Category: Uncategorized

What is driving growth in government spending?

by  Tyler Cowen in

Here are some very useful pictures and infographics, excerpt:

To clarify: all of the major categories of government spending have been increasing relative to inflation. But essentially all of the increase in spending relative to economic growth, and the potential tax base, has come from entitlement programs, and about half of that has come from health care entitlements specifically.

That is not NRO but rather Nate Silver.  Here is the concluding tag:

We may have gone from conceiving of government as an entity that builds roads, dams and airports, provides shared services like schooling, policing and national parks, and wages wars, into the world’s largest insurance broker.

Most of us don’t much care for our insurance broker.

For the pointer I thank Rob Raffety.

Addendum: Henry Aaron has a very sane piece on progressives and the safety net.  I see the current American Left as rapidly losing what it once knew about the need for entitlement reform.  This is a shame, it does not augur well for our fiscal future, and it remains an under-reported story.  I see it happening right under my nose, day by day, article by article, blog post by blog post.

Assorted links

by  Tyler Cowen

1. Where in the store should you place the condoms?

2. Paul Krugman on inequality and recovery and Stiglitz.

3. Are all prices in Norway this high?

4. Tim Duy on inflation in Greece, but sorry falling inflation of a few scant percentage points doesn’t do the trick, nor does the 1% deflation which finally arrives at the end of the energy-subtracted series.  For a simple point of comparison, the rate of U.S. price deflation in 1932 was greater than ten percent with overall deflation running at about twenty-five percent over a period of a few years.  More recently, Japan had nine straight years of core CPI deflation and Greece cannot even manage anything close to that.  Just what is the Greek Phillips Curve supposed to look like?

5. Where Chinese growth is coming from.

6. Shruti R. on James Buchanan.

7. Fake economist fools Portugal (for a while).

Why are budget issues urgent now?

by  Tyler Cowen in

Paul Krugman considers that question, Matt comments also.  I would offer a few points:

1. One might prefer, for macro reasons, to start with fiscal consolidation a year from now rather than now.  But still the question can be considered with that slight shift of time frame if need be.

2. One major problem is that America is aging, and benefit cuts or decelerations will become successively harder to achieve as the years pass.  There will be many more elderly voters and the elderly as a voting bloc are already quite effective at getting their way.

3. As the years pass, our health care establishment becomes increasingly geared to require especially high revenue streams.  It becomes successively harder to back out of an excessively costly health care system.  Do you believe it would have been easier to put in a more unified and more efficient system of health care assistance in say 1969?  Probably so, and this is simply the mirror side of that belief.

4. Whether one likes it or not, U.S. politics phases in benefit cuts, or benefit decelerations, only slowly.  Grandfathering is much preferred, so that a critical mass of elderly voters will support the changes and arguably this is more fair as well.  That means one must start relatively early to have a significant cumulative fiscal impact over time.

4b. David Henderson makes numerous good points, here is one: “people can adjust better when they have more time to adjust. If the Social Security formula is altered for the future, people can have longer to save to make up for the higher benefits they would have got but will not get. That’s the argument for doing something about it now rather than later. Remember what happened in 1981 when OMB Director David Stockman tried to cut the early retirement benefit by about one third for people retiring only a few years later. That got nowhere. People looking at a one-third reduction in their retirement benefits who are planning to retire in a few years will not look on that kindly. But what if some previous Administration had announced in 1962 a gradual reduction in the early retirement benefit for people retiring in the early 1980s. Those people would have had much more time to plan.”

5. Krugman has written about why raising the retirement age is a bad way to make up for fiscal gaps and I agree with many of his arguments.  Nonetheless I would insist on taking the continuing survival of such proposals as a kind of datum, indicating just how many other (possibly more sensible) proposals are complete political non-starters.  Let’s learn and draw inferences from the popularity of “raise the retirement age” proposals rather than merely condemning them.

6. The threat is not that future benefits will have to be cut (if that were the case, cutting benefits now would be an odd solution, as Krugman notes).  The threat is that future benefits cannot be cut or slowed and that the U.S. will spend far too much on consumption and the elderly, along with having excessively high taxes and permanently slower growth.

7. I am puzzled by Matt’s argument that government cannot easily save for the future.  Even if one accepts it as stated, government could subsidize private consumption of health care and other amenities less than it does.  That would be easy to achieve.

8. Morgan Stanley estimates that most developed economies are, when unfunded liabilities are taken into account, in some manner insolvent.  Or ask how the fiscal picture would look if the standards for private pension funds were applied to the government.

Maybe my reading is missing it, but I don’t see that Krugman pays much if any heed to political lock-in arguments.  Overall I do not see entitlement spending paths as very easy to alter, mostly for political reasons.  One plausible scenario is simply that it is already too late and has been too late for some time (the rejection of managed care in the 1990s?), although denouement (which does not have to mean default) remains a ways away.  If you are fiscally and/or growth doomed anyway, hurry at the margin will indeed seem of not much extra value.  But that is on net hardly an argument for fiscal complacency.

Assorted links

by  Tyler Cowen

1. Is on-line dating a science?

2. Living the arbitrage. and more here.

3. Which UK students have benefited the most from tuition fee revenue?  And Pinker on lead and crime (pdf).

4. The value of Scrabble tiles as determined by auction, and more here.

5. Apply for Mercatus Master’s fellowships here.

6. How much of an advance would open access journals be?  Excellent FT piece by John Gapper.  And Orin Kerr on the Aaron Swartz case.

The future that is America

by  Tyler Cowen in

A large and growing share of American workers are tapping their retirement savings accounts for non-retirement needs, new data show.

The withdrawals, cash-outs and loans are draining nearly a quarter of the $293 billion that workers and employers deposit into their 401(k) and other savings accounts each year, undermining already shaky retirement security for millions of Americans.

