

It was clear from the beginning that the public sector union battle was going to expose fault lines between Pragmatic Libertarians and Progressives. For a time, a strain of self styled  liberaltarians had managed to convince themselves that the American left was just a bit misguided and if they only understood the economic arguments against their favored policies they would reject them.

True, progressive allegiance to the nanny-state was strong but even here pragmatic libertarians felt the weight of the empirical evidence was on their side. When the progressive assault on salt, soda and even meat failed to achieve its goals progressives would abandon it; just as they abandoned the similarly widespread but similarly misguided notion that the state should own and operate the major industrial concerns.

In the wake of Wisconsin, Kevin Drum called a resounding but by no means solitary, bullshit, on those hopes and dreams

If unions had remained strong and Democrats had continued to vigorously press for more equitable economic policies, middle-class wages over the past three decades likely would have grown at about the same rate as the overall economy—just as they had in the postwar era. But they didn’t, and that meant that every year, the money that would have gone to middle-class wage increases instead went somewhere else.

. . .

If the left ever wants to regain the vigor that powered earlier eras of liberal reform, it needs to rebuild the infrastructure of economic populism that we’ve ignored for too long

This sentiment is resolute among progressive bloggers. The decline of economic populism in general and unionism in particular is the front line of the new war. Wisconsin its cause celebre.

This fault line strains a potential liberal-libertarian fusionism to its core. The health care debate could be dismissed as a battle between monopolistic health insurance companies and a monopolistic state for control of fundamentally dysfunctional industry. That the federal government might choke the health care serpent to death in its future efforts to balance its budget could be seen as consolation for the growth in state control.

However, there is no such consolation to be offered in the unionization battle. Economic populism is precisely what libertarians hope to dissuade liberals of and to the extent public sector unions matter at all, its because they stand in the way of educational reform. Making public unions the heroes of a new populist revolution is not going to make any of this any easier.

What I didn’t expect though was a divide even within the libertarian camp. Libertarians are coming out in favor of private sector unions. Will Wilkinson is a representative

The right of workers to band together to improve their bargaining position relative to employers is a straightforward implication of freedom of association, and the sort of voluntary association that results is the beating heart of the classical liberal vision of civil society. I unreservedly endorse what I’ll call the "unionism of free association".

That free association is to be respected is without question. What is at issue of course, are contracts in restraint of trade – that is, “the right to band together to improve their bargaining position”

Does industry likewise have a right to create and have enforced by the state contracts which restrict supply and raise prices. May the Airlines, invoking their right to associate, form an organization and contract to hike fairs? May the automakers enter into an agreement to sell their cars at higher prices?

In a perhaps more parallel example, may the pharmaceutical companies enter into a collective bargaining agreement with the health insurers that the health insurers will cover only non-generics or they will not be sold any patented drugs at all?

What justification can there be for permitting labor to enter into such contracts but not business? I can’t help but suspect that it is a sympathy for economic populism and the notion that what is bad for the business must be good for the worker.

We must not forget that these restrictions work by driving up the cost of hiring the least advantaged members of our society. A man who could be profitably employed before a collective bargaining agreement may be forced into a lower paying occupation or even out of the labor force entirely after collective bargaining.

Perhaps, Will can clear it up for me but it seems that this line of reasoning goes against the core liberal-libertarian message as articulated by Will himself

It’s best to just maximize growth rates, pre-tax distribution be damned, and then fund wicked-good social insurance with huge revenues from an optimal tax scheme.

Kevin Drum is afflicted with Social Security rationalism. At its worst this disease manifests with trichotillomania and associated emesis.

Sufferers will wander aimlessly noting to anyone they see that the Social Security deficit is not that large and does not accelerate as a fraction of the economy. They may even begin to wail that uncertainties surrounding productivity and population forecasts are actually larger than the projected deficit.

Libertarian sufferers have been found huddled in corners, repeating endlessly: “sustained immigration lowers the average age of the population, sustained immigration lowers the average age of the population. . . ” It is not known what this phrase means.

