Who Pays for Obamacare?

The dust seems to have settled on ACA a bit, so now is probably a good time to look at who's paying for what.   A lot of this question is boring and obvious:  when it comes to things like Medicaid expansion and the exchange subsidies, the answer is simply that we all are.  Revenues for those entitlements come out of the general fund.  Sure, there are a vast array of new taxes and the Great Medicare Advantage Robbery, but ultimately the burden of this stuff is spread, if not exactly evenly, at least widely.

Instead, I'd like to look at just the impact of the parts of ACA that deal with the Qualified Health Plans and the exchange subsidies.  In this case, the burden is far from even.

A quick refresher:  ACA mandates that the vast majority of individual insurance policies be Qualified Health Plans.  QHPs have the following attributes:

1. They have a mandatory set of coverages, including preventive care, psychiatric care, substance abuse treatment, maternity coverage, and a variety of other women's health coverage.  Those coverages cost something.  Pre-ACA, a lot of that cost was borne by women, who were more expensive to insure.  Now they're borne by both sexes equally.
2. QHPs are guaranteed issue, which means that poor risks can't be denied coverage.  Again, costs increase.
3. QHPs have community rating restrictions.  The one with the largest impact is that rating on age is capped at 3 times the rate for the best unadjusted rate in the plan.

I have problems with the mandatory coverages and the size of the community rating cap, but in general these are all reasonable.  But they cost something.  The question is how much, and who pays.

To answer this, let's start with some stats that HHS released in June 2014 (see table 2):

• Before any subsidies are applied, the average premium for an individual QHP is $346/mo.
• 87% of all people insured with a QHP through the exchanges received subsidies.
• Based only on those who received a subsidy, the average subsidy was $264.
• Therefore, the average subsidy reduced the monthly premium to $82/mo.

Next, we need to know how many people are signed up on the exchanges and how many people have purchased non-group QHPs outside of the exchanges.  This should give us a pretty good number for the total number of people in the individual insurance market.  It's not a perfect number, because it doesn't account for grandfathered non-QHPs.  I'm going to ignore the grandfathered plans on the grounds that I'm trying to find out what QHPs are costing, and who's paying for them.  By the same token, I'm ignoring the vast majority of people who are covered by employer-sponsored group health plans.

This site states that, as of this writing (and the numbers have already been revised down two days later):

• There are 7.3 million people current on their premiums for policies purchased on the exchanges.
• There are another 8.0 million who have purchased QHPs off of the exchanges.  By definition, all of these people are not receiving subsidies.

Next, now that we know that the average policy costs, $346/mo, we need to calculate what it would have reasonably cost in the absence of ACA's QHP provisions.  To do that, we first note that, in 2010, before ACA took effect, the Kaiser Family Foundation calculated that the average individual policy premium was $215/mo.

Now, if we know how much that premium would have gone up due to health care cost inflation, we can come up with a "what if there were no ACA" number for the average premium.  Here are some World Bank numbers for 2010-2012 for per-capita health expenditures:

Year	Expenditure	Percent Change
2010	8254
2011	8467	2.6%
2012	8895	5.1%
2013	9125 (est)	2.6% (est)
2014	9361 (est)	2.6% (est)

I'm using the 2010-2012 average growth to compute the numbers for 2013 and 2014.  When you do the whole thing, growth from 2010 (where we had the average premium of $215) to 2014 is 13.4%.  That would make the new average premium $244.  Note that this number is conservative; in reality, a lot of the per-capita spending growth occurs with the elderly, who are covered by Medicare.  So we might reasonably expect that the "if ACA didn't exist" premium, based solely on cost inflation, could be even lower.

OK, we're getting there.  Now, we know that the average person who got a subsidy probably did very well under ACA.  But what about the people who didn't get a subsidy?  On average, they're paying $346/mo for a QHP, when without the ACA laws they could expect to be paying $244.  So they're paying $102/mo, or $1224/yr, more under ACA.

We're now in a position to calculate the total amount spent on the QHP provisions and subsidies for ACA.

87% of the 7.3M on the exchanges get a subsidy of $264, so 7.3M * 87% * $264/mo * 12 mo = $20.1B/yr in subsidies.  (Note that this number doesn't jibe with the CBO number of $17B in Table 1, presumably because the $20.1B is for a full year and the $17B is for about 7 months of a fiscal year, with February, March, and April having a big ramp-up.)

Then we have 13% of 7.3M = 950K people on the exchanges with no subsidy, and another 8.0M people off-exchange, for a total of 8.9M who are paying the full freight of the new laws, which we computed to be $1224/yr, so they're paying $10.9B/yr.

$20.1B in subsidies + $10.9B for the full freight people = $31.0B a year as the total cost of the QHP and subsidy provisions of ACA.  (Note that I'm leaving out the risk corridor payments.  They make things even worse, but not that much worse.)

Now, I'm going to make the assumption that the $20.1B is distributed evenly across every taxpayer in the US.  The most recent IRS statistics show that the number of returns filed in 2012 as classified by filing status (Excel) shows:

Filing Status	Returns	Taxpayers
Married Filing Jointly	53.7M	107.4M
Married Filing Separately	2.7M	2.7M
Heads of Household	21.8M	21.8M
Surviving Spouses	0.1M	0.1M
Filing Single	66.7M	66.7M
Total Taxpayers		198.6M

Again, this number is conservative, because it doesn't account for people who paid no federal tax.  But based on this number, every one of those 198.6M taxpayers in the country (feel free to tweak this number up by a bit to account for it being 2014) is paying out $101/yr for the ACA subsidies.  So far so good.

But wait!  The 8.9M people who don't get subsidies are paying not only that $101/yr, they're also paying the $1224/yr for the increased premiums, for a grand total of $1325/yr. That's more than 13 times what the average taxpayer pays.

Put another (and even more horrifying) way, 4% of all taxpayers are paying for 35% 38% of the cost of the QHP and subsidy provisions of ACA.

That doesn't sound very fair, does it?

But maybe those 8.9M are very wealthy, you say.  I don't have any data on the income distribution.  We know that their incomes are greater than 400% of the poverty level, or they'd get subsidies.  But consider the small business owner or the independent contractor.  Some of those people are wealthy, but the vast majority are living solidly middle-class existences.  I'd be surprised if the majority of them made more than $100K/yr.  Those are the people we're burdening with a hefty chunk of this law.

