Archive for February, 2010

Government Spending (post #3 of 3)

February 14, 2010

We Are What We Spend

The three charts shown below demonstrate the growth of government in rather dramatic fashion. Most critically I believe the spending charts vividly demonstrate the immense size and power of government. In a series of earlier posts titled, “Government Etiology” and “Government Regulation”, respectively I briefly described my observations of government versus the private sector. 

From these earlier posts, “I posit that when government achieves a critical mass, which I suggest happened in the 1930’s in the US, it then becomes a self-sufficient organism that does not exist to adjudicate private relations but to ensure its own survival, growth and reproduction. There is the illusion of regulating private relations but it is a chimera to hide the survival mechanism of the governmental organism.

This first chart depicts the combined spending of Federal, State and Local governments. That today’s combined spending levels, as a percentage of GDP, are rapidly approaching the peak levels achieved in WWII should be ringing alarm bells loudly enough to damage our hearing. Incredibly, government, at all levels continues to insist it is underfunded

Federal State and Local Spending

Note the sharp rise in combined spending beginning in the early 1930’s. This level of spending never declined to the pre-1930’s level again but became a base upon which all future spending growth has been multiplied. Post WWII spending never again was as low as that in the mid 1930’s and early 1940’s. There are clear periods of level spending (e.g., spending rising in concert with GDP) such as the post Korean war period through the late 1960’s, the 1980’s and a gentle decline in the 1990’s as a peace time economy combined with a technological revolution and a divided government controlled its innate spending impulse. 

This next chart shows just the Federal government spending. Some blogs have compared this level of spending (again, spending as a percentage of GDP) to that of other nations. Norway, as an example, has double this level of federal spending. While I do not know what the level of “state and local” spending is in Norway or elsewhere, frankly, I don’t care much. They are may do as they see fit. My worry is with the United States. This level of government intrusion and control is a clear threat to our Representative Democracy and market oriented economy. Still, this chart suggests federal spending has not been the prime force behind the combined government spending levels. Although the sharp rise in 2008-2010 is threatening that more benign outlook. Question: does this chart tell the whole truth? I say, “no” it doesn’t. While direct federal spending may not be egregious one must also consider the effect of indirect spending where the federal government mandates spending by state and local governments. After all, we only have one private sector. We must therefore consider the combined government spending not its interwoven parts.

Federal Spending as a Percent of GDP

 Again, from my earlier set of posts I noted, “I regret my repetition but I don’t see government as intertwined with the private economy any longer.  It may have been at one time and indeed, surely was. Government was originally designed (in the US) to buttress and support the private economy and hence private relations. It no longer is the support but the controlling master abusing the power of law to effectively blackmail various (and shifting) sectors of the private economy to gain the financial support to continue its growth and ensure its survival.” When government controls $1 out of every $5 government is in control.

It is an arguable proposition whether government (federal, state and local combined) at roughly 45% of GDP has only just now attained a critical mass or if it was achieved at 33% or 25%. I do not believe it is arguable whether our combined government forces have now in fact achieved that critical mass. And, having done so that government is now an independent, self-sufficient organism engaged in territorial conflict with the private sector. The tail is not only wagging the dog but beating it as well. 

Observing the chart of State and Local spending one sees a curious anomaly: spending declined precipitously from the 1930 level to the mid 1940’s. And from the early 1930’s peak the decline is even more significant. However, it rapidly regained its footing and has climbed ever upward since to the point that State and Local spending is now at levels equivalent to that of the Federal government. 

This chart suggests that a large part of the growth in overall government spending is not due to massive growth of the federal government but to state and local governments. I believe this is true on the top level but that underneath one might observe that this is the outcome of federal mandates pushed down onto the states and localities. The largest such mandate is for Medicaid spending. It is arguable whether a federal mandate that forces state and local government spending is any different from federal spending in the first place. 

State and Local Spending as a Percent of GDP

I believe these charts show that government has clearly achieved a critical mass and now qualifies as an independent organism that is in conflict with, as opposed to being a supporter of the private sector.

In that vein I also noted that, “Government will continue to craft rules and regulators will continue to enforce the rules. It cannot be “smart” as … suggest[ed] for the simple reason that today government is akin to any physical organism. It will grow (tax, regulate) to survive and thrive. Government has no interest in innovation only its own survival and gain. Asking government to simplify itself is like asking a human to eat less. Might be helpful, beneficial even, but not going to happen. Force is required. Not necessarily physical force. It could be force by ballot or by quiet revolution. But force it must be.


A friend noted the source of my data for this post. He indicated that the data, due to some interpolations done by the author was not as accurate as I may have surmised. He further notes, “I use the NIPA accounts at 

You can then go to OMB for federal projections and use  the Census data for state and local projections.  … For ballpark estimates [the original] site is ok.

 Also, you should be aware that state and local spending includes intergovernmental transfers that are in addition to state and local revenue receipts.  These transfers should be backed out either at the federal level or the state and local level for total government spending.  Currently the total tax burden stands at about 27% of GDP state, local and federal, Spending is about 38% of GDP for last year and this year.”

I am eminently grateful to my friend for his observations and I stipulate that his data is doubtlessly more accurate. Still, the distinction between spending at 38% of GDP and 45% of GDP is not significant to the point I am making in this post. That is, government has achieved a critical mass and is now a self-sufficient entity that exists for its own purposes. Government, once the servant of the people has now become the master of the people.

Government Etiology (post #2 of 3)

February 14, 2010

The blog, The Conspiracy to Keep You Poor and Stupid by Donald Luskin, published a post titled, “A Marriage on the Rocks” written by Steven Hales. Mr. Hales and I have corresponded on this issue and he has given me permission to post our correspondence along with my comments. I have titled these posts as “Government Etiology” (the initial correspondence) followed by the “Government Regulation” post which combines my comments with Steven’s “A Marriage on the Rocks” article. 

