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"The past 60 years has been a period of politics by interests, not principles." Just the past 60 years? No need to romanticize the past. Examples of politics by principle are few and far between throughout all history. I'm not convinced that the past 60 years represent an anomaly so much as an evolution. The real mystery of political economy to me is: given the strength of the status quo, how did we ever get positive change? What predicts the sort of environment where positive change is possible?

In answering this question I think disaster and strife have a particularly bad track record. Crises do make change more likely and increase the variance of possible responses, but it seems like things are much more likely. I'm much more hopeful about the positive demographic shocks you mention as a channel for positive change, or perhaps positive technology shocks that vastly increase wealth at a rate faster than the state is destroying it. Good outcomes feed in to good ideas which lead to good policy.

The fact is that immigration has MASSIVELY INCREASED the fiscal problems of California & the US.

The data are completely unambiguous.

Uneducated immigrants families from South of the border cost 10s in not 100s of thousands more in social services across lifetimes than they contribute in taxes.

Do the math on the cost of government eduction, government healthcare, government retirement, and government disability payments in California.

The typical uneducated immigrate pays no income tax and very little of any other kind of tax.

I assume no libertarian has every looks or thought about the numbers, otherwise they are simply very, very dishonest people.

"(a) a unexpected positive demographic shock to the US thru (2) open immigration."

Exit polls show that mass immigration has lead to a massive demographic shift in the ideological make up of the United States.

Modern immigrants overwhelmingly vote left and against more limited government, and so do their children and grandchildren.

Open borders is part of the recipe of for a permanent ending of the classic liberal experiment in America.

Greg,

I think it is easy to mistake your position for anti-immigration. Contrary to your apparent assertion, we indeed need immigration, but immigration which increases productivity, not drags it down.

The problem is not *immigration* per se, but rather that the existing incentive structure created by the current rules of the game (the government) do not lead to good immigration. So it is easy to see that the problem is not blanket immigration, but rather the problem is the government creating bad immigration through bad policy.

*Bad immigration* involoves the problem of free-riding that you point to. Good immigration on the other hand incentivizes the immigration of folks who want to join in the classical liberal experiment. If we change the incentive structure in a positive manner, we will quickly see a change in the makeup of the immigrants who enter. We will see more folks like my collegue and friend Javier, a native of Mexico City who holds a PhD in geochemistry, and is one of the foremost experts in his field in the entire world.

So the solution to bad immigration does not involve a higher fence at the borders, or troops, but rather a realization that the problem is embedded deeply within the rule structure of the current society.

Again, the solution to bad immigration is not to barricade the borders, but rather to change the incentive structure which will thus lead to a "good immigration" which will lead to a better society and a faster growing economy.

I don't think you're being reasonable at all by characterizing the situation this way:

"But we shouldn't forget that we cannot persistently trade-off long term economic growth for short term relief and not reduce our well-being significantly. Again, this isn't an issue of political ideology or of different schools of economic thought, the trade-off is real and binding. Wishing it to be different because it is inconvient [sic] isn't going to make it so. Tough fiscal decisions need to be made."

No one that I know is suggesting persistently trading short term relief for long term growth. For most of the post-war period (not the last 60 years) there's been nothing unsustainable about the deficit outside of entitlements (and those were and to a certain extent still are a long way off). Yes, current deficits are "unsustainable", but nobody is proposing sustaining them. Acting like every deficit of the last sixty years is in the same boat as a way of forcing balanced budgets now is bad - many of us argue - not because we want to trade-off long-term growth for short-term relief but precisely because the short-run damage that sort of austerity will do will hurt long-term growth.

If you don't agree with that, then this is a "different schools of thought" issue. But you can't act like the entire post-war period is a homogeneous, interchangeable fiscal history and then hand wave the very real distinctions between short and long term policy here.

You may not like it or agree with it, but people who are advocating expansionary short run policy advocate it in part because of the damage that austerity would do to the long run.

In the long run, the big problems are obviously entitlements. Now we fund these with dedicated taxes rather than debt precisely because we didn't want to juggle debt for inter-generational payoffs. But that doesn't change the fact that we still need to balance revenue in costs in these programs (particularly Medicare). The problem with this post, from my perspective, is that Medicare costs are driven by health care price inflation and the fee for service payment system. Needless to say, balanced budget requirements and cutting public spending doesn't fix either of those things. So I don't see exactly what a balanced budget amendment has to offer here. Even if we push it off of the books, you may solve the more superficial budget problem, but the real problem is still going to be there.

