Cut the meat, save the fat

Thomas Sowell describes the perverse incentives of government bureaucrats facing budget cuts much better than I can:

Back in my teaching days, many years ago, one of the things I liked to ask the class to consider was this: Imagine a government agency with only two tasks: (1) building statues of Benedict Arnold and (2) providing life-saving medications to children. If this agency's budget were cut, what would it do?

The answer, of course, is that it would cut back on the medications for children. Why? Because that would be what was most likely to get the budget cuts restored. If they cut back on building statues of Benedict Arnold, people might ask why they were building statues of Benedict Arnold in the first place.

A ranting Brit

A bit of an impressive rant from England:

Now we know why they don’t call themselves ‘police forces’ any more. But they aren’t ‘services’ either, for they certainly don’t serve us or do what we want them to do, preferring to arrest us for defending ourselves. The criminals, who are cunning without being intelligent, all know this.

Read more: http://www.dailymail.co.uk/news/article-2025695/UK-riots-Police-water-cannon-plastic-bullets-After-50-years-lavish-welfare-state-earth-What-abject-failure-says-Peter-Hitchens.html#ixzz1V6Erdk8v

The king of ranters

Nobody writes rants like Mark Steyn.

The Treasury crowed that Fiat had agreed to pay a whopping $560 million for the government's Chrysler shares.Wow! 560 million smackeroos! If you laid them out end to end, they're equivalent to what the federal government borrows every three hours. That's some windfall! In the time it takes to fly Obama to Toledo to boast about it, he'd already blown through the Italians' check.

A small bit of a longer piece that no single excerpt can do justice to. Read the whole thing. As someone who occasionally writes rants, I am awed at the skill of Mark Steyn.

The scary thing is he is probably right about the three hours.

The government and the financial panic

The theme that the financial panic of 2008 and the recession that accompanied it were caused by a lack or regulation or by deregulation is common, especially on the Left. The counterargument is that the financial panic was the direct result of government regulation and policy, especially in the housing market. Joseph Lawler makes the case in The American Spectator:

[T]he financial crisis was not caused by weak or ineffective regulation. On the contrary, the financial crisis of 2008 was caused by government housing policies -- sponsored and promoted by many of the same people who framed and ultimately enacted the DFA.

Because his argument puts the blame on the government and not on the private sector, it has been attacked. He responds here.

The coming fiscal crisis

The Congressional Budget Office put out an amazing document on July 27, 2010 titled "Federal Debt and the Risk of a Fiscal Crisis " The purpose was not to say that there was no risk of a fiscal crisis. On the contrary, the document outlined how fiscal crises come about and said that the U.S. will eventually have a fiscal crisis unless the government greatly reduces the level of deficits:

But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy. When fiscal crises do occur, they often happen during an economic downturn, which amplifies the difficulties of adjusting fiscal policy in response.

The most arresting passage in the piece, though, was this one:

According to the Congressional Budget Office’s (CBO’s) projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.

The Democrats want to blame Bush for this, but there is an inconvenient truth that they have to ignore to do that: they captured control of congress in the 2006 elections and have had control the purse strings since then.

You can find a link to the document on Greg Mankiw's blog here, or get the document directly here.

Greece on the skids?

In the Washington Post Robert Samuelson ponders the fate of Greece, and wonders if it is the canary in the mineshaft:

What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro.
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The threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birth rate and rapidly graying population automatically increase old-age assistance even as the government tries to cut its spending. At issue is the viability of its present welfare state.
Almost every advanced country -- the United States, Britain, Germany, Italy, France, Japan, Belgium and others -- faces some combination of huge budget deficits, high debts, aging populations and political paralysis. It's an unstable mix. Present deficits may aid economic recovery, but the persistence of those deficits threatens long-term prosperity. The same unpleasant choices confronting Greece await most wealthy nations, even if they pretend otherwise.

Emotional voting

In his Myth of the Rational Voter Byran Caplan argues that because we do not have to bear the consequences of our votes, we choose our politics on other bases. A pretty good example of what he is saying seems to be evident in this article, in which the author expresses some buyer's remorse for one of her emotional reactions, but seems unaware that all of her political views are nothing more than emotional reactions. (The comments are brutal.)