In this initial correspondence Mr. Hale crafts a very cogent explanation of the rationale for the development of government and by extension, regulation. I offer my comments as to how the origination of our government differs from its current manifestation.

Government Etiology

Steven Hales:    If the main purpose of government is to provide a framework for the free exchange of goods, services and ideas, to provide for protection of property rights as well as protect the citizenry then you would say that government has already gone too far.  But what has driven it to this metaphorical cliff?  I would say that it is increasing complexity in our relations with each other (here I am referring to all relations from individuals to companies to government).  This necessitates a more nuanced or complex response from our government, something that is sorely lacking in our current administration and in the last administration because the nature of the increasing complexity is not well understood.  

RedSt8r:               First, I disagree with the premise that “increasing complexity in our relations with each other” drives the government regulatory bureaucracy. It is the other way around. Government complexity drives our relations. Regulators craft rules for our “free exchange of goods, services and ideas” and each year they add to those rules. I believe that is because once a set of rules are crafted what else would the regulators do? As carpenters hammer and saw, regulators craft rules and re-craft rules and craft rules for crafting rules.

Second, government is fundamentally incapable of “a nuanced or complex response” because they are incapable of crafting a rule to encompass nuance. No rule no response. 

Steven Hales:    To look at complexity let’s take a look at the business cycle and how government responds and has responded.  Since the business cycle exists and is subject to some unknown periodicity we have developed several responses to smooth out the ill effects of this cycle.  One of these tools is unemployment insurance.  Workers and employers contribute to an unemployment insurance fund which is then disbursed to those workers who lose their jobs and are searching for new ones.  Now this fund is used even when the business cycle is in a positive phase but its real benefit is to support aggregate demand in a general economic downturn.

RedSt8r:               Okay so far. 

 Steven Hales:   But you would say this is hardly a complexity more a mundane feature of economic activity present since antiquity.  But our current recessions are usually global in nature and have triggers that can arise in the most curious of places.  When, in 2007, the pricing of certain real estate financial instruments was not possible the mortgage market froze.  This was the beginning of the recession and its cause had barely been recognized.  Who would think that the relatively small sub-prime market would trigger a financial collapse?  This took place in an environment of lax regulation and direct government mandate of increased home ownership.  The problem wasn’t too much regulation but too little.  Government had deviated from its primary purposes.  Restoring regulation to its proper role is what we are now trying to accomplish.

RedSt8r:               It is an arguable proposition whether it was too little or too much regulation. One should differentiate between regulations (rules) and regulators (government officials charged with enforcing regulations). We have plenty of regulations but the enforcement was lacking. Many of us attribute that lack of enforcement to other government officials such as legislators and the Fed who actively proscribed the necessary enforcement. Government has indeed deviated from its primary purpose but that has been the case for at least two decades. Restoring regulations is incorrect. It should be restoring regulatory enforcement of regulations. Any restoration of regulatory enforcement will be met with fierce resistance from the regulated. 

Steven Hales:    The other problem is that the government had transferred market risk onto itself (implicitly through the GSEs) in the midst of an economic boom and ironically became the catalyst for the boom.  Risk transference is something the government should only undertake in an economic downturn.  The FED being the lender of last resort, deficit spending to spur private business activity are all tools of risk transfer when the private economy is risk averse.

RedSt8r:               Au contraire. Government should never be in the position of holding or receiving market risk. Government stepping in to contain the economic problems while simultaneously allowing market participants to fail and fail big is quite different from preventing private failure in the first instance.

Fed lending – quantitative easing or QE – is exactly the wrong prescription at almost any time. The Fed can create low interest rates to ease the cost of borrowing but this is vastly different from the Fed doing the lending directly. Transfer of risk to the government has paradoxically increased the risk to the taxpayer and created massive moral hazard to boot. The Fed should only be the “lender of last resort” when it steps in to prop up the banking system by providing costly liquidity and taking quality assets as security. This time around the Fed has provided cheap liquidity and taken the lowest quality assets. Even worse the Fed has stepped outside the normal bank arena to provide this liquidity and QE to all manner of financial purveyors. 

Steven Hales:    Today, this process of risk transference has exceeded its usefulness because it is becoming increasingly difficult to unwind this risk taking by government and in the process government has accelerated the claims on future output by engaging in unwise and ill planned investments.  Here I am referring to the Bush and Obama stimulus bills.  Ex-Tarp these bills were pure deficit spending totaling some $1.5 trillion.  The debt service of this spending is itself financed and the problem increases through compounding.  This process will claim an increasing share of federal revenues.

RedSt8r:               While not accepting the validity of government risk transfer I concur that the deficit spending has not cured anything but has made a bad situation seriously worse. 

Steven Hales:    Because the nature of the recession was little understood in its increasing complexity and the government response has likely compounded the problem and extended the length of the recession but lessened its depth, it is unlikely that government will now respond correctly and it is left to the private economy to grow our way out of the mess.  But economic growth will have to be extraordinary to be effective.

RedSt8r:               Here I disagree that the “nature of the recession was little understood”. But I agree that the private economy must “grow our way out of the mess”. After all it is the private sector that supports and feeds the public sector not the other way around.

My disagreement regarding the understanding of the nature of the recession is conditioned on the response of the government. Unfortunately I believe their response was crafted not to contain the situation but to support the financial entities with which government was most familiar with and most comfortable with. Yes, this is a conspiracy theory of sorts. But look at their response. Bailing out the favored financial institutions (but not all) was done ad hoc as the first response. There was and still is no public recognition that the issue was always solvency and not liquidity. But to accept solvency as the issue puts the favored financial institutions in a position of bankruptcy and our regulators will not do this. 