On-balance, I favor a lot of the provisions of the QHP and subsidy portions of ACA.  But if you're going to embark upon this grand redistribution of wealth, the least you can do is spread the burden fairly.


UPDATE 11/8/14:  If you take out the filers with less than $10,000 adjusted gross income, you wind up with about 172M taxpayers.  That's probably a better proxy for who's paying for the general fund stuff.  If you use that number, then every taxpayer is paying $122/yr for the subsidies and the 8.9M full-freight people are paying $1346/yr each, for a total of $12.0B.  So then 5% of taxpayers are paying for 39% of the total.  Not a lot better.

Also fixed computation error (see strikethru).

UPDATE #2:  I found a whole bunch of CMS data on per-capita healthcare spending and consumption (see here, here, and here) and was able to cook it down to get a better number for the 2010-2014 increase in personal health care consumption, ages 0-64 (so no Medicare taken into account).  The number is 16.1%.  Using that number and the 172M taxpayers revision would make the following changes to the model:

• "What if there is no ACA" average premium: $250/mo.
• Contribution of excess premiums to total cost of QHP and subsidies: $96/mo/person, $1152/yr/person total $10.3B/yr.
• Subsidy cost shared by 172M taxpayers:  $117/taxpayer
• Total cost of QHP and subsidies: $30.4B.
• Yearly amount paid by full-freight QHP payers: $1275/yr., or $11.3B.
• So 5% of taxpayers pay 37% of the total cost of ACA.

GDP vs. Productivity Growth, Updated

I keep referencing this chart in comments elsewhere, so I thought I'd update it:

GDP and productivity numbers courtesy of the US BEA and BLS.  The moving average and growth rates are courtesy of Excel.

Mitt Romney Lost Because of Abortion

The despondency, fear, and loathing in the GOP has begun, with a wide range of explanations for Romney's loss in what should have been a slam-dunk year against Obama.  So far, I've seen:

• The GOP will never win until they have the courage to nominate a conservative.
• The GOP will never win until they nominate a competent moderate and don't drag him down in the primaries.
• The GOP will never win until it fixes its core values to appeal to hispanics and women.
• The Obama campaign had an amazing secret sauce to get out the vote, and the GOP will be fine next time because they'll have the same secret sauce.
• We're no longer a center-right country, and conservatives need to concentrate on seizing the cultural levers of power.
• We're no longer a center-right country, so conservatives need to build themselves a parallel society next to the one that's ultimately going to fail.  (If you've got an hour and half to burn, listening to Bill Whittle grope his way toward something coherent on this topic is kind interesting.  I suspect that when he's done with this it won't sound quite as looney as it did in spots.)
• We're no longer a center-right country, and we're all gonna die.

Some of these are laughable.  Some of them are pretty close to the truth.  Some are... worth deeper consideration.  But I think the most plausible is that the Obama campaign not only had a secret sauce for getting out the vote, but they had a real issue on which to ladle the secret sauce.

The Obama campaign, with a little bit of mind-boggling stupidity from the Republicans, managed to scare women out of their minds, convincing them that Romney was unacceptable.  And they did it over abortion.

I have a wife, two daughters, and a son.  One of my daughters and my son are apolitical--they are, in effect, the dreaded low-information voters, but they don't vote.

My wife also didn't vote, but she's far from a low-information voter.  She's just decided that voting only encourages the bastards, and they're all equally bad.  Plus, we live in Texas.  Why bother, when you know what the result is?

My oldest daughter (she's 31) is well-informed and a regular voter.  She has the handicap of having a BFA from a California art college, so she's been exposed to the absolute worst that liberal academia could possibly throw at her.  However, she's also my daughter, so she's emerged as a relatively centrist, probably slightly left-of-center, voter.

She considered voting for Romney and liked a lot of his economic ideas.  But she ultimately decided that she couldn't vote for him because she was sure that he was going to destroy the reproductive rights infrastructure in the US.  All arguments to the contrary were lost on her.  Romney and the Republicans were just too dangerous even to consider voting for them.  According to her, all of her friends thought the same way.  My wife thought the same way; if she'd voted, she would have voted against Romney for this sole issue.

Now, this is admittedly the smallest sample possible.  And my daughter admittedly is part of the Austin artsy-musician-y community, which is pretty liberal.  But I have a hunch that Obama won the election because of people like her.

The abortion issue poisons all attempts the GOP will make to regain a working electoral majority.  Unmarried women won't vote for them.  Married women who remember the 60's won't vote for them.  Only married women who are happily building families will vote for them.  Since this is a shrinking demographic, the anti-abortion activists in the GOP will manage to lose election after election for their candidates.

I am pro-abortion.  I hate the term "pro-choice" because using it prevents a frank confrontation with the ugly truth about abortion:  It's a way to kill something that would otherwise turn into a human being.  When it comes to things like this, the individual has no "choice"; society gets to make laws that bind its citizens to certain courses of action.  I don't support a burglar's right to choose whether to rip me off; I'm anti-burglary.  I don't support a violent felon's right to choose whether to beat the crap out of me;  I'm anti-battery.  But I'm pro-abortion.

Why?

Before I can explain why, I have to make things worse.  See, I actually believe that a fertilized egg is alive and for all intents and purposes human.  Will all such fertilized eggs implant and start pregnancies?  No.  But hormonal contraception will guarantee that pretty close to 100% of any zygotes that would implant, don't, and die.  Will all pregnancies result in a live birth?  No; about one third of all pregnancies end in spontaneous miscarriage.  But abortion again guarantees that almost 100% of all viable pregnancies against which it is performed will end without a live birth.  (And the small fraction that don't--well, we'll get to that.)

A common "pro-choice" argument is that a blastula, or an embryo, or an early-to-mid-term fetus isn't human because it's not viable ex vivo.  That's certainly true, but a baby isn't viable ex vivo either, without its mother's care.  Yet (almost) all cultures consider babies to be human.  Another argument is that a fetus is something less than human because it lacks many uniquely human features and faculties.  But a baby lacks many of those faculties as well.  And a baby resembles an adult human about as much as a blastula resembles a baby.  Don't think so?  Try touching a baby's arms together above its head.  Babies are born as partially-grown heads with a minimum life-support system.  They don't look or act much like people.  We're awfully fond of them, for powerful evolutionary reasons, but the only thing they have in common with adult humans is a genotype.