Headstart

Is the Headstart program effective? A study from the federal government is not reassuring.

In sum, this report finds that providing access to Head Start has benefits for both 3-year-olds and 4-year-olds in the cognitive, health, and parenting domains, and for 3-year-olds in the social-emotional domain. However, the benefits of access to Head Start at age four are largely absent by 1st grade for the program population as a whole. For 3-year-olds, there are few sustained benefits, although access to the program may lead to improved parent-child relationships through 1st grade…

Why no recovery yet?

Writing in the Wall Street Journal, Gary Becker, Steven Davis, and Kevin Murphy ponder why the recovery has been so slow. They argue, though not using the term, that the Obama Administration has pursued bad supply-side policies.

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.
Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.
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By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession.

Government failure

Economists often talk about market failure and sometimes about government failure. The airport at Johnstown, PA seems to be a pretty good illustration of government failure.

In 20 years, Mr. Murtha has successfully doled out more than $150 million of federal payments to what is now being called the airport for no one.

The economics of heath care

Tigerhawk links to an excellent article in the Atlantic on health care. From the article:

All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.
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But health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is.
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There was nothing natural or inevitable about the way our system developed: employer-based, comprehensive insurance crowded out alternative methods of paying for health-care expenses only because of a poorly considered tax benefit passed half a century ago.
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Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total.
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Many hospitals still exist in their current form largely because they are protected by regulation and favored by government payment policies, which effectively maintain the existing industrial structure, rather than encouraging innovation.

Read the whole thing if you want a good summary of why health care is the mess that it is.

Staffing the government

The New York Times reports that only 43% of the senior positions in the Obama administration have been filled.

Measuring the progress in appointments depends on what positions are counted and who is doing the counting. The White House Transition Project counts 543 policymaking jobs requiring Senate confirmation in four top executive ranks. As of last week, Mr. Obama had announced his selections for 319 of those positions, and the Senate had confirmed 236, or 43 percent of the top echelon of government. Other scholars have slightly different but similar tallies.

Much of the problem is the vetting process:

“Anyone who has gone through it or looked at this process will tell you thatevery administration it gets worse and it gets more cumbersome,” Mrs. Clinton said last month. “And some very good people, you know, just didn’t want to be vetted.” She added: “You have to hire lawyers, you have to hire accountants. I mean, it is ridiculous.”

Isn't there a lesson here, that trying to solve one problem with ever more regulation can create a new, more serious problem elsewhere?

Chapman on heath care

From Steve Chapman:

In their 2006 book, "The Business of Health," economists Robert L. Ohsfeldt and John E. Schneider set out to determine where the U.S. would rank in life span among developed nations if homicides and accidents are factored out. Their answer? First place.
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In Britain, by contrast, having guaranteed access to care doesn't mean you'll actually get it. Twenty percent of British cancer patients who might be cured become incurable while awaiting the treatment they need.

Orzag and Public Choice theory

The Wall Street Journal has an article profiling Peter Orzag, the White House budget director:

The battle heated up in June, when Mr. Orszag visited Capitol Hill to discuss health care with a small group of House Democrats. The meeting started well, with one lawmaker after another echoing his message that spending controls were critical to any health-care overhaul, according to two administration officials.

Then one member said her top priority was winning higher payments for oxygen suppliers, the officials say. Mr. Orszag was taken aback. Officials had been trying for years to cut payments to suppliers of oxygen and other medical equipment, which critics say are inflated. Yet when a new competitive bidding process was set to take effect last year, industry supporters in Congress were able to delay the plan. They are still fighting to block changes.

"One of the reasons we currently have such disjointed and skewed incentives is that we have an excessively political process," Mr. Orszag said in an interview.

So the solution to disjointed and skewed incentives causes by an excessively political process is to increase the role of the government in health care? I cannot figure out what the logic is to this argument.

It is an interesting article about one of the big players in the changing of health care policy. He reminds me a lot of the very bright Keynesian economists of the 1960s, who were sure that they could solve the economy's problems if only they did not have to worry about the politics that goes with government spending, regulating, and taxing.