Steven Hales:    How might we persuade government to now get out of the way and focus on its proper role?  First we must recognize that the size of government today is not just a result of ideological driven takings but really a response to uncertainty. And that uncertainty derives from complexity of relations.  We are part of a global economy where whole towns can be devastated overnight; where financial capital flows to where returns are greatest.  National currencies are buffeted about by global trade; where the gains from trade are blurred by protectionist rhetoric; where political movements can arise from an on-air rant; where recessions can be caused by falsely enabling the poorest of the aspirational. 

RedSt8r:               We cannot persuade government to get out of the way. We can only force them. I vehemently disagree with the idea that government complexity is a benign outcome of supposed complex activity. Government complexity is a conscious design intent to ensure its survival and growth. None of the listed examples – towns devastated overnight, currency movement, capital flows, etc. – are new. All have been present for decades. On-air rants are the technological equivalent of pamphleteers and rabble rousers. Again, not new. 

Steven Hales:    Government must not be moved to over-regulate or to improperly reduce uncertainty it must move carefully and deliberately it must cease the destructive rhetoric directed at our best and brightest.  It must not be swayed by interest groups that little understand what they promote.  It must embrace the possible, the productive, the most prudent use of its revenues.  It must respond to complexity not by old responses of ossified regulation or mandates on behavior.  It must above all be smart.  It must understand that innovation cannot be directed or taxed into existence that it arises where there are incentives.  For it will only be through innovation and technology that many of the problems we see today will be solved.  If we could promote an innovation focused government we would have a government that increased incentives not for pet projects or social goals but pure innovation that reduces the work required to get something done.  But this only arises when government first protects property rights, fosters an environment of free exchange and protects it citizens.  Is this too much to ask?

RedSt8r:               Government will continue to craft rules and regulators will continue to enforce the rules. It cannot be “smart” as you suggest for the simple reason that today government is akin to any physical organism. It will grow (tax, regulate) to survive and thrive. Government has no interest in innovation only its own survival and gain. Asking government to simplify itself is like asking a human to eat less. Might be helpful, beneficial even, but not going to happen. Force is required. Not necessarily physical force. It could be force by ballot or by quiet revolution. But force it must be.

Government Regulation (post #1 of 3)

February 14, 2010

The following post appeared on the blog: The Conspiracy to Keep You Poor and Stupid  by Donald Luskin

This was a guest post by Steven Hales: entitled, “A Marriage on the Rocks”. I have corresponded with Mr. Hales regarding this post and my comments are from that correspondence. Please note that the preceding post (Government Etiology) and comments are the prelude to this article. Steven’s article is a humorous look at the rationale for the development of government. 

My title is:  Government Regulation

Steven Hales:           “A Marriage on the Rocks”

Steven Hales:    Thanks for the response.  Let me address the first of several issues.  In a humorous manner, I hope.  What came first the relation or the law?  I posit that the relation came first or there would be no need for the law.  Disagreements and conflict form the basis of much of our legal code so it was the relation or the behavior that had to come first not the law.   If we can agree on that point we can agree that government arose from relations and as those relations grew more complex more conflicts arose and the law responded and grew more complex.  They are part of a symbiotic evolutionary process. 

RedSt8r:               I appreciate the humor. Obviously the chicken came first. In a more serious vein early government was the codification of the rules of kings albeit with great leavenings of common sense. What is called, “Common Law”. So far so good, I agree with you the relation came first. It is in the last part of the paragraph where I challenge the order. There is no rational conflict or relation that requires government to regulate smoking, ingestion of trans fats or any of a hundred thousand (hundred million?) little regulations strewn throughout government.

I posit that when government achieves a critical mass, which I suggest happened in the 1930’s in the US, it then becomes a self-sufficient organism that does not exist to adjudicate private relations but to ensure its own survival, growth and reproduction. There is the illusion of regulating private relations but it is a chimera to hide the survival mechanism of the governmental organism. 

Steven Hales:    I view all inventions as technology, ala Brian Arthur and other “new institutionalist” economists.  Government and the law are inventions and by definition are technologies.  They have all the elements of a technology.  They are assembled from other technologies and something new is created.  The last great evolution of government came in the 18th Century.  It was assembled from a variety of other ideas or technologies.  Liberty and Equality, Self Government, Representative Democracy and our greatest innovation, the separation of powers.  At about the same time as our evolutionary experiment began another great invention was born, Capitalism.  It was born out of the Industrialization of production and together our experiment in governing and capitalism became intertwined into a single system of production and governance. 

RedSt8r:               There’s nothing to argue here. However, I do believe the two experiments were actually one. That capitalism required limited government as presented by our well designed Representative Democracy and the reverse was equally true. A viable Representative Democracy required a privatized economic system, capitalism, to ensure its survival. Neither would succeed on its own. Often today, we seek to inculcate private economic rights as a prelude to democratic political rights. 

Steven Hales:    Shortly after the union of these great technologies a third invention was born, the corporation.  Not only did the organizing principles of the corporation extend to the production of goods but also to the government.  Our government began to look like a corporation with all the attendant complexities.  Like all transformative technologies it reached into every part of life.  This marriage of government and capitalism under a corporate governance structure is often in conflict and like all marriages each spouse, at times, wants a divorce.  Bad things are said but the marriage endures and grows stronger.  We see the current estranged spouse in the White House regularly throwing tantrums and hurling dishes in the direction of capitalism now symbolized by the corporation and its financiers, the evil bankers.  But this is just so much theater and the marriage will endure, it has to, each depends on the other.