So, given all of the above, how can I possibly be pro-abortion?

I'm pro-abortion because we as a society get to decide when the taking of human life is justifiable and when it's murder.  We can kill people in wars and celebrate the people who do so.  We can kill people in defense of ourselves or our families and society holds us blameless.  We execute humans that have done things so heinous that we as a society consider ourselves better off without their continued existence.  We almost always regret the taking of human life, even when justified, but we do it anyway, in some circumstances.

I consider early-term abortion to be justifiable homicide.

Sounds really bad, doesn't it?  And yet, I think I can support my argument, and further show that it's merely an attempt to put something that about half the people in the country support onto a semi-ethical foundation.

For fifty years now, ever since the technology became available, women have been able to control their fertility.  The ability to do this might not have resulted in breaking down the gender-specific roles we had in our culture.  We might, as a society, have decided that women should have remained homemakers in single-income families, even if those families had control over the number of children they had, including the ability to have none at all.  Indeed, there were plenty of arguments in the 70's and 80's to that very effect.  But those arguments failed.  We provided women largely equal opportunity in almost all aspects of modern life.  It dramatically improved our economic output, but it also made the two-earner family a requirement, because the economy adapted to the new economic power afforded to women.  We can't go back to a gender-segregated set of societal roles.  If we did, our economy would collapse.

An unwanted child is therefore now an economic disaster.  Not only does it affect the woman, who can't work effectively for a long period, it also affects her entire family.  A family living hand-to-mouth on two incomes can cease to be viable as the result of an extra child.  Loss of viability could mean dissolution of the family, inability to raise the existing children properly, homelessness, hopelessness, and who knows what other misery.


So the equality of women has led, irreversibly, to families with a lot less slack in their finances, and that in turn has led to the requirement that women be able to control their fertility.  That's largely achieved through contraception but when that fails, early-term abortion is a necessity.

Of course, women could just stop having sex, both in an out of wedlock, until they wanted children.  But again, we've crossed that bridge as a society and burned it behind us.  And let's be honest:  that was never really an option, was it?  Even before contraception, women had sex, sometimes with disastrous consequences.  But it's what human beings do.  Depriving half of the country to engage in an activity that makes almost everybody happier is a horrible idea.

But what of the unwanted child itself?  The "pro-life" (a term as deceptive as its opposite) argument is that the child's right to life trumps any amount of economic hardship for the family into which it is born.  That's a valid topic for debate, but I suggest that everybody who espouses that belief should spend some time with the chronically poor.  And there's nothing that will make a family chronically poor faster than having unwanted, unaffordable children.

Economically non-viable families produce socially non-viable children at an alarming rate.  Sure, lots of kids escape chronic poverty, but lots don't.  And those unlucky kids don't just grow up poor.  They grow up... stunted.  Stifled.  Hopeless.  And we're not just talking about the unwanted child here; that child's siblings suffer the same hardships, even though they're completely innocent of the action that dropped their family below the line.

Almost everybody, even the most ardently pro-life, believe that abortion is justifiable to save the life of the mother.  This makes sense:  if the mother dies, the fetus dies with her.  Better to sacrifice one life than two.  But why doesn't that argument apply to the family as a whole?  Where's the moral distinction?

More than anything else, that's why I believe that early-term abortion is justifiable homicide.  But let's not kid ourselves:  this is a bad thing, even if it's sometimes a necessary thing.

I don't think I'm going to change any minds among the pro-life faction here.  But let's return to the political now.  If for no other reason than that economy can't manage without it, abortion is going to continue.  The pro-life faction needs to understand this.  They're not going to win.

Even worse, though, the pro-lifers recently came close enough to succeeding that the other side, the political side that can't live without the cover of their "pro-choice" half-truth, had to consider the possibility that they might win.  This inevitably forces the pro-choicers to fight for every last inch of political ground.  No issue that even whiffs of "reproductive rights" can be ceded.  They'll mobilize every last resource to fight for the most repellent of practices, because they know that every time they lose a battle, the owners of the "pro-life" half-truth will advance, ready to conquer the next issue.  Neither side can back down.

And yet, I'll bet that an overwhelming majority of Americans would agree with the following:

• Partial-birth abortions are an obscenity.  Unless the life of the mother is threatened, there should never be an excuse for this practice.  
• If the baby from a medically necessary abortion is born alive, it needs to be treated as a baby.  That may mean that the mother has the right to make the agonizing choice to withhold medical care and watch her child struggle and die, or it may mean that we as a society are on the hook for endless care of a premature baby, if that's the mother's choice.  But we can't cross that line; if the child is born alive, it's born alive.
• Short of medical necessity, there is no excuse for an abortion later than the end of the first trimester.  If the mother is an idiot and doesn't know she's pregnant, too bad.  She can put the baby up for adoption after she's carried it to term.  If we're going to tolerate abortion at all, we have to treat it as acceptable only as a failure of contraception, and that demands that the mother take some responsibility for understanding what's going on with her body and making a prompt decision.
• Pregnant minor children are their parents' responsibility.  The parent decides what happens, just like with any other medical procedure.  If the parents decide that their daughter should carry a pregnancy to term, so be it.  After all, the baby will be their responsibility.  Withholding notification from parents is insane.

This looks like the best--possibly the only--compromise that's possible on this issue.  It's an important issue, even if it poisons every piece of political discourse that it touches.  Fundamentally, this is about what acts a society considers to be murder, and I can't think of a more important public policy topic.

But the social conservatives need to understand that abortion isn't going away.  The social and economic pressures to continue it are overwhelming.  Societies have the morals that they can afford, and our society can't afford the cost, both in economic and human terms, of unwanted children.  Until they understand this, and work out a firewall compromise like the one I've outlined above, they're going to continue to lose elections.  They got too close to succeeding in rolling back a set of laws whose existence most women depend upon, and they're never going to be given another chance to do so.

If they hold on to this, they will be politically annihilated, over and over again, until they stop.  And the net result will be a continued fraying of economic prosperity, liberty, and consensus culture.

