Tuesday, May 29, 2012

How Liberalism’s Good Impulses Led to Fiscal Unsustainability

Much of the debate over the role of the federal government devolves into a shouting match over whether the federal role is too large and threatens basic freedoms or whether an expansion of that role is vital for achieving a fairer society and that we should model our society on that of, say, Sweden.
But framing the debate in that way is not only unhelpful (it’s unlikely that either side will suddenly experience an epiphany and become converted to the opposing viewpoint), it lacks historical context and a balanced analysis of how we got to where we are today.

From the beginning of the nation’s history, the federal government has played a vital role, as designed by Alexander Hamilton, among others.  Hamilton’s goal, along with many of his contemporaries, was to increase national power and stature for the benefit of all citizens, but was not to necessarily make some citizens rich or to ensure economic equality.

Hamilton’s objectives, therefore, included the long-term structural development needed to help the nation grow (a strong banking sector, roads and later railroads, etc.), and was not focused on providing more jobs during any economic downturn, or even as an ongoing responsibility of the federal government, and certainly did not contemplate efforts to divide the country between haves and have nots.

Hamilton’s program (and the prevailing philosophy until Franklin Roosevelt) was to emphasize opportunity, rather than specific economic outcomes, equal or otherwise, and the resulting political actions focused on innovation and education, rather than economic security.  As a result, the federal government’s role in the economy historically averaged about 4% of GDP, and even during the Depression was less than 10%.

But this approach has been largely abandoned, often for what seemed like good reasons at the time.

First came the Progressive era, where laws and regulations were properly enacted to protect workers and consumers, but in connection with these fine impulses a philosophy took placed great faith in the government’s ability to effectively use it’s powers to “rationalize” the market and design appropriate outcomes without unintended consequences.

Second was the New Deal, where Roosevelt very wisely reacted to economic distress with pro-active government programs.  What that lead to, unfortunately, was a political system where politicians paid less attention to long-term structural improvements and more to jobs created in any one month. 

Whether or not government can meaningfully create jobs in the long-term, the reality is that politicians of both parties have since become wedded to debt, thereby sacrificing the interests of the next generation, who will be burdened with that debt, all for the sake of politically popular spending (largely on the middle class) and tax cuts.  In effect, public funds were used to buy votes and ensure the triumph of incumbency.

The third step down that road was taken by President Johnson and his Great Society, and the open-ended promises made, particularly in the area of health care, where the combination of those promises and changing (but not unanticipated) demographics made current programs (Social Security, Medicare and Medicaid) unsustainable in their present form.

In each case, a fundamentally good and generous impulse led to unsustainable commitments, as the government attempted to satisfy an expanding constituency’s short-term desires.  Instead of a focus on long-term innovation and infrastructure (both physical and cultural), we largely devote our resources to health care and a comfortable retirement for an aging middle class.

So, the question is not whether the federal government is inherently evil or benign. The relevant questions are instead:

(1) what do we really, really want government to do;

2) what are the appropriate priorities among those desires, understanding that we simply do not have the financial or human resources to do everything we might want; and

(3) how do we best enhance our long-term fiscal situation to enable us, and succeeding generations, to have the resources necessary to answer society’s legitimate needs, while avoiding piling up long-term debt to address short-term desires.

In fact, one could argue that if one is a true liberal, and sincerely wants to have an expanded government role to help those seen as in need, then the first priority should not be increased taxes and an expanded bureaucracy, but an enhanced economy, which is what will eventually pay for any of those government functions.

And, as a bit of a sneak preview regarding fiscal sanity, the answer probably lies somewhere close to the recommendations of the President’s own fiscal commission: a 3 to 1 ratio of spending cuts to tax increases, realizing that much of those tax increases will necessarily fall on the middle class.

Sunday, March 18, 2012

The General Human Condition

People often bemoan the current state of world or national affairs, without taking into account an historical perspective.

I think that's usually a mistake and the short BBC video cited below, presented from a non-partisan and academic viewpoint, by someone without a particular axe to grind, makes that case convincingly, at least as to two vital metrics over the last 200 years: life expectancy and per capita GDP.

While there are certainly other ways to measure progress (greater political freedoms, less oppression of minorities, expanded educational opportunities and levels of achievement, environmental impact, etc.), those two are very central to a data-driven, evidence-based evaluation of the human condition.

The video is less than five minutes in length and I very much recommend it to each of our readers:


Saturday, January 14, 2012

The Debt Ceiling Fight - It's Coming Back

For those (like the writer) who found the federal debt dealing fight of last Summer to be essentially political theater, with no resolution of long-term structural issues, we should be aware that this particular drama will probably be replayed before the end of the year, or very soon thereafter.

The current debt limit is about $16.4 trillion.  Researchers at Goldman Sachs have run the numbers and they forecast that we will hit that mark in late November, conveniently after the elections.  Shifting some federal internal finances around could operate to move that date to mid-January, but still making it likely that the debt crisis will be addressed by a lame-duck Congress.

The chart below, courtesy of Goldman Sachs, presents the reality of the situation.

Of course, an unexpected economic surprise (conflict with Iran, collapse of the Euro, etc.) could move the decision date up substantially, due to lessened tax revenue.

So, stay tuned!

Tuesday, January 10, 2012

Occupy Wall Street, College and Jobs

One of the issues raised by the Occupy movement has been unemployment among college graduates, especially if combined with large levels of educational-related debt.

So, I thought it might be interesting to research the actual current unemployment level among college graduates, so as to have a firm idea of the magnitude of this problem.