Samuelson on deficits

In the Washington Post, Robert Samuelson reminds us about the problems of big government:

Everyone favors benefits and opposes burdens (taxes). Republicans want to cut taxes without cutting spending. Democrats want to increase spending without increasing taxes, except on the rich. The differences between the parties are shades of gray. Hardly anyone asks the hard questions of who doesn't need benefits, which programs are expendable and what taxes might cover remaining deficits.
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The CBO notes that elevated deficits would penalize saving, investment and income, while unprecedented tax burdens could "slow the growth of the economy, making the [government's] spending burden harder to bear." To such warnings, Americans' collective response is: Go away.

There is nothing new in what he writes. However, not enough people realize that eventually someone will end up losing in this gigantic Ponzi scheme that we are all running. Governments have finite lifetimes, but they budget on the assumption that they are immortal.

The supply-side case against Obama

In his "War Against Producers", Victor Davis Hanson makes the supply-side case against Obamonomics:

And that means rippling throughout this key sector of the economy — even before these taxes have been enacted — are hesitation, stasis, and ultimately constriction — at first for psychological reasons, soon confirmed by the actual facts of less money. In short, very bright people will be thinking how to hide income, how to barter, how to slow down and not produce goods and services, rather than blast full speed ahead and enrich angry others.

Taxicabs and medallions

Found on Carpe Diem and traced back to its source at The Washington Examiner:

The soaring number of taxicab operators in D.C. -- roughly 8,000, most of whom own their own cars -- is a "pressing and urgent problem," Graham said. There are more licensed drivers in D.C. per capita than any place in the world, he said, and new applicants continue to take the required class, giving them access to the driver exam administered by the D.C. Taxicab Commission. A glut of drivers could jeopardize the chances of any cabbies making an adequate living, Graham has said.
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New York City's medallion system, established in 1937 during the Great Depression in response to a ballooning number of unregulated taxis, artificially capped the number of cabs on the road, to what is now about 13,000.

The medallion program, however, made it very difficult for the average New Yorker to join the industry as an owner: The May 2009 price for an individual medallion, those held by owner-operators, was $568,000. The cost of a corporate medallion was $744,000.

D.C. Taxicab Commissioner A. Cornelius Baker said during a recent meeting that the city must move "toward a regulated taxi force" and create a system "that sustains our drivers and also creates wealth for them in the long term."

When the ordinary workings of a competitive market are seen as a problem, what chance does capitalism have? (The New York medallion program was being used as an example of the problems of regulation forty years ago when I was a student. It is amazing that other cities want to emulate it.)

California dreaming

Kevin Hassett writes about the deficits spending of California and the Obama administration:

It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.
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The federal picture is so bleak because the Obama administration is the most fiscally irresponsible in the history of the U.S. I would imagine that he would be the intergalactic champion as well, if we could gather the data on deficits on other worlds. Obama has taken George W. Bush’s inattention to deficits and elevated it to an art form.

Regime uncertainty

A discussion of regime uncertainty at samizdata.net, mostly in the comments. (It is rather unusual for the comments to be more interesting than the main post, but this may be an example.) There is also a link to an article by Robert Higgs that looks at regime uncertainty as a reason the Great Depression lasted so long.

Asymmetry and government failure

Imagine that the TARP program had not passed in early October, 2008, and that in the months following the unemployment rate had soared to 8.1% in February with further rises expected, on March 9 the Dow Jones Industrial Average had dropped below 6650 in the most severe bear market since the Great Depression, and that the GDP had declined at a 6.3% rate in the fourth quarter of 2008. Do you doubt that those who voted nay on the bill would be blamed for the disastrous course of the economy and the financial markets followed? So why are we not damning those who voted for a bill that obviously did not meet the expectations of those who advanced and implemented it? It is because they can always reply that in the absence of action, the situation would be even worse. But there is no evidence for that and there cannot be because we do not know what would have happened if the bill had not passed. Logically if the bill had not passed and the same things had happened in the economy, those who had opposed the bill could say that if the bill had passed, things would be even worse. However, few would believe them. We live in a world that has great faith in the ability of government to right wrongs.

Asymmetry of this sort, in which there is risk in only one direction, causes bad decision. I have no idea of how to right this, but it should be mentioned when the topic of government failure is discussed.