Please Assume the "Brace" Position for Our Ride Over the Fiscal Cliff

In early September, I made another prediction on which I'd like to double down:

...Maybe the Republicans will suddenly decide to put the best interests of the nation ahead of political power games.  But the problem is that they honestly, truly believe that the endpoint of a successful second term for Obama results in national ruination.  Compared to that, a double-dip recession seems a small price to pay.  Furthermore, repeal of the middle-class tax cuts will mitigate the deficit caused by the recession, which will make the deficit hawks happy.  Bottom line:  the GOP is gonna play scorched-earth if Obama wins.

I don't think this is a good idea.  A double dip will put us way too close to a debt crisis for comfort.  But I'm not sure that the House GOP thinks that a debt crisis can be avoided any more.  Maybe they make the calculation that the deficit reductions from nuking the Bush tax cuts in toto are enough to stave off the debt crisis and give them the political whip hand.

Let's look at this a bit more closely:

1. Short of an encyclical by His Holiness, Father Grover, pontiff of the Church of No Tax Increases Ever, most House Republicans are on pretty firm ground refusing to vote for any replacement to the expired Bush tax cuts, while still getting to execute a huge tax increase that will ultimately remove a big chunk of the deficit.
2. Obama may offer to extend the Bush tax cuts again, but that has a certain Lucy-with-the-football-esque quality to it.  Better to get the pain out of the way early in Obama's second term so he gets blamed for the shambles, rather than getting pinned up against the next mid-term or presidential election.
3. There is no upside to the Republicans for a grand bargain unless it's a clear win for them.  That would involve, at the very least, genuine tax reform and a deal to soft-land the transfer payments crisis at some viable percentage of total outlays (60% would be my guess).  I think Obama's too arrogant to take that deal.  (Minor prediction:  We'll hear at least one of the phrases, "Elections have consequences" or "I won" from the President some time in the next 3 months.)
4. There is nothing but political upside for the GOP to doing nothing.  Things going to hell in a handbasket three months after Obama's reelection has a cause-and-effect association that will impress even the lowest of low information voters for a long time.  ("Long time" >= 4 years.)

In short, the only thing that saves us is if Obama is willing to take a big, yummy bite of Mr. Boehner's Famous Crap Sandwich.  ("Ya want dingleberries on that, Mr. President?" he asks with a big,--oh, what's that modifier?--grin.)  I'd love to believe that Obama has the character to understand his position and do the right thing, but I think we're way too close to his blind spot for him to exhibit the necessary self-awareness.

Oddly enough, tax reform could be Obama's salvation.  You can hide a huge tax increase under the guise of "reform" and nobody will be able to figure it out.  But it'll come at a price, one that will look oddly Romneyesque when the dust settles.  My proposal:

• Across-the-board rate reduction of 5% in exchange for capped deductions and a reversion to the 20% capital gains rate at incomes above $500K.  Similar corporate tax reform.  The package should bring in $1 trillion over 10 years.
• An additional $2 trillion out of Medicare and Social Security over 10 years.  The best solution would be to means-test both programs.  I don't think Obama can go for premium support after all the stupid things he said during the campaign, but he's gonna have to throw the GOP a bone that convinces them that he's not going to get the savings with price controls.
• A targeted set of reforms to ACA:  a reduction in IPAB's power and smoothing over the small business penalty for hiring the 50th employee would go a long way.
• From there, we're down to needing about an extra $1 trillion in cuts over 10 years.  This is within the zone of possible agreement between Obama and the GOP.

It's doable, but I have to say that the GOP has a massive strategic advantage going into this.

Why "Investment" and "Nation Building at Home" Are Going to Fail

I feel like I'm beating a somewhat dead horse here--or perhaps stabbing it with an obsolete bayonet--but I'd like to reintroduce the chart that represents the single largest threat to our continued national existence.  I posted a slightly different version of it here, but I've relabeled some curves and added some trend lines to make things a bit more specific:

This is straight from White House statistics.  There are a lot of versions of this chart floating around, but most of them show payments to individuals, aka mandatory spending, aka entitlements, as a percentage of GDP.  Those are plenty alarming, but I think this one makes the case a bit more persuasively.

The American public will only put up with a certain level of taxation, so revenues are going to be capped at some relatively constant amount of GDP.  The real problem is what we spend those revenues on--what the outlays are.

This chart ought to scare the crap out of you.  Note that the linear regression here is pretty tight and, well, it's linear.  This shows payments to individuals rising at a pretty constant 0.77% per year.  Now obviously, this can't go one forever, because it's impossible to exceed 100% of total outlays.  But so far, there's very little sign of the curve going asymptotic.

What that means is that discretionary spending is being crowded out very rapidly.  So when Obama talks about making education a priority, or rebuilding infrastructure, or investing in basic research, most of which are essential, he might as well be shooting the breeze with his buds from the Choom Gang.  (Yes, double entendre intended.)

But he's right;  we do need all that "investment".  But he is so dead set on preserving the national entitlement culture that we simply can't do it.  Until we realize that we can't pay everybody enough money to make their lives totally secure and anxiety-free, we're merely swapping a bit of comfort today for decades of misery in the not-too-distant future.

A Response to Ezra Klein's Debt Chart

Ezra Klein has a post that cites a Center on Budget and Policy Priorities report attempting to show that the US debt isn't really Obama's fault.  Here's the graph from the report:

The implication, being, of course, that if we just got rid of those mean ol' Bush Tax Cuts, everything would be hunky-dory.

There's just one teeny little problem.  On the same CBPP site, there's another report entitled CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion.  Oddly, this report in in absolute numbers, rather than percent of GDP.  It's also over a ten-year period, rather than until just 2019.  I just don't know why they won't do these things as apples-to-apples comparisions.

So I hauled out Excel, input the CBO's GDP forecasts and summed up the savings from the CBPP post, and looked at what would happen if we reinstated the Bush tax cuts for everybody making more that $250K a year.

In 2019, that comes out to a debt savings of 3.1% of GDP.  Non-trivial, to be sure.  But let's re-do that chart, shall we?  (I don't have access to the raw data, so I'm doing this free-hand...)

Now, given that Obama has repeatedly said that he wouldn't raise taxes on anybody with an income over $250K, you pretty much have to hold him responsible for everything below the green stuff.  Kinda puts things in perspective, doesn't it?