The problem with politicians is not that they always want to deficit spend. All politicians can talk about these days is cutting the deficit.

The problem isn't that they use short-term measures in downturns. The problem is that politicians make policies in growth periods that are not sustainable in the long run. An amendment requiring a balanced budget or (preferably) a sustainable-deficit over the business cycle (balancing the budget every year would be a terrible idea), combined with politicians' propensity to make bad policies in growth years could generate some very perverse results like pro-cyclical fiscal policy.

If we had substantial automatic stabilizers that politicians leave alone, an amendment requiring a sustainable-deficit over the cycle might be valuable. But if not, I think that sort of constitutional constraint would provide a very bad institutional environment.

Constraining the government with constitutions isn't enough. It has to be a good constitution.

"The problem isn't that they use short-term measures in downturns. The problem is that politicians make policies in growth periods that are not sustainable in the long run."

The problem is both.

"You may not like it or agree with it, but people who are advocating expansionary short run policy advocate it in part because of the damage that austerity would do to the long run."

"Austerity" in political spending frees up resources for the market to allocate. Yes, a substantial cut in government spending will then require re-allocation of labor and resources, which is always what is needed after government action has distorted the structure of production, and in the short term this is experienced as a "recession." It makes growth and a vibrant economy possible in the longer term. The idea that permitting this readjustment is damaging in the long run is simply quackery, and the fact that such a view could be widely held in the profession indicates the depth to which the mainstream has sunk.

Allan Walstad -
re: "The idea that permitting this readjustment is damaging in the long run is simply quackery"

Not the readjustment - the demand shortfall. If everyone agreed the only problem was readjustment we wouldn't be having this discussion. Although apparently you don't think we should be having this discussion anyway.

Peter -
Could you be more specific about exactly what constitutional reform you're thinking of? It's a little vague in this post. From context, I've guessed that it's something like a balanced budget requirement. Are you thinking an annual balanced budget requirement or over the business cycle?

We have to always ask how political actors will behave under constraints we place on them, and the more I think about it, both of these versions (as well as a constant-percent-of-GDP rule) would produce pro-cyclical fiscal policy in the hands of actual, real live politicians. A balanced budget over the cycle may get counter-cyclical fiscal policy if politicians are wise and benevolent about it, but I am not interested in betting on that. The incentives of that sort of constitutional arrangement would be too strong in favor of pro-cyclicality.

So are you saying that would be a good thing?

Or are you thinking of an entirely different set of constitutional rules?

It's easy to get head nods for a call to constrain politicians - I'm just trying to get a better sense for exactly what you have in mind and its implications.

Permitting the readjustment is what's necessary, Keynesian prattle about "demand shortfall" notwithstanding.

NPR had an analysis of the fiscal cliff plus the sequester and estimated that if both became law they would reduce the deficit to $640 billion / yr. That’s a big reduction in the deficit, but debt will still grow by 2/3 of a trillion every year.

No politician is considering reducing spending. Ryan’s plan would merely cut growth in spending by 10% and the left considered that draconian and unacceptable.

Most Americans including politicians think they can solve the problem by taxing the rich more. Of course, southern Europe has tried that for decades.

Some remember the Reagan years and think we can outgrow the problem, but that train left the station decades ago.

The US fiscal problem will resolve itself when all the baby boomers are dead because Social security and Medicare spending will collapse.

Getting back to Pete's original post, I agree with him. I wrote some of my own observations at ThinkMarkets:

http://thinkmarkets.wordpress.com/2012/11/09/fiscal-cliff-sense-and-nonsense/

But let me add here that underlying much of the expansion of the welfare state is the idea that the "general welfare" is just a collection or aggregation of "special interests." Hayek and Buchanan have shown what is wrong with that. (Indeed Mitt Romney claimed yesterday, with some justification, that Obama won the election by giving fiscal or other gifts to just the right special interests.)

This idea infects discussions about how to solve the fiscal problems. Get everybody together to compromise -- I am not sure what that would look like. But it probably ensures that the most powerful interests get theirs. And why not? That was the principle underlying the expansion of the welfare state in the first place. The game remains fundamentally the same.

The "unreasonable" solution is the best -- across the board cuts in expenditures. Across the board cuts or elimination in tax deductions and then reduction of tax rates. No excuses.