RedSt8r:               Given that Thomas Jefferson was opposed to corporations I’m not so sure this was a unique technology to the US. And, given that a “Corporation” is truly a beast created by the law it may not fully fit your definition of “invention” or “technology”. But we can ignore all that. Yep, we got corporations and government seems to be organized like one. But then that organizational form was not original nor unique just useful. Is it not similar to a King and his council?

You may not have intended this meaning but the comment, “it reached into every part of life.” is exactly my point that government has long since ceased to be a partner and is now a master, a self-sufficient organism dominating our lives. 

Steven Hales:    Currently, our government is trying to get capitalism to do the dishes and take out the trash and like most stay at home spouses feels generally unappreciated.  It has also taken to comparing itself favorably to capitalism’s last spouse and is saying how good it is compared to that bitch and how messy she left the house and what a shamble the finances are, she was a spendthrift, blah, blah, blah.  It gets so bad that you have to tune her out.  What’s worse is that her sisters chime in from time to time to berate capitalism and give him a good talking to.  But like all dutiful spouses capitalism takes it and continues to support them.  

RedSt8r:               Yes, well put. Good humor here. I am a 37 year husband. 

Steven Hales:    My point here is not just humorous but informative when looking at the growth of government and the increasing complexity of our economic relations, they are intertwined and spring from a common heritage.   There is a dynamic tension between them but each needs the other to survive and thrive.

RedSt8r:               I regret my repetition but I don’t see government as intertwined with the private economy any longer.  It may have been at one time and indeed, surely was. Government was originally designed (in the US) to buttress and support the private economy and hence private relations. It no longer is the support but the controlling master abusing the power of law to effectively blackmail various (and shifting) sectors of the private economy to gain the financial support to continue its growth and ensure its survival. 

Steven Hales:    I’ll address some of your other points later.  But I want to know, what is your understanding of how the Federal Reserve operates?  Some of your comments indicate a misunderstanding, like the role of “lender of last resort.”  I am not being pedantic but I want our discussions to be in agreement on the facts.

RedSt8r:               What? You mean I can’t have my own facts? Grumble, grumble. What fun is that?

RedSt8r:               I understand the Fed as the institution responsible for the monetary policy of the US. It adjusts the money supply and by issuing or purchasing securities from its member banks. The two interest rates it controls, Fed Funds rate (rate paid on inter-bank lending) and the Discount rate (rate at which the Fed loans to member banks.) There are two other primary issues (I peeked at Wikipedia):  regulating financial institutions and protecting the financial system.

The phrase “lender of last resort” is of course colloquial but I understand it as meaning the Fed will print money (used to be literal paper money but today its electronic) and “loan” it to a member bank that is in need of liquidity. The Discount rate applies and if the bank is in trouble the Fed may require high quality assets as collateral. All of this is to minimize the moral hazard of the lending.

What the phrase does not mean is that the Fed will lend to investment banks, hedge funds, private equity, pension funds, industrial companies, and other non-bank financial institutions such as insurance companies. Ahem, not that they ever would mind you.

Manufacturing (Dis)Employment

February 11, 2010

 RedSt8r: The following is my comment regarding the letter from Professor Don Boudreaux to the Wall Street Journal

“Picking Winners” by Making the Rest of Us Losers [Please read his entire post]

by Don Boudreaux on February 9, 2010

Below are two letters [ RedSt8r: I’ve only reprinted one letter ] that I sent yesterday to the Wall Street Journal.  Both are in response to this essay whose author argues that America needs an “industrial policy.”  (This essay has many flaws beyond those that I highlight in my letters.)

John Hofmeister builds his case for a U.S. industrial policy on a foundation of falsehoods (“The U.S. Needs an Industrial Policy,” Feb. 8).

The most notable falsehood is Mr. Hofmeister’s assertion that American manufacturing is faltering.  In fact, America remains the world’s leading manufacturing country, one whose manufacturing output continues to increase.  For example, in inflation-adjusted dollars, the value of U.S. manufacturing output in 2007 was 8 percent higher than it was in 2000, 69 percent higher than it was in 1990, and 184 percent higher than it was in 1980.

And while it’s true that the Chinese will one day produce more manufacturing output than do Americans, that eventuality is hardly surprising given that China is home to one-sixth of the world’s population.  Moreover, the fact that manufacturing outputs in newly industrializing nations such as China are growing faster than American output no more means that American manufacturing is in poor health than does the fact that a two-year-old girl is growing faster than her ten-year-old brother mean that the brother is shrinking, is in poor health, or is in need of a ‘height’ policy.


Professor Don,

Your recent letter to the Wall Street Journal continues a theme of yours, to wit, that manufacturing in the United States is alive and well. To buttress this claim you provide statistical evidence showing that the dollar amount of manufactured products is high and rising. I will stipulate that your statistics are valid, that your math is accurate and that as far as it goes your conclusions valid.

 But from the hinterlands I see a wholly different picture. Out here in non-tenured land I see manufacturing employment as seriously ill and getting worse. The chart below is based on data obtained at It shows the percentage of workers employed in manufacturing versus the total employed work force.

Manufacturing Employment as a Percent of Employed

As this chart demonstrates the manufacturing employed are dropping in a rather precipitous manner and have been doing so ever since the WWII peak. I concede that this is not all bad as many such workers were able to find alternative employment and the cost of manufactured goods was minimized. I do not believe this to be the case any longer.

You provided a cute analogy to a 2 year old girl growing “faster” than her 10 year old brother. I suggest a more accurate analogy is the 2 year old growing “faster” not just while she is young but throughout her life. Surely at some point, when she is 12 for example,  the now 20 year old brother who may now be smaller than his 12 year old sister should be examined for some pathological issue. That is the case today with manufacturing in the United States.