If you'd like to blame Bush for the wars, go right ahead.  But the last time I checked, Iraq expenditures were way down and Obama's also repeatedly told us how the "real war" was in Afghanistan.  Again, whose policy are we following now?

If the President would like to stay stuck on step one of the Three Envelopes Joke, I guess he can do whatever he wants.  Personally, I'm leaning toward step three.

UPDATE 8/30/12:  Made the second chart a bit prettier.

Investment Tax Expenditures Have to Be Changed

I hate the tax debate.  I have 100% drunk the Kool-Aid that any tax increase will be used to increase spending even further beyond baseline, and as such needs to be resisted at all costs.

But that only means that any tax reform has to be revenue-neutral.  To actually reduce revenues when we've been dug this far into the hole is insanity.  We ought to be able to do a lot of reform with revenue-neutrality as a constraint.  Both Romney's and Ryan's plans attempt to do exactly that.

But today there's a Brookings analysis of Romney-esque tax reform.  It assumes a 20% reduction in rates across the board (I think--they've been slippery about this), then looks at how many non-investment tax expenditures (i.e., hands off capital gains and dividends) need to be phased out, starting from the top end of the income spectrum and moving down, to get back to neutrality.  Bottom line:  everybody with income under $200K has about a 1.2% decrease in after-tax earnings (i.e., their taxes go up), but incomes over $1M have a 4.1% increase.  The reason, the authors say, is that the non-investment tax expenditures heavily favor the poor and the middle class, while the investment expenditures heavily favor the rich.

Makes sense intuitively.  I'll be interested to see how--or if--this gets refuted.  In the meantime, this is a huge exposure in Romney's plan.  And frankly, this is where I have to agree with some of Obama's positioning--but only some.  Let's not raise rates on the rich, but do we really have to increase their after-tax income at the expense of the less rich?

The only way we're going to get there is to start fiddling with capital gains and dividend rates, while still reducing/flattening the tax brackets.

The argument against increasing investment taxes is that it disincents investment.  At the very least, it certainly reduces the marginal gain possible on investment, which in turn makes the investments have a less favorable risk-to-reward profile.  Even more important, in my opinion, the low capital gains rate encourages capital mobility, reducing the cost of exiting an under-performing investment and using the proceeds for a better-performing one.

Seems to me that there's a compromise to be had here:

1. Don't tax capital gains that are reinvested.  This is tricky to implement.  I'd guess that you'd have to have some sort of fed-blessed escrow account.  Note that this should also exempt capital gains distributions from taxation, which would allow for better tax planning.  It also allows for capital mobility, as long as you don't consume the profits.
2. For capital gains that aren't reinvested, tax 'em at the (reduced) ordinary income rate.
3. Get rid of the reduced qualified dividends rate entirely.  This doesn't encourage capital mobility at all (quite the contrary), and it's pure income.

I haven't crunched the numbers on this, and have no idea whether it can produce enough revenue to make a Romney-like plan revenue neutral without hurting middle- and low-income families, and to ensure that very high-income earners aren't getting a windfall.  The rich don't pull a lot of money out of their investments as consumption, which seems like a good deal both for them and for the economy in general.  But it definitely limits the revenue-generating potential from capital gains.

This is a better compromise than increasing marginal rates on high-earners.  Small-to-medium business owners take their profits as ordinary income, and will genuinely reduce expansion to manage their tax burden.  That's not to say that taxing investment income doesn't also have a negative impact on expansion and venture capital--it obviously does--but there simply isn't enough money right now.

By all means, let's simplify the system.  By all means, let's not increase revenues over where they are right now.  But burdening the middle class and the poor at the benefit of the rich just isn't going to fly.

UPDATE 9/12/12:  There's a reasonably cogent analysis from Rosen at Princeton (PDF) showing that, when you dynamically score the Romney plan to include both behavioral changes and a 3% increase in economic growth from the lower taxes, you get about $29 billion more in revenue from individuals making more than $200K per year.  Not sure I buy the 3%, but even with zero growth, the plan is slightly better than revenue neutral.  This is a pretty decent rebuttal to the Brookings/TPC study.

More on Productivity Growth

For a while now, I've been arguing that we're going to reach a point at which productivity growth permanently exceeds output growth, which will cause the economy to shed jobs. (Productivity) = (output) / (hours worked), so (productivity) * (hours worked) = (output). If productivity increases faster than output, then hours worked has to get smaller. Fewer hours worked generally means fewer people employed.

Or does it? To find out, I graphed GDP growth, GDP per worker (computed from BLS historical stats), and productivity growth. Here's the result:

That's a terrible mess, so here's a 5-year moving average of the same data:

That's clear enough to draw some conclusions.

First, note that productivity growth never goes above GDP growth, even in the unsmoothed version, for more than a year until we get to about 2000. Then it's a fairly regular occurrence. However, note that productivity growth is always higher relative to GDP growth as we come out of a recession, so the trend isn't completely definitive yet. The we're-not-in-Kansas-any-more moment will come when productivity growth permanently breaks trend and exceeds GDP growth. We're not there yet, but things are looking interesting.

Next, note that GDP per worker growth never exceeds GDP growth until 2000, even in the unsmoothed version. The first time that GDP per worker growth breaks through GDP growth in the post-war period is 2009.

Finally, note that there are several places where GDP per worker growth significantly underperforms productivity growth. This always occurs during periods of declining productivity growth. If GDP per hours worked is declining slower than GDP per worker, I think that means that hours worked per worker has to be declining--I think.

Bottom line: nothing conclusive here, but the trend I expected to occur shows signs of emerging. Note that this is really bad news in the long run.

The Second Most Important Economic Rule of Thumb

Rule #1 is, "Price controls cause shortages." But for some reason Rule #2 has only recently crystallized for me:

Economic Rule #2: Whenever the government subsidizes something, its price goes up.

Let's look at some examples from recent history:

• Companies were subsidized through tax policy to provide health insurance; medical costs went up.
• Healthcare was further subsidized by Medicare and Meidcaid; medical costs went up a lot.
• Student loans were subsidized through Federal loan guarantees; the cost of higher education skyrocketed.
• Ethanol production was subsidized; the price of corn, and all of its dependent foodstuffs, went up.
  