We need a new attitude toward government. Keynes's idea of judging each intervention on its own merits is flawed as I tried to show in my slippery slope work. The old dogmas of laissez faire have their role.

In any event, I want all those youngin's out there to work very hard and pay all of my benefits. And then the savage cuts can take place. :)


Daniel has offered no explanation for the fact that much of the western world (and Japan) is simultaneously headed along a similar fiscal trajectory. Perhaps if the fiscal issues were endemic to one or two countries, it might be argued that the problems are isolated noise in a reasonably well-functioning system of social democracy. However the fact that so many countries are simulaneously headed the same direction begs for a better explanation. In my mind it likely points to some sort of institutional problem that is embedded in western democracy. I think Pete's theory (and that of Hayek and Buchanan)is on the right track.

K Sralla -
Maybe you can be more clear on what fiscal trajectory you're talking about.

We are on a fiscal trajectory of steadily growing government. With more disposable income from economic growth and greater demand for more public-ish goods (I hate those dichotomies) we are seeing expansion of spending on that sort of stuff. I don't see why that's a problem. That's a good thing, but I understand people disagree.

Or are you talking about a fiscal debt trajectory? Some are more and some are less sustainable. Different entitlements in different countries need to be reformed in different ways. The short-run run up in debt for a lot of countries has been a result of the financial crisis - not a governance or constitutional problem. I'm sure we've all seen by now that a lot of the PIIGS were as well behaved as a lot of the rest of the EU fiscally. The problem has been the crisis, not an institutional problem.

The explanations are all there, what you mean is you don't find them convincing. I can sympathize with that - I don't find yours or Pete's particularly convincing. Conflating post-war fiscal policy, entitlement issues, and the impact of the financial crisis is a confused way of approaching this, and any solution that relies on that conflation is barking up the wrong tree.

On that first issue; if one thinks that the market leaves lots of gains on the table, and that government is better than the market at capturing those opportunities, then by all means, the west should continue to grow the size and scope of government. But if that idea is wrong, then the continual expansion of government eventually slows down or even halts the prosperity of a nation. If the "investments" that government makes are wasteful enough to counterbalance gains made by the market, then at some level indeed it does stall out the economic growth of a society. It is really that simple. We don't even need the market to operate near a Pareto optimum for this to be true. It just must be better than government.

Now the tricky part is that democracy unhinged from strict constitutional constraints makes it very difficult for a nation to change course, even after economists and the public begin realize that government is consuming a nations scarce resources and offering poor returns. When most folks are asked if the government should get smaller, they say yes. But when the vote, they most often vote in their own self interest.

I don't believe politicians who say they are for austerity and then turn around and vote for more and more spending. I don't believe politicians who say they are for cutting the deficit, but do not engage in baseline budgeting and call a reduction in a spending increase a "cut." There may be some who are willing to believe the words of politicians; I am only willing to believe their actions. Saying this or that politicians is saying they are in favor of deficit cuts proves nothing. I don't know how anyone can believe people whose actions have without fail proven the opposite of their words.

People like Warren Buffett are a major part of the problem. Here is his take on business:

“Consider this set of coin-tossing possibilities, proposed by Warren [Buffett]. Suppose 225 million Americans all join in a coin-tossing contest in which each player bets a dollar each day on whether the toss of a coin will turn up heads or tails. Each day, the losers turn their dollars over to the winners, who then stake their wings on the next day’s toss. The laws of chance tel us that, after ten flips on ten mornings, only 220,000 people will be in the contest, and each will have won a little over $1,000. After that, the game heat up. Ten days later, only 215 people will still be playing, but each of them will be worth over $1,050,000.

“[Buffett] suggests that this small group of winners will marvel at their own skills. Some of them will write books on “How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Or, they will tackle skeptical professors of finance with “If it can’t be don, why are there 215 of us?” But, [Buffett] goes on to pount out, “…then some business chool professor will probably be rude enough to bring up the fact that if ]225] million orangutans had engaged in a similar exercise, the results would be much the same – 215 egotistical orangutans with 20 strait winning flips.”

Peter Bernstein, Capital Ideas: The Improbable Origins of Wall Street p. 142-143 cited in “Applied Value Investing” by Joseph Calandro, Jr.

In other words, no one contributes to wealth creation. The wealth pie is fixes and chance redistributes it. Since no one earns what they get, it's unfair and the state has the right to take from the winners as much as it wants to give to the losers.

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