Category: Political Science

The new Y2K problem?

Felix Salmon writes:

…it’s far from clear that it’s even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I’m sure could not be implemented overnight — and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Now that’s what I call government precommitment.  The post is interesting throughout.

Medicare Cost Control?

Long-time readers will know that I am skeptical of the FDA. Let’s ignore that for the purpose of this post. Now consider the following two quotes.

The FDA recommended unanimously that Avastin no longer be used to treat breast cancer, saying that the risks of the drug far outweighed any benefits.

…”Even though we have anecdotal information, we don’t have evidence that it prolongs survival or improves quality of life,” said Natalie Compagni-Portis, a patient representative and voting member of the FDA panel. In a series of four questions, the six-member panel voted across the board that the clinical trials conducted by Genentech did not provide evidence that Avastin prolonged life for breast cancer patients, nor did it improve their quality of life. The panel also recommended that FDA commissioner Peggy Hamburg should not continue to allow the drug to be used for breast cancer patients.

A strong statement from the FDA. Now compare:

Medicare will continue to cover Avastin for breast cancer treatment even if U.S. Food and Drug Administration Commissioner Peggy Hamburg decides to withdraw Avastin for such use, according to Don McLeod, a spokesman for the Centers for Medicare and Medicaid.

“The FDA decision, when it comes, does not affect CMS,” McLeod told Reuters.

How does this make sense? Does CMS have information that runs counter to the FDA’s information? If so, let’s hear it. Or is this just a turf war? What does this say about the prospects for cost control of Medicare?

“It is too soon to tell” — the real story China fact of the day

The impact of the French Revolution? “Too early to say.”

Thus did Zhou Enlai – in responding to questions in the early 1970s about the popular revolt in France almost two centuries earlier – buttress China’s reputation as a far-thinking, patient civilisation.

The former premier’s answer has become a frequently deployed cliché, used as evidence of the sage Chinese ability to think long-term – in contrast to impatient westerners.

The trouble is that Zhou was not referring to the 1789 storming of the Bastille in a discussion with Richard Nixon during the late US president’s pioneering China visit. Zhou’s answer related to events only three years earlier – the 1968 students’ riots in Paris, according to Nixon’s interpreter at the time.

How so?

At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.

“I distinctly remember the exchange. There was a mis­understanding that was too delicious to invite correction,” said Mr Freeman.

He said Zhou had been confused when asked about the French Revolution and the Paris Commune. “But these were exactly the kinds of terms used by the students to describe what they were up to in 1968 and that is how Zhou understood them.”

But will this revelation diminish the use of this story?  Dare I say it is too soon to tell?  By the way:

The oft-quoted Chinese curse, “May you live in interesting times”, does not exist in China itself, scholars say.

The next Fed nominee

1. Should have spent a lot of time talking to Republicans.

2. When meeting with Ron Paul, the following should come to his mind: “I have great respect for the proponents of hard money and I view them as one reason why America became great again, in the 1980s.  I know you think the minimum wage is worse than we at the Fed do, so please let me bring one argument to your attention.  Unemployment is very high now, perhaps in part because the minimum wage has raised forty percent in the midst of a downturn a few years ago.  But those statists in Congress simply will not vote to lower or abolish the minimum wage, damn them.  We can, however, surreptitiously lower the minimum wage in real terms with a bit of loose monetary policy.  I know you are not with us on this monetary issue, but if you find yourself having to strike a compromise of some kind, at least rest assured that a budge from your side would be liberating millions of lower-income Americans from slavery.  It could get us off the Road to Serfdom.”

The Fed governor doesn’t have to believe that, and may not wish to say exactly that, but a speech of that nature should come rather quickly to his or her mind.  If not, he or she is probably not the right nominee in the first place.  The Fed staff can figure out the rest.

Addendum: Matt Yglesias offers relevant comment.  Alternatively, Felix Salmon may be correct that there is no deal to be made with the Republicans.  In that case, a) Diamond would not have mattered anyway, and b) we still should base the choice upon the scenarios where the choice stands a chance of making a difference.  Furthermore, the Republican reps. do not have the same incentives as the Presidential candidate, so a deal may be possible after all.

When does greater inequality lead to greater redistribution?