  
• Home ownership was subsidized through federal loan guarantees and cheap bundling of mortgages through Fannie and Freddie; we had a housing bubble.

I'm sure I could add another fifteen or twenty examples of this if I wanted to do some research, but you get the idea. Why is this true? The answer is simple: Free money. It may come out of our tax dollars, but the ability to get not only your own tax dollars but a hunk of everybody else's is at worst a good deal and at best the basis for a lucrative business model.

So: Suppose I'm a doctor, and I charge my patients $10 a visit (hah!), because I know that it's what they can afford if they're going to buy my service on a regular basis. Then I read in the paper that Medicaid will pay for $10 an office visit, and I know that 25% of my patients are on Medicaid. To me, I now know that my patients have, on average, an extra $2.50 that they'll happily give me without changing their buying habits at all. So I raise my price to $12.50 and office visit.

The reason for the price increase is obvious, but there's a deeper, more corrosive dynamic at work under the surface. In the example above, there are winners and losers. For the 25% of patients on Medicaid, they now have an extra $7.50 that they wouldn't otherwise have had. But for the 75% of patients not on Medicaid, they've each lost $2.50 in spending power. The doctor's doing great, the Medicaid patients are doing better, but the other 75% of the doctor's patients are getting screwed. We've destroyed real purchasing power by picking a few winners (the Medicaid patients and the doctors) and disadvantaging a vastly larger number of losers (the other 75%). And in the end, because we've favored the few at the expense of the many, more people need Medicaid, which drives prices even higher, which further impoverishes the many, and the beat goes on.

But it's even worse than that: The doctor increased his prices because he knew how much money was out there to be had. So the net result is that the economic value of the subsidy is completely destroyed by the price increase.

So, what does this tell us about a philosophy of government? Are subsidies ever justified? We clearly want to have some form of social safety net. That implies that we subsidize the poor, but we have to understand that we need to be extremely careful about how we allow the subsidies to flow back into the economy, or they simply become worthless.

But lots of subsidies are instituted for policy reasons, to encourage some sort of behavior that the government finds desirable. These are effectively worthless, because the price increases will always wipe out the value of the subsidy, causing the economic activity that was being encouraged to decrease back to its equilibrium level. In short, policy subsidies are worthless in the long run.

There are still lots of collective action problems that only government spending can address. But behavior modification is never going to be the government's strong suit.

A Couple of Comments on the New Malthusian Limit

I've been thinking a bit more about whether productivity growth rates can permanently outstrip economic growth rates, and what that means if it happens. Comments from me here and here.

I'm starting to wonder if we're not about to bump up against a new kind of Malthusian limit. The old one had increased output leading to birth rates that exceeded food supply, which caused collapse. Is the new version of this improved technology leading to productivity rates that exceed growth rates, causing the number of available jobs to collapse? And does the collapse of jobs presage the collapse of population? Of civilization?

I'm also wondering: what other Malthusian-ish transitions might we have gone through? Clearly there was a point near the Neolithic revolution where we stopped being one of the variables in a predator-prey equation, which seems like a pretty big transition. Are there others? Can we foresee others in the future?

In Which the Blindingly Obvious Becomes, Oddly Enough, Blindingly Obvious

Michael Lewis has a piece in Vanity Fair that kinda rocked me back on my heels.  It's nominally about debt in California--at all levels of government, but the interesting part comes from an interview with neuronscientist Peter Whybrow:

“Human beings are wandering around with brains that are fabulously limited,” he says cheerfully. “We’ve got the core of the average lizard.” Wrapped around this reptilian core, he explains, is a mammalian layer (associated with maternal concern and social interaction), and around that is wrapped a third layer, which enables feats of memory and the capacity for abstract thought. “The only problem,” he says, “is our passions are still driven by the lizard core. We are set up to acquire as much as we can of things we perceive as scarce, particularly sex, safety, and food.” Even a person on a diet who sensibly avoids coming face-to-face with a piece of chocolate cake will find it hard to control himself if the chocolate cake somehow finds him. Every pastry chef in America understands this, and now neuroscience does, too. “When faced with abundance, the brain’s ancient reward pathways are difficult to suppress,” says Whybrow. “In that moment the value of eating the chocolate cake exceeds the value of the diet. We cannot think down the road when we are faced with the chocolate cake.”

The richest society the world has ever seen has grown rich by devising better and better ways to give people what they want. The effect on the brain of lots of instant gratification is something like the effect on the right hand of cutting off the left: the more the lizard core is used the more dominant it becomes. “What we’re doing is minimizing the use of the part of the brain that lizards don’t have,” says Whybrow. “We’ve created physiological dysfunction. We have lost the ability to self-regulate, at all levels of the society. The $5 million you get paid at Goldman Sachs if you do whatever they ask you to do—that is the chocolate cake upgraded.”

The succession of financial bubbles, and the amassing of personal and public debt, Whybrow views as simply an expression of the lizard-brained way of life. A color-coded map of American personal indebtedness could be laid on top of the Centers for Disease Control’s color-coded map that illustrates the fantastic rise in rates of obesity across the United States since 1985 without disturbing the general pattern. The boom in trading activity in individual stock portfolios; the spread of legalized gambling; the rise of drug and alcohol addiction—it is all of a piece. Everywhere you turn you see Americans sacrifice their long-term interests for short-term rewards.

What happens when a society loses its ability to self-regulate, and insists on sacrificing its long-term interest for short-term rewards? How does the story end? “We could regulate ourselves if we chose to think about it,” Whybrow says. “But it does not appear that is what we are going to do.” Apart from that remote possibility, Whybrow imagines two outcomes. The first he illustrates with a true story, which might be called the parable of the pheasant. Last spring, on sabbatical from the University of Oxford, he was surprised to discover that he was able to rent an apartment inside Blenheim Palace, the Churchill family home. The previous winter at Blenheim had been harsh, and the pheasant hunters had been efficient; as a result, just a single pheasant had survived in the palace gardens. This bird had gained total control of a newly seeded field. Its intake of food, normally regulated by its environment, was now entirely unregulated: it could eat all it wanted, and it did. The pheasant grew so large that, when other birds challenged it for seed, it would simply frighten them away. The fat pheasant became a tourist attraction and even acquired a name: Henry. “Henry was the biggest pheasant anyone had ever seen,” says Whybrow. “Even after he got fat, he just ate and ate.” It didn’t take long before Henry was obese. He could still eat as much as he wanted, but he could no longer fly. Then one day he was gone: a fox ate him.