I don’t really care that the dollar value of manufactured items has risen as you indicate. That only tells me that lower value manufacturing and the jobs that go with it has been transferred overseas. Please explain to me why that 2 year old girl – China – who should be eating more (relatively) than her older brother – America – is in fact not doing so? Shouldn’t the newly developing, rapidly growing, third world nation such as China be importing vast quantities of raw materials and finished goods to fill the growing demands of her population? And shouldn’t that be confirmed by a current account deficit as she buys more goods from overseas and consumes more internally? Yet that is clearly not the case. In fact the older brother, your analogy, is consuming more and growing less than his younger sister. Something is clearly wrong and yet you persist in following ideological paths rather than the evidence in front of you.

Health Care was NOT ‘Responsible Legislation’

February 6, 2010
Is It Possible to Pass Responsible Legislation?
February 6, 2010 · by Austin Frakt · Posted in Health Policy 

This post originally appeared on 1 February 2009 on The New Republic’s The Treatment blog.

The purposes of comprehensive health reform are noble: expansion of coverage and control of costs. Yet, the latest attempt to begin to address those goals is near death. For nearly a year Democrats shepherded bills through the complex legislative process, revising and merging them to accommodate the congressional process and political realities. Ultimately two bills, similar in broad structure and differing only in detail, passed the chambers of Congress.Yet, at the brink of completion support for them has waned. What can be learned from this experience?

First, it is worthwhile appreciating how unlikely it is that policy-makers have brought health reform legislation this close to passage. It doesn’t clearly benefit all influential interest groups, a condition that normally dooms major reform. To have even pursued it was, therefore, a political risk. That Democrats, and Obama, took responsibility for attempting to solve the large and important problems of the uninsured and health care costs is laudable. In doing so they managed to mollify the concerns of major stakeholders.

One might think that support for reform would increase as more and more interest groups embraced it. That it has not has more to do with the glacial, agonizing, and ugly process of production of legislation than it has to do with its content. The spotlight hasn’t been kind to health reform. Opponents have been able to focus it on the less savory elements of legislative sausage making and on the least popular aspects of the bills, whether they exist (the individual mandate) or not (death panels).

Still, the overall structure of both the House and Senate bills is sound. The individual mandate, the low-income subsidies and other provisions are required to make the insurance reforms like the ban of pre-existing condition exclusions possible. Without the mandate people would buy coverage only when ill, increasing premiums for all. And one cannot expect low-income individuals to purchase insurance they cannot afford.

In a panicked response to the Massachusetts election, policy-makers considered chopping up the logical structure of the bills into separate legislative proposals. That’s a recipe for unworkable policy. The bills are large and complex not because policy-makers want them to be, but because they must be. It would be irresponsible to attempt to solve one component of the problem without addressing the whole. That begs the question: can comprehensive reform of the health care system or of anything else ever occur? If government controlled by one party (including a super-majority in the Senate) cannot bring about responsible reform, what can?

I wish I had an answer. We need one. I understand why reform is hard: too frequent elections, too great minority power (the filibuster), too much special interest money, among other reasons. But knowing these doesn’t lead directly to an easy fix because the process of implementing a solution is subject to the same forces that are the source of the problem. It’s a deep and difficult hole from which to legislate egress.

If health reform succeeds despite all the hurdles it will be a major accomplishment that has eluded presidents and policy-makers for decades. But if it fails (again), it will be in large part due to the challenges of governance and the imperative to win the next election. Even the best ideas face substantial risk of failure. Even for good ideas offered by responsible leaders, Congress is a graveyard.

Some say reflexively that government is not the solution to our problems. Usually proponents of markets or libertarian ideals view government as an impediment to good outcomes. The experience of health reform has revealed another sense in which government may not be the solution–because it can’t get out of its own way. That is, our government is improperly structured to solve the problems we face. It isn’t necessarily that government can’t be a solution or that government can’t propose a solution, it is that government can’t pass a solution, at least not very often. Even if health reform ultimately passes, it is clear that an historically rare level of single-party control was required to pull it off.

Unfortunately, when it comes to health care the market is not a solution either. And so we’re stuck (or may be), with a set of problems that can’t be addressed with either broad system at our disposal. It could be that the health system we have, the one resulting from a far from perfect market and a far from ideal set of government regulations, is the only one we can get. The sad consequence is that it leaves so many under-served and wastes so much of our treasure. I’m confident we can prod government into doing a little better, but without comprehensive reform, not much and not soon.

The gap between our ideals and reality is large, and even with the will and the votes the obstacles to closing it are nearly insurmountable. That’s the most troubling lesson of all.


One Response to “Is It Possible to Pass Responsible Legislation?”

  1. RedSt8r on February 6th, 2010 5:05 pm | permalink

    @AF: First, I challenge the premise. Neither proposed health care “reform” bill constituted “Responsible Legislation”. What they did constitute was a single party attempt to force selective changes to a large portion of the economy. This can hardly be called responsible.

    “One might think that support for reform would increase as more and more interest groups embraced it. That it has not has more to do with the glacial, agonizing, and ugly process of production of legislation than it has to do with its content.”
    It had everything to do with the content as only those interest groups that (a) were on the left wing of the Democrat party or (b) were bought off by either political patronage – Louisiana, Nebraska, Florida, unions or (c) bought off by false promises of enhanced profits – insurers, AMA, big pharma. When the content was so one sided the process exacerbated the issues to the point of failure.

    Why could Richard Nixon open up China? Because as a Republican he was trusted on national defense. Hence he could open up China to the US without being seen as weakening US national defense. Why could George Bush (43) pass the Medicare D (drug insurance) with bi-partisan support? Because again, as a Republican he was trusted not to squander taxpayer dollars (so much for that trust). Why could Bill Clinton reform welfare? Because he was trusted to protect the poor at least to some degree.