Henry Farrell reports:

Noam Lupu and Jonas Pontussen (PDF) have a piece on the relationship between inequality and distribution in the new American Political Science Review. There is a lot of debate about whether the level of economic inequality in society leads to greater or lesser distribution – what Lupu and Pontussen suggest is that the structure of inequality (that is – the more particular relationships between different segments in the income distribution, rather than some summary index) is more important. More particularly they argue that if one tries to hold racial and ethnic cleavages constant, the key factor determining redistribution is the income gap between middle income voters and lower income voters. Where this gap is low, middle class people feel some degree of solidarity with the poor and exhibit what Lupu and Pontussen describe as “parochial altruism.” That is, they are more likely to support income redistribution because they feel that the poor are in some sense, ‘like them.’ When the gap is high, middle class people will have a much weaker sense of solidarity with the poor, and hence be less supportive of redistribution. Lupu and Pontussen suggest that the US is an outlier, with weaker solidarity than the structure of US inequality would suggest. They argue that the explanation for this is straightforward – “it is clearly attributable to the high-concentration of racial-ethnic minorities in the bottom of the income distribution.” More bluntly put – middle class Americans feel less solidarity with the very poor because the very poor are more likely to be black.

Just “The Seen,” not The Unseen — how well did the fiscal stimulus do?

This is not, not, not a blog post about the economic efficacy of fiscal stimulus, rather think of it as an analysis of the public relations of the stimulus.

I ask myself a simple question: have I seen any completed benefits from ARRA, which now passed into law well over two years ago?  I drive around all the time and I see ARRA-funded projects which are not yet finished.  The  lane closures make my life worse, although the new lanes might eventually lower traffic congestion.  I wish I could say these projects will be done soon, but that is not obvious.

My “grandma test” for a big spending program on infrastructure would be:

1) Has it fixed the mess at LaGuardia airport?

2) Does the DC Metro run any better?

Again, that’s PR, not analytics about the net return of the program, but I believe the answer to both 1) and 2) is “no.”  The DC Metro seems to run worse each year.

I find this all remarkable, if only as viewed through the light of public choice economics.  More useful monuments might have been expected.

There is no need to list the not-so-easily-seen benefits of ARRA in the comments; doing so would suggest you were not paying attention.  This is a  post about the easily seen benefits and how remarkably unpersuasive they have proven.

The wisdom of Josh Barro

Unfortunately, it’s also possible (as many other voices on Wall Street are warning) that a default would permanently raise Treasury spreads, drive investors to find alternative safe havens, cause a double-dip recession, and unleash various other evils. So, if they are willing to create the possibility of a default, Republicans in Congress are willing to expose America to severe downside risk.

It’s important to step back and consider the stakes here. Republicans say it is important, above all else, to rein in federal government spending. But the risk with excessive spending is not that government will literally become unaffordable or that we will be unable to service our debts. The United States has tremendous available fiscal capacity, as demonstrated by significantly higher tax burdens in most other first-world countries. The real risk of elevated spending is that we’ll adopt a permanently higher level of taxation.

That is a risk, but not a catastrophic one. While there is a link between government spending and economic growth, it is not as strong as conservatives like to believe. For example, Mueller and Stratmann find that a one percentage point rise in government spending as a share of GDP will tend to reduce annual GDP growth by a bit under one-twentieth of a percentage point. If we take Simpson-Bowles as an example of the sort of deficit deal that might be achieved in the medium term without the need to flirt with a bond default, then we’re talking about a difference of one to two points of GDP in government spending compared to an all-Republican plan.

There is also nothing special about government spending as a share of GDP as opposed to other determinants of economic growth, such as rule of law, freedom of contract, immigration policy, free trade and the structure of the tax code—not to mention policies on infrastructure, land use and education. Basically, we could make up a sub-0.1 percentage point hit to long term GDP growth with policy improvements elsewhere.

Which is to say, it does not make sense to create a risk that U.S. Treasuries will be dislodged as the world’s safe-haven investment as a strategy to shift the size of government by a percentage point of GDP or two. Winning this fight is not so important that it makes sense to throw caution to the wind, but that is what Republicans in Congress appear willing to do. The gamble looks even worse when you consider that a debt-limit-impasse-gone-wrong would not necessarily lead to Republicans getting their way on the long-term fiscal adjustment.