The other possible outcome was only slightly more hopeful: to hit bottom. To realize what has happened to us—because we have no other choice. “If we refuse to regulate ourselves, the only regulators are our environment,” says Whybrow, “and the way that environment deprives us.” For meaningful change to occur, in other words, we need the environment to administer the necessary level of pain.

Did our value system only work because it was designed for scarcity?  Or would the old-timey Christian values of hard work, community, cooperation, and charity still function, if only they hadn't been eroded by abundance?  Is there any market-based solution that will encourage long-term thinking?  Are we approaching another Malthusian limit where the wealth of our society no longer causes a self-limiting population explosion, but instead fuels a self-limiting explosion in consumption?  Or is this all nonsense, and all we need is the ability for everybody in the society to understand compound interest?

If this thesis is correct, it has vast implications for the future success not only of government in the developed world, but of market-driven economies in general

Can the Financial System Be Made to Operate in the Public Interest?

Tyler Cowan thinks probably not:

A key lesson to take from all of this is that simply railing against income inequality doesn’t get us very far. We have to find a way to prevent or limit major banks from repeatedly going short on volatility at social expense. No one has figured out how to do that yet.

It remains to be seen whether the new financial regulation bill signed into law this past summer will help. The bill does have positive features. First, it forces banks to put up more of their own capital, and thus shareholders will have more skin in the game, inducing them to curtail their risky investments. Second, it also limits the trading activities of banks, although to a currently undetermined extent (many key decisions were kicked into the hands of future regulators). Third, the new “resolution authority” allows financial regulators to impose selective losses, for instance, to punish bondholders if they wish.

We’ll see if these reforms constrain excess risk-taking in the long run. There are reasons for skepticism. Most of all, the required capital cushions simply aren’t that high, so a big enough bet against unexpected outcomes still will yield more financial upside than downside. Furthermore, high capital reserve requirements insulate bank managers from the pressures of both shareholders and bondholders. That could encourage risk-taking and make the underlying problem worse. Autonomous managers often push for risk-taking rather than constrain it.

What about controlling bank risk-taking directly with tight government oversight? That is not practical. There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections. It’s also not clear how well regulators can identify risky assets. Some of the worst excesses of the financial crisis were grounded in mortgage-backed assets—a very traditional function of banks—not exotic derivatives trading strategies. Virtually any asset position can be used to bet long odds, one way or another. It is naive to think that underpaid, undertrained regulators can keep up with financial traders, especially when the latter stand to earn billions by circumventing the intent of regulations while remaining within the letter of the law.

It’s a familiar story, repeated many times in the past. If one recalls the Basel I capital agreements for banks, the view was that we would make banks safer by inducing them to hold a lot of AAA-rated mortgage-backed assets. How well did that work out? So, with no disrespect to the regulators or the sponsors of the recent bill, it is hardly clear that enhanced regulation will solve the basic problem.

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Another root cause of growing inequality is that the modern world, by so limiting our downside risk, makes extreme risk-taking all too comfortable and easy. More risk-taking will mean more inequality, sooner or later, because winners always emerge from risk-taking. Yet bankers who take bad risks (provided those risks are legal) simply do not end up with bad outcomes in any absolute sense. They still have millions in the bank, lots of human capital and plenty of social status. We’re not going to bring back torture, trial by ordeal or debtors’ prisons, nor should we. Yet the threat of impoverishment and disgrace no longer looms the way it once did, so we no longer can constrain excess financial risk-taking. It’s too soft and cushy a world.

That’s an underappreciated way to think about our modern, wealthy economy: Smart people have greater reach than ever before, and nothing really can go so wrong for them. As a broad-based portrait of the new world, that sounds pretty good, and usually it is. Just keep in mind that every now and then those smart people will be making—collectively—some pretty big mistakes.

How about a world with no bailouts? Why don’t we simply eliminate the safety net for clueless or unlucky risk-takers so that losses equal gains overall? That’s a good idea in principle, but it is hard to put into practice. Once a financial crisis arrives, politicians will seek to limit the damage, and that means they will bail out major financial institutions. Had we not passed TARP and related policies, the United States probably would have faced unemployment rates of 25 percent of higher, as in the Great Depression. The political consequences would not have been pretty. Bank bailouts may sound quite interventionist, and indeed they are, but in relative terms they probably were the most libertarian policy we had on tap. It meant big one-time expenses, but, for the most part, it kept government out of the real economy (the General Motors bailout aside).

The other important idea from this piece is that Cowan equates rising income inequality solely from the abuses of the financial sector. He argues that, if you remove this, inequality has changed very little for 98% of the US population.

He also cites "threshold earners", people who work only to make a specific amount of money and then devote the rest of their time to pursuits that improve their quality of life, as another factor that's making inequality appear worse than it actually is.

If Cowan is right, we're likely to be subject to financial crisis after financial crisis, until we finally learn how to prevent people from gaming the system. The problem is that the people gaming the system are smarter than the people trying to engineer a solution, so they have a built-in advantage that's likely to last decades until the legal and regulatory frameworks have walled-off all the low-hanging fruit.

The big problem here is that the technology is still accelerating the information flows upon which the financial beast feeds, which means that the crises are likely to be sharper, less anticipated, and closer together.

An important piece, very clear, and ultimately pretty depressing.

Yet Another Obsidian Wings Comment Thread

Got myself involved with these guys on the topic of corporate foreign tax havens and why American multi-nationals pay so little in US taxes sometimes. Nice pool of commenters over at this site.

A Bit of Lies, Damn Lies, and Statistics

Via Instapundit, we are directed here, where we find the following graph:



Kinda scary, but note that it shows percent change from the most recent employment peak. Since employment was incredibly high prior to the Recent Unpleasantness, the reversion to the mean--and then beyond it, looks worse than it is.

The whole thing prompted a trip to the BLS web site to get raw non-farm employment numbers, from which, via the wonders of a bit of Excel hacking, I got a 3-month-smoothed rate of change on employment. Here it is:



So, this one's bad, but comparable to the stuff that happened in '74 and many of the recessions in the 50's. Interesting chart--does anybody see things getting more orderly, and the cycles (mostly) damping out over time? I wonder if this is better economic management, or whether it's a result of the structural changes from a manufacturing economy to a service/information economy.