    Had Obama and the Democrat majority taken on their interest groups – trial lawyers, unions, politicians – and truly reformed the process they would have earned the abiltiy to pass other legislation that might have had an actual positive impact on both health care cost and availability. As it was they were clearly seen and it was clearly understood this was a left wing bill designed to serve only left wing (or bought off) interests and worse, to do so while penalizing the people. The elderly saw Medicare cuts, the young saw expensive insurance mandates, those of us in between saw a loss of personal freedom for no gain. It was a lose lose for us.

    Responsible legislation requires challenging ones interest groups not the opponents. Republicans can and should be trusted to raise taxes in the most responsible manner. Democrats can and should be trusted to reform social welfare programs in the most responsible manner. When each attempts to work in the others camp failure results.

Sun Tzu, Scott Brown and the Debt Bomb

February 2, 2010

The post below is an interesting take on the Scott Brown election and the concomitant debt bomb. It was written by a virtual friend noted as “VF”. VF’s original remarks follow the dashed line, RedSt8r comments are labeled as such and any follow up comments from VF are also labeled.


VF:         Sun Tzu, the 7th Century BC military strategist once said “When your enemy has the high ground do not attack.”  Scott Brown, the Tea Party activists and the RNC took that advice to heart. Late last year, in the dead of winter, the Brown campaign circled around the Coakley camp and made her abandon her high ground (a sense of entitlement and arrogance).  But as soon as she had pivoted, Brown moved on to skirmish elsewhere using the media to drive his message.  Coakley never regained her balance.  The Coakley team, like the army of the Chinese emperor of Chu, was defeated by a much smaller force, nimbler and smarter.  A year ago the Republicans looked much like the Confederate army after Gettysburg, defeated by losing sight of strategic goals (fiscal prudence), being distracted by tactical changes on the ground (Obama’s occupation of the center) and fighting battles that should not have been fought (defending the Bush record).  Today they look like Obama’s guerilla army of volunteers in 2008 rising up, this time, in the midst of the bluest of blue. 

RedSt8r:          The left, liberal, democrat condescension is that Coakley gave Brown a gaping opening when she left town for a vacation as opposed to Brown running a better campaign and, more importantly, having a better message. Add to those positives some RNC cash and staff and the win was a little less like a guerilla war than a Sun Tzu style defeat of a larger enemy by a smaller force.

The Republican comparison to the Confederates post Gettysburg is quite apt as is the defeat of Coakley “by a much smaller force”. I do think the Congressional Republicans had little alternative to defending Bush’s record since they were so much a part of it. Even they couldn’t pivot that far, that fast to disavow their own participation in that fiscal disaster. 

 VF:      Bush got derailed by Paulson, Geitner and Bernake.  Frankly, he blinked.  But we’ll never know for sure how the markets would have sorted it out.  I for one was terrified  that my pension would evaporate as asset values would plummet so far so fast that payments would have to be reduced or suspended to preserve capital, so I blinked, too.

 RedSt8r:          My great fear is that the independents and Tea Party activists will get swallowed by the traditional Republican morass rather than being the very much needed thorn in their side.

 VF:      The good thing is that the RNC is just providing support but where there is money there is payback, the Tea Partiers need to deliver. 


VF:         In politics where there is victory there is always defeat.  The one politician that was defeated this past Tuesday was Obama not Coakley.  In an instant he saw his agenda collapse and what we saw on Thursday was that Obama and the Democrats will continue the “Coakley Pivot” to the populist message of ‘evil bankers’.  With the release of Glass-Steagall Lite  (T-shirts available soon) and his response to the SCOTUS decision on political speech we see him grasping at anything where he can claim victory or win populist polling points.  He is reverting to the position most recent presidents have taken, use the institutions of government to advance domestic policy and do it through regulation, the tax code and rhetoric and not much reliance on new spending programs. 

RedSt8r:          Sad to say you are spot on here. Early “leaks” (wholly intentional to test the winds I’m sure) of Obama’s State of the Union speech continue the faux populist message with budget freeze (on 17% of the budget) and “middle class” entitlement expansion. Oh joy, more rubber checks for the workers. No jobs, just rubber checks. 

VF:      That again is Obama smoke and mirrors because all that is fungible is payroll and as I said only about $100 billion is politically possible unless there is a consensus on major reform. 


VF:         It looks like Healthcare Reform is dead and Cap and Tax Trade is on life-support (the coal states and Midwest power producing states will likely kill it) and all that is left of the Obama agenda is to put Wall Street in the stocks and supply the rotten tomatoes.  And this is a new beginning, a new era, eh?

RedSt8r:          Change and hope, hope and change, hallelujah! Dang that was short lived. The king is dead. Long live the king. But he’s got three more years to resurrect stuff or use the “regulation, the tax code and rhetoric” avenue. I don’t believe any of it is really dead unless a wooden stake is driven through the heart. We won a battle, the war rages on.

VF:      I disagree the budget realities have hit home, they have lost a strategic advantage of striking fast and hard before their enemy could awaken and counter.  Obama is trapped and permanently.  The only thing that will rescue him is economic growth.  And that is all anyone really wants.  But that is always a function, in the short run,  of a normal economic recovery. 

The problem now is that productivity is soaring and is a permanent feature of the world economy.  Where output per remaining worker continues to grow, constraining hiring in those industries where output grows but headcount falls.  Returns to labor ala a production function are increasing but money wages are constrained by unemployment. This is structural unemployment and the only way that it has changed in the past is when new industries emerge or population growth is so rapid that the economy bumps up against a capacity constraint and has to expand.  We saw it in the 1920s and we saw it again in the 1990s but in all prior periods the rebound was buoyed by demographics. 