It turns out that it may not be as much of a problem as some people might think.

According to the most recent numbers from the Bureau of Labor Statistics (see www.bls.gov/news.release/pdf/empsit.pdf), for persons 25 years and older, the seasonally adjusted unemployment rate for college graduates (including those with advanced degrees) as of December 2011 was only 4.1%.

[To put this in context, the unemployment rate for those without a high school diploma was 13.8%, for those with a high school diploma was 8.7% and for those with some college but without a bachelor's or higher degree was 7.7%.]

And in the last year or so, the unemployment rate for college (and above) graduates has continued a significant downward trend.  See the following chart, based on BLS data, from the National Association of Colleges and Employers (www.naceweb.org/s12072011/job_market_new_graduates/) through November:

Unemployment Among College Grads

So, the take-away may be that while unemployment is a very unfortunate condition for anyone, for those with college or other advanced degrees the problem may not be as bad as some people might think.

Tuesday, January 3, 2012

The President's Re-Election Strategy

Perhaps unsurprisingly, we learn from a recent Washington Post story (www.washingtonpost.com/politics/obamas-2012-political-strategy-keep-attacking-unpopular-congress/2011/12/30/gIQATe7WRP_story.html) that the President's core re-election strategy will be to "(k)eep beating up on an unpopular Congress.

Given an economy with continuing serious issues regarding a significant lack of jobs and concerns about continuing wealth and income inequalities to which no one has made any meaningful proposals to address, this may be a natural path for the President to take.  After all, if Congress has an historically low approval rating, running against it may hold out the possibility of tapping into a shared distaste for an evidently ineffective institution.

However, the strategy is not without some significant risks, including the following:

1.  Such a strategy does not actually address any of the voters' substantive concerns, such as unemployment, high debt levels, structural deficits, the need for entitlement reform, budget cuts or social inequalities or present a record of solving those issues.

2.  For the first two years of his term, the President's party not only controlled both houses of Congress, but their most significant achievement (ObamaCare) has features opposed by large portions of the electorate.

3.  During that period, as well as thereafter, there was no meaningful progress on entitlement reform, the structural deficit and increasing debt levels, budget cuts or otherwise.

4.  Similarly, the President not only failed to support the recommendations of his own fiscal commission, but also advanced no specific proposals for entitlement reform, the structural deficit and increasing debt levels, or budget cuts.  Generally, if one plans to complain about obstructionism, it's a political advantage to have a record of having made your own proposals, with specific, substantive detail, for solutions to major outstanding issues, which the voters can then evaluate.

5.  Finally, if (as seems likely), the Republicans retain control of the House (and practical "blocking" control of the Senate), running against the folks you will have to work with, and claiming they put party over country, bodes ill for future cooperation between the two branches of government.  This may be especially so if Governor Romney is the eventual nominee and can present a record of having successfully having worked with a Democratic legislature in his home state.

Monday, December 26, 2011

Income Disparity and Other Countries - OECD Data

Although the US continues to have one of the highest levels of income disparities in the developed world, the growth in income disparity has been about as great or greater in other countries, including those with substantially different economic and social systems, including Israel, New Zealand, Germany, France, Finland and Sweden.

So, to the extent this is a problem in the U.S., we are not alone in it getting worse.

The only country that showed a decline in income disparity was Greece, perhaps due to their financial system cratering which, I suppose, is one way to solve the problem.

The OECD chart below gives the relevant data - increases are shown by the distance between the top of the blue lines and the red diamonds.

See the OECD Report at www.oecd.org/document/40/0,3746,en_21571361_44315115_49166760_1_1_1_1,00.html

Tuesday, December 20, 2011

Income Inequality, Public Perception and Actual Data

With the rise of the Occupy movement (relatively quiescent now, after many evictions from public spaces), income and/or wealth inequality has become the issue de jour in some circles, even resulting in mention in recent speech by the President.

Putting to one side the fact that there have been relatively few specific proposals by any pubic officials to address income differentials in America, a question remains:  How much are Americans actually concerned about this issue?

The answer, it appears, according to a recent Gallup Poll (www.gallup.com/poll/151568/Americans-Prioritize-Growing-Economy-Reducing-Wealth-Gap.aspx), is: 

Not as much as some might expect.

When asked to rate the relative importance of government policies in various areas, here were the results regarding percentages rating such policies as extremely important:

Grow and expand the economy - 32%

Increase the opportunity for people to get ahead if they want to - 29%

Reduce the income and wealth gap between rich and poor - 17%.

Apparently, Americans remain strongly supportive of economic growth and equality of opportunity, but not of government steps to reduce the outcome of income or wealth disparities.

As the Gallup survey notes in its summary - "It is clear that while some Americans, disproportionately Democrats, consider it important that the federal government enact policies to reduce the income and wealth gap, many more Americans consider it important that the government grow the economy and increase the equality of opportunity."

A separate Gallup question found that "the fact that some people in the United States are rich and others are poor" is deemed "an acceptable part of the economic system" by 52% of those asked, a reversal from the last time the question was asked (in 1998) when 52% said that it was "a problem that needed to be fixed."

 So, while steps to reduce income/wealth differentials may or may not be good policy (some differentials being an inherent part of any free market system - George Clooney will always make more than Joe the Plumber), it seems clear that support for proposals to reduce such disparities are, relatively speaking, simply not a high priority for most Americans.

In that regard, it may be that the Occupy activist's priorities are shared by only a small proportion of most Americans.