Sadly, there is at this time, no cure.

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I’m a tad bit late on commenting on the tax compromised reached between the White House and Republicans, but I think that there has been some fairly high-quality commentary around the blogosphere. I stand mostly with the reasonable left in supporting what was put into the package, even though we got the wrong payroll tax cut, and a strange and potentially politically deadly compromise on the Estate tax (which I otherwise oppose, but wouldn’t let my positing get in the way of providing economic stimulus, like some on the left).

Mark Thoma worries that the payroll tax cut will become permanent (edit: found the link). This is the mirror of the argument that government spending tends to become permanent, as well…which I have an inkling that Mark doesn’t mind that feature so much.

I think Kevin Drum misses a grand opportunity to call out to the left to articulate a better way forward here:

In the end, this is the second stimulus we all wanted. It’s not a very efficient stimulus, and it sadly caves into the conservative snake oil that the sum total of fiscal policy is tax cuts, but them’s the breaks. Anyone who doesn’t like it needs to spend the next two years persuading the public not just to tell pollsters they don’t like tax cuts for the rich, but to actually vote out of office anyone who supports tax cuts for the rich. That’s the only way we’ll win the replay of this battle in 2012.

I’m not looking to go tit-for-tat on whether direct government spending/investment is “more efficient” than providing payroll tax cuts, as it’s pretty clear which side we are both on (as I’m much less sanguine on the Keynesian consumption function, for a reasonable view from the other side, see here), however I do want to address his prescription of a public awareness campaign in order to return to “normal”, with normal being defined as roughly “Clinton-era tax rates” on capital and high incomes.

I view this very compromise as a golden opportunity for the left to reinvent themselves with regard to taxation, win an adjacent political battle (and a dear progressive goal), and wrap it all up in a bow that not only makes our government funding more efficient, but lowers tax rates for virtually everyone. And that is to begin a campaign of gradually removing the income tax, in exchange for a revenue-neutral tax on carbon, which would be gradually instituted as the income tax was phased out. In addition, offer an automatic stabilization policy of payroll tax cuts (all of them, or at least all of the “employers share” — the better side to cut — in exchange for a sharply more progressive payroll tax, used to fund Social Security and Medicare/caid. Institute a progressive VAT or GST with a standard deduction of the first $25,000 of income for all taxpayers, and expand a means tested EITC, as well. You could trade this for elimination of minimum wages, but that’s not a real pressing problem in my mind. At the end of the line, offer a land tax in exchange for really whatever the right happens to want for it. Repeal of the estate tax, maybe?

That would be a real “progressive” package that would end the debate regarding the level of income taxation (from any source; labour, capital, etc). It would simplify our tax code, and get rid of ridiculous inefficiencies like the mortgage income tax deduction. More importantly, contrary to our current tax code, the new consumption-based funding of government would encourage a greater savings and investment equilibrium.

Beyond the scope of this post — but relevant — is different ways that you can find to streamline efficiency of the government. I seem to remember an argument put forth by Matt Yglesias that I personally agree with (and can’t find the link to currently), and find it baffling that it is so often overlooked; and that is that there are some government workers whose marginal utility is so low, that paying them anything at all constitutes overpayment. So it’s not a question of overpayment, it’s a question of marginal utility. At the margin, is society gaining utility by paying various individuals? If yes, then pay them. If not, then don’t.

That aside, I do think that this is a unique opportunity for Democrats to articulate a new vision for government funding that better enables elements of the welfare state that they hold so dear, this is highly progressive, removes the distortions and bad incentives created by the income tax, and genuinely makes the economy more efficient — facilitating growth. It could be a popular platform, and one that I would vote Democrat for, and I’ll be that many other pragmatic libertarians would feel the same way.

Of course, at the end of the day, I still believe that monetary policy is the last mover. The Fed has quietly indicated that it is looking at extending QE2, which is definitely good for the prospects of any pet fiscal policy.

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