The next wave of creative destruction will be when a new domain of technology sweeps through the economy reaching into every part of life from the household to the factory.  But it has to be doubly strong as its effects will no longer be buoyed by demographics and will actually be constrained by negative demographic trends.  New jobs that require new skills will have to multiply by the millions to absorb the unemployed as well as new entrants. 

As Ray Kurzweil has opined, “GNR” (Genetics Nanotechnology Robotics).  Genetics is about ready to begin paying dividends in the area of curing disease and increasing healthy lifespan.  Because genetics is an information technology a Moore’s Law of genetics should begin to apply as these mappings and codings escape the cost increasing nature of current healthcare.  Nanotechnology is probably about 10 years out and Robotics is about 5 years out with “just good enough” AI.  As these three technologies sweep through the economy and combine with each other and existing technologies a radical new domain will be created. 

The automobile did not truly change life until highways were built out.  Computer tech did not truly change life until the internet was built out.  The automobile had reached its end of radical influence when the last stretch of interstate highway was built and is now constrained by capacity, expensive to add.  The internet can increase capacity by simply changing optical switches, cheap to add.  In 1999 we measured speed at the gigabit level now it is terabit and we’re headed to petabit and higher.   The interconnectedness of the world will only enable these new technologies to spread faster and deeper.

In technological evolution a new technology usually leverages and is built from existing technologies. AI and Robotics is probably where we’ll see the deepest personal effects as they will augment our abilities and move education as an expensive investment over many years to an inexpensive continuous process.  But the true unfolding of the other technologies of genetics and nanotechnology will leverage these innovations and expand them further.  Nanotech and Genetics will penetrate the economy at every level as we will manipulate nature from energy harvesting to materials science. 

The physical world will be built up by the virtual world in design and simulation and direction of building and in some cases the two will be indistinguishable. But our understanding of it will only be enabled by the prior AI and robotics revolutions.  We only grasped the meaning of the automobile because we had the analog of the railroad and horse driven coach.  Early references to automobiles were to horseless carriages and Fisher body works had its roots in making horse carriages. In fact its symbol was an early carriage largely indistinguishable from a horse driven carriage. We only understood the internet because we accessed it through a familiar technology, the computer.  We will only understand these new technologies because we are familiar with their building blocks or conceptual foundations.

But what does this have to do with Obama and the Democrats and Scott Brown’s victory?  It is interesting to note that Obama’s attention has been in preserving failing or mature industries with large union representation and in expanding entitlements that belong to a world dominated by a labor force with little or no bargaining power.  This is a static vision of the world where domestic industries have to be defended and the government has to intervene to extract a living wage and other benefits for a labor force pressured by a reserve army of the unemployed.  Though some elements of this vision appear to rest on solid ground today that ground shifts with every innovation, every change in technology. 

The base of support of the Democrats has ironically fallen to the educated class of college graduates away from the traditional rank and file working stiff.  It is fitting because it is that class that has the most to lose when the ground shifts.  As advanced skills and deep knowledge are easier to acquire and certify and vet the advantages of money and position will diminish.  Those who already have skills will be under pressure as competition increases.  With barriers to entry falling the professional class will no longer have that exclusive position.  Their alignment with Obama with his policies of preserving the status quo and increasing the distribution of a fixed pie to constituencies that seem to be moving away from him is a curious on the ground development.  It is as if those who have the most to gain from technological innovation are moving away from Obama and those who have the most to lose are supporting him.  If this is indeed the case then the Republicans have a chance to seize the future and be the party of innovation and change. 


VF:         Obama is now an institutionalist out of necessity not an ideologue by choice.  He is trapped (Bush was too, as was Clinton to a lesser degree) by a government budget that is on autopilot. More than 85% of the fiscal 2010 3.6 trillion dollar budget is comprised of payments to individuals including government employees and defense spending. The remainder, this year, is some remaining stimulus spending ($85 billion) and unemployment insurance payments to the states, some $135 billion is allocated to net interest payments the remaining $346 billion will be spent on the cabinet departments from Agriculture to State.   Again, this is mostly autopilot spending leaving perhaps $100 billion that could be cut without political consequences but you have to track that down in every agency, in every city and town in America to do it.  This leaves little for policymakers to do all they can really do is tinker with the tax code (Bush did it and so did Clinton) and regulate (and they did that really well).  So, what’s a politician to do or a former community organizer for that matter?  Surrender to the budget and go to Hawaii, frequently, and don’t forget to take off your shirt and walk on the beach.

RedSt8r:          Would that he were trapped by the budget. Apparently he doesn’t believe in budgets as I’ve recently seen estimates of 9-12 TRILLION in new deficits/debt in the next 10 years based on current administration plans. It remains to be seen if he’s trapped or just circling the bait. I’ll buy him a mojito if he does retire to the beach.

VF:      Remember that there is a difference between gross federal debt and the privately held public debt.  Debt service payments on the privately held public debt affect the budget and payments on the intragovernmental debt to the trust funds does not. 


VF:         But why did Obama’s agenda unravel so quickly?  It unraveled partly because of overreach and arrogance of purpose and partly because America is a center right country whose citizens are skeptical of government.  Put these two things together with entrenched interests at the public trough, job losses and foreclosures and the apparent government spending of trillions of dollars with little observable impact you have the Tea Party movement and Scott Brown toppling a political dynasty.

 RedSt8r:          A fascinating aspect is gleaned from the center left/left wing economic blog comments that actually complain Obama is governing from the center right and that’s why Brown won and Obama is failing. Huh? The left is congenitally unable to accept the reality of a center right country. They consistently believe we’re too stupid, their message was unclear and if they just double down on the program budget it will make it right with the world.