The full post is here.

*The Declaration of Independents*

The authors are the renowned Nick Gillespie and Matt Welch and the subtitle is How Libertarian Politics Can Fix What’s Wrong with America.

This book is a excellent 2011 statement of what libertarianism should be, though I would say the title is more descriptive of the content than is the subtitle.  It’s well written throughout, smart to focus on the areas where libertarianism is strongest, and remarkably for an “ideological” book it never ventures into the absurd or makes indefensible claims.

It stresses government as a dysfunctional institution which forces too much bundling, too little choice, and too little real accountability.  It explains why the dynamics of political power are so difficult to avoid.  It recognizes the numerous ways in which we are freer than in times past and it stresses the cultural dimensions of both recent progress and libertarian thought.  It reads like a book which is much smarter for having read blogs written by people of opposing points of view (just my speculation).

Is the book libertarian or liberaltarian?  There’s never quite a recipe for how government might, say, shrink to a much smaller share of gdp.  The section on health care stresses that health care is not the major determinant of health and that government policy has driven cost inflation.  I am never sure how much the latter claim is true.  They call for more choice in the hands of consumers, but the details are murky.  They call, correctly, for insurance and provider deregulation.  There is a call, correctly, for more competition and portable, non-job-attached health insurance policies.  But can all that, combined, lead us to dismantle Medicare and Medicaid and still somehow deal with the “people dying in the streets” problem?  That case is not made, nor am I sure how much the authors wish to make it.  I am also not so sure that current political markets are a crumbling duopoly; we will see.

This is the up-to-date statement of libertarianism.  Not warmed-over right-wing politics, but real, true-blooded libertarianism in the sense of loving liberty and wanting to find a new path toward human flourishing.

Words of wisdom

Basically when you ask questions where the left-wing answer is also the one supported by economics, suddenly left-wing people have a better understanding of economics. But when you ask the other set of questions, it comes out the other way. Basically, there’s a lot of confirmation bias out there. This is why I think people who teach economics ought to think harder about their choice of examples when teaching.

That is Matt Yglesias (check out the interesting graph), referring to this paper by Daniel Klein and Zeljka Buturovic.

A few thoughts on the debt ceiling

This topic is so laden with “us vs. them” thinking that I am loathe to approach it.  Still, here are a few thoughts:

1. There is plenty in the federal budget which can be cut and should be cut, starting with farm subsidies but extending considerably further.

2. In blackmailing President Obama (and arguably the Senate too), the House Republicans are cowards.  They want him to take the heat for the spending cuts.

3. In considering the blackmail to be blackmail, the Obama administration has its share of cowards.  “You are forcing us to propose something we believe in” is not that serious a negative charge, even if the motives of the forcers are ignoble.  That said, the Obama administration is probably not going to propose something it believes in, which makes them ignoble too.

4. “Blackmail” is also known as “checks and balances” and it does not, normatively speaking, require an electoral mandate.  That said, arguably the House Republicans do have an electoral mandate for the idea of “doing something about the crummy budget,” but do not have a mandate for particular cuts which might be prompted.  Which of these is the “fact of the matter” is a moot point.

5. In my view the consequences of “funny debt ceiling outcomes” could be very, very bad.  Various crude causal theories, or underspecified bargaining theory axioms, will be used to apportion this blame to one side or the other.  The naive causal perspective would seem to apportion most of the blame for the chance of catastrophe to the Republicans.

6. By refusing to raise income tax rates on the non-wealthy, or to propose some comparably unpopular reforms, the Obama administration is somewhat undoing the normative relevance of the naive causal perspective here.  The Obama administration is also stonewalling on (required) further fiscal reforms to Medicare, to better use the issue against the Republicans.

7. Do we take market prices seriously?  Since Treasury rates are still low, low, low, arguably we can infer that the market does not think the Republican stance is so catastrophic.  Paul Krugman does not take a consistent position on the relevance of low rates.  They are allowed to indicate that the U.S. government should spend more, but not allowed to indicate that we should diminish the blame to be leveled at Republicans.  One cannot have it both ways.

Addendum: Megan McArdle comments.