Is this because standards of living have been going up so much (free Facebook), or because some individuals, rightly or wrongly, feel compelled to make up for stagnant or declining job market prospects?  You tell me, here is more on that one.  I call it the tyranny of consumption smoothing, an underreported theme in welfare economics.  And there is this:

Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.

The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay capital gains taxes.

And from the NYT, this article considers how the feeling of scarcity drives the desire to borrow.  These points are related to income inequality, and here you will find my colleague Garett Jones on whether individuals with low time preference will inherit the earth (pdf).

Facts about cities

by  Tyler Cowen in

The average tract density of all these (U.S.) cities taken together declined in every decade since 1910, from 69.6 persons per hectare in 1910 to 14.6 persons per hectare in 2000, almost a fivefold decline.  Fitting an exponential curve to this average density in every decade from 1910 to 2000, we found that the average annual rate of decline for the entire period, assuming a constant rate, was 1.92 percent.  Declines in average tract density between any two consecutive censuses were registered in 124 of the 153 observations, or 81 percent of the time.

That is from the new and quite interesting Planet of Cities, by Shlomo Angel.  My takeaway is that the Avent-Yglesias push for greater urban density, which I sympathize with, is unlikely to happen on a significant scale.  If you are looking for hopeful signs, there is this:

…between 1990 and 2000, six cities in this group registered an increase in average tract density: New York, Washington, Los Angeles, St. Paul, Syracuse, and Nashville.  Hence, while average densities in U.S. cities have been in general decline for almost a century, they may now be reaching a plateau and even gradually increasing.

I definitely recommend this book to all those with an interest in urban issues.

Assorted links

by  Tyler Cowen

1. Economic freedom rankings for the states of India (pdf, and revised link here).

2. My interview with Yale School of Management on cultural globalization.

3. Do chimpanzees actually care about fairness?

4. The David Brooks syllabus on humility, for his course at Yale.

5. Do guns protect us from tyrannical government?

6. Will the end of sleep push down wages?  (By the way, does sleep make it easier to save?)

Richard McKenzie writes a tribute to James Buchanan

by  Tyler Cowen

You will find it under the fold…

At a conference organized in the early 1990s to celebrate Professor James M. Buchanan’s Nobel Prize in Economics, the speakers were asked to tie their comments on economic education to Professor Buchanan’s prodigious works.  My opening line crystallized the importance of my serendipitously coming within Professor Buchanan’s orbit of influence: “When I was in Professor James Buchanan’s microeconomics class in the fall of 1969, he taught me very little.  I say that with pride here in this august setting because Professor Buchanan would be the first among you to realize that I could not offer a higher compliment. He understands, as he got me to see, that the measure of good teaching is not how much you teach, but how much is learned by students – and then how much students can do with what little is taught and learned.  The first principle in economics should be economy in the principles covered,” a point rarely driven home for young economists today.

With his death at age 93, much will be written about Professor Buchanan’s prodigious scholarship that has changed the way people view political and government arenas.  My perspective is more personal, that of a student who came to know an admirable side of Professor Buchanan that his critics and devoted readers will never know.  Professor Buchanan was my dissertation director.  Most dissertation directors take weeks, if not months, to return first drafts of their students’ dissertations.  In my case, I vividly remember placing all 250 pages of my first draft on Professor Buchanan’s desk just before 5 PM one day, only to find a marked-up version, as well as an untold number of typed single-spaced pages of comments, the very next morning!

After graduating and taking an assistant professorship, I started churning out a stream of papers, anxious to move up the academic ladder. But I had an advantage that other young professors could only wish for.  I had Professor Buchanan in my corner, giving generously of his time to review and comment on my work, and all with unbelievable promptness.   I would send Professor Buchanan a paper, and he would have it back to me in no time at all, with pages of comments – long ago, when papers and messages traveled at the snail’s pace of the Post Office.  He was so prompt and predictable on getting papers back that on occasion I would put a paper in an envelope and then go to one of my colleagues and say something to this effect: “Notice that I am putting this paper in the mail to Jim Buchanan today.  I am willing to bet you a cup of coffee that I will get this paper back with one or more single-spaced pages of comments a week from now.”  Without fail, I won the bets and had any number of cups of coffee off Professor Buchanan’s tireless generosity with his time and wisdom with a former student.

I once told Professor Buchanan’s longtime assistant Betty Tillman how remarkable it was that he would get my papers back so promptly and with obvious attention to detail.  I was struck by her reaction, “Honey, I hate to tell you this, but he doesn’t just do it for you.  He does it for everyone.  There’s hardly a day that goes by that he doesn’t get at least one paper in for review, and he almost always has his comments written by the next morning.”

Professor Buchanan’s comments on my papers followed a somewhat predictable format.  He would always start by saying something positive about the content, perhaps focusing on how well the paper was written, if lost for positive comments on content. He would then add his incisive comments, which sometimes forced me to set the paper aside.  But on one paper I remember well that he didn’t start with his usual positive remarks.  He wrote to this effect: “Dear Dick, we all write good papers and bad papers.  With some papers we pursue publication.  With others, we trash them.  In the process of writing any number of papers, we acquire great wisdom in deciding which papers are which.  You will acquire great wisdom in deciding what to do with this paper.”  I didn’t need for him to say more, which he didn’t.  I never tried to revise that paper.

Today, I am pleased to call James Buchanan my professor for pressing on me a remarkably simple but important point that escapes so many colleagues across the country:  Being a professor is a privileged position.  It demands scholarship, but it also demands that you give of yourself in ways that will never show up on your resume, or in your obituary.

Richard McKenzie is the Walter B. Gerken Professor of Economics and Management Emeritus in the Merage School of Business at the University of California, Irvine.