VF:         In just 12 months in office this administration has increased the privately held public debt by almost 3 trillion dollars.  The shortfall in tax receipts was about 14.5% of the prior year’s budget but spending increased by over 40% over the prior year and relative to receipts it increased by over 50%.  (Most of this spending can be classified as countercyclical and the deficits resulting are cyclical deficits not structural)  The spending increase was driven in part by a jump in unemployment insurance claims, the $700 billion dollar stimulus, the auto bailouts, the continuing financial sector bailouts and other spending increases in Medicaid, Food Stamps and other automatic stabilizers that kick-in in a recession. 

This fiscal year spending will decline by $500 billion from 2009 and remain stable through 2011 but by 2014 something interesting occurs, the net interest payments on the outstanding privately held public debt soars in fact it increases by 240% over fiscal 2010 by 2014.  This is partly a result of the assumptions in the budget projections about interest rates and the unwinding of the Fed’s balance sheet but it grows so much so fast that the economy cannot grow fast enough to keep up.  It will be the signature achievement of the Obama administration, a structural deficit driven by debt service obligations.  If current politicians are hamstrung by the autopilot budget just wait, we’ve got something better for the next crop, a debt bomb.  If the deficit continues to hover around $500 billion a year that debt service obligation will continue to grow at about 20 billion dollars a year.  Barring higher interest rates, this is manageable but our recent experience has been that the privately held public debt is doubling every 6 to 8 years so, by 2022 debt service obligations will be closing in on 900 billion dollars per year which would indicate perhaps a much higher structural deficit over those years than $500 billion, try $1.5 to $2 trillion, now that’s a deficit.

RedSt8r:          Few reasonable folks will complain about the extended unemployment benefits, some more will complain about the growth in Medicaid, food stamps and such. But those areas were actually quite minimal relatively speaking. It’s the humongous rest of the spending that has “us” in such an uproar. Your review is both accurate and frightening. A quick and simple calculation assumes the total public debt (that is, Federal only!) at $24 Trillion (current $14T + $10T from Obama) with 10 year Tnote rates at 6% will cost $1.44 Trillion a year just in interest payments. And for what? Banker bonuses? Goldman Sachs? Handouts to State and local governments?


VF:         The only solutions to a structural deficit are budget cuts or tax hikes or some combination of both the solution is never more spending.  But the problem here is that the autopilot budget continues to grow largely driven by demographics.  Sometime around 2020 our existing entitlement system will need to be partially financed through general revenues rather than solely through payroll taxes as is currently the case.  The focus then needs to be slowing the growth rate of entitlement spending.  Obama’s healthcare reform was meant to “bend the curve” on health expenditures but what finally emerged out of the Senate was a compromise that would ironically increase costs not reduce them.  It is fortunate that this bill died in the House.

RedSt8r:          Yes, we are all fortunate that the Brown election win has – so far – stopped the healthcare reform masquerade. I don’t yet see the wooden stake but I’m hopeful. Still, there is one other solution to a structural deficit owing to debt service payments. A national debt default. Not pretty but Argentina did it twice and they can still borrow. Well, after they settle their little argument with the President of their Central Bank. Details, details.

VF:      A default would reduce our credit rating and raise the premium on future borrowing so that is unlikely. It would also spark inflation as the dollar falls and import prices soar.  A reduction in our sovereign credit rating is around the corner anyway when an increasing share of receipts will be used to pay Medicare and Social Security beneficiaries.


VF:         The director of CBO, Doug Elmendorf said in a speech last year, “The country faces a fundamental disconnect between the services people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. The fundamental disconnect will have to be addressed in some way if the budget is to be placed on a sustainable course.”  I think that pretty fairly sums up our situation.  There are very difficult choices ahead and we need politicians who can make those choices .

RedSt8r:        Elmendorf has earned some respect for his work although it would be a lot more if he identified the flaws of the work he was asked to do. Scoring a healthcare bill as deficit neutral (or positive) by counting 5 years of expenses and 10 years of revenue is hardly reasonable.

VF:      Elmendorf did caveat on language that could be read to say if you really believe these budget fictions. In their scoring of the senate bill on their blog they stated:

” These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The legislation would put into effect a number of procedures that might be difficult to maintain over a long period of time. Although it would increase payment rates for physicians’ services for 2010 relative to those in effect for 2009, those rates would be reduced by about 23 percent for 2011 and then remain at current-law levels (that is, as specified under the SGR) for subsequent years. At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). The projected longer-term savings for the legislation also assume that the Independent Medicare Advisory Board that would be established by the bill is fairly effective in reducing costs—beyond the reductions that would be achieved by other aspects of the bill—to meet the targets specified in the legislation.

“Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the bill would increase at an average annual rate of roughly 2 percent during the next two decades—much less than the roughly 4 percent annual growth rate of the past two decades. Whether such a reduction in the growth rate could be achieved through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care is unclear.”

VF:      Basically saying that the uncertainties and political realities will be cost increasing and that the bill is based on a political view where everyone can just hold hands and sing camp songs.

RedSt8r:          But I disagree with him on the “fundamental disconnect”. The fundamental disconnect is between politicians who promise expansive benefits with little cost (and usually to someone else) and a public that never gets told the true and full cost to each of them over the long term. A secondary disconnect occurs to those who become enmeshed in the “benefits for older Americans” after having paid in to a system all their working lives and who now find themselves facing restrictions and limitations. They paid what they were told and now expect to get what they were promised. There is a complete lack of understanding how SSA, Medicare, were (are) just giant Ponzi schemes that would make Bernie Madoff blush with embarrassment.