The Internet and the Anti-Counterfeiting Trade Agreement

From Cory Doctorow comes this fairly depressing report on the internet chapter of the current ACTA negotiations in Seoul:

The internet chapter of the Anti-Counterfeiting Trade Agreement, a secret copyright treaty whose text Obama's administration refused to disclose due to "national security" concerns, has leaked. It's bad. It says:

* That ISPs have to proactively police copyright on user-contributed material. This means that it will be impossible to run a service like Flickr or YouTube or Blogger, since hiring enough lawyers to ensure that the mountain of material uploaded every second isn't infringing will exceed any hope of profitability.

* That ISPs have to cut off the Internet access of accused copyright infringers or face liability. This means that your entire family could be denied to the internet -- and hence to civic participation, health information, education, communications, and their means of earning a living -- if one member is accused of copyright infringement, without access to a trial or counsel.

* That the whole world must adopt US-style "notice-and-takedown" rules that require ISPs to remove any material that is accused -- again, without evidence or trial -- of infringing copyright. This has proved a disaster in the US and other countries, where it provides an easy means of censoring material, just by accusing it of infringing copyright.

* Mandatory prohibitions on breaking DRM, even if doing so for a lawful purpose (e.g., to make a work available to disabled people; for archival preservation; because you own the copyrighted work that is locked up with DRM)

Since the Obama Administration is making such a big deal about network neutrality, I can't imagine that many of these provisions make it into anything remotely ratifiable, but I suppose the entertainment industry could yank Obama's chain hard enough to make him do something here.

I have no idea how to rework copyright to make it viable in the internet age. Obviously, something profound is going to have to happen. Fair use changes a lot in a hyperlinked world, and it is simply impossible to enforce copy protection long term. Content providers can derive some amount of value from convenient and reliable delivery services. (Oh, wait! No they can't--not with network neutrality in place.) And there is some market value associated with producing "free" content and getting people to through money into the hat. But I doubt sincerely that there would be enough money in it to produce a blockbuster movie.

Frankly, I'm not sure that we don't already have approximately the right system. Content providers lose a fair amount of money, but they can prop up their prices somewhat through scorched-earth enforcement actions. Their deterrent allow them to inflate their prices somewhat, while the threat of mass rebellion if they get too obstreperous prevents them from getting, well, too obstreperous.

This seems like one of those policy questions where the answer is going to self-organize from the bottom up. The less top-down government policy, the more likely that somebody will come up with the right business model.

The Economics of Green Jobs

Here's a question: We keep getting told how many jobs are going to be created through green technology, and how wonderful it will be for the US economically. But all of those jobs are going to get factored into our overall energy costs, right? So, if lots more people are going to be employed making green energy than all those nasty fossil fuel producers (who will surely lose their jobs, due to the fact that they are fundamentally evil), doesn't that mean that the cost of energy has to go way, way up? And if energy costs go way up, doesn't that imply that US GDP goes down, or at least flattens out a lot? And doesn't that really mean that cutting over to green energy is more-or-less a zero-sum game?

I'm Not Understanding Something

So, we have the banks sitting on piles and piles of CDOs, because if they sell them, they'll wind up under-capitalized and begin the credit-trap death spiral. But doesn't mark-to-market accounting require them to write down their CDOs' value as soon as anybody sells enough of them to make a market?

Could it be that nobody is selling CDOs? And, if so, doesn't that start to smell a bit of collusion on the banks' part?

Change--Not!

I've been scrupulously avoiding any discussion of the stimulus bill, but I can no longer contain myself.

Today, in response to still more bad (but completely expected) employment numbers, Obama said:

I am sure that at the other end of Pennsylvania Avenue, members of the Senate are reading these same numbers this morning. I hope they share my sense of urgency and draw the same, unmistakable conclusion: The situation could not be more serious. These numbers demand action. It is inexcusable and irresponsible to get bogged down in distraction and delay while millions of Americans are being put out of work. It is time for Congress to act.

This would be fine if the bill weren't a giant, steaming, Christmas-tree-shaped dog turd. Obama can have a stimulus bill any time he wants, just by including only infrastructure, temporary unemployment relief, and tax cuts. But he apparently doesn't want that. He wants to use the crisis as an opportunity to placate every constituency he owes from the campaign.

This is, of course, nothing new, nor is it particularly surprising. It certainly isn't a new kind of politics, however.

I performed a little exercise on the CBO analysis of the stimulus bill (PDF): I took all the expenditures the listed from the various titles of the bill and marked which ones looked stimulative to me and which ones looked like ornaments on the Christmas tree. My criteria where as follows: For something to be judged "stimulative" it had to either be one of the following:

1. A genuine infrastructure improvement (roads, bridges, public buildings, electrical grid, or broadband infrastructure).
2. A tax cut.
3. Something that sounded reasonable for helping out the unemployed.
   

Here's what I came up with:


In other words, there's about $250 billion that doesn't look very stimulative to me. A quarter of a trillion dollars.

Let's assume that I've been overly harsh and $100B of that actually is stimulative. That means that we can lop of $150 billion without trying very hard.

I don't care if we add more tax cuts or not. I'll grudgingly accept that we need a whopping big infrastructure spend (even though the evidence for that seems to be somewhat paltry, and this multiplier effect has obvious logical problems). But it's simply not gonna fly for Obama to try and stampede us into wasting hundreds of billions of dollars.

He should be ashamed of himself.

That Pesky Multiplier Effect

Conventional (or at least popular) wisdom is that each dollar of government spending contributes more than a dollar of GDP. Further popular wisdom is that spending has a better multiplier than a tax cut.

But Greg Mankiw thr0ws up several well-taken caveats:

In practice, however, the multiplier for government spending is not very large. The best evidence comes from a recent study by Valerie A. Ramey, an economist at the University of California, San Diego. Based on the United States’ historical record, Professor Ramey estimates that each dollar of government spending increases the G.D.P. by only 1.4 dollars. So, by doing the math, we find that when the G.D.P. expands, less than a third of the increase takes the form of private consumption and investment.

Mankiw goes on to poke further at the popular wisdom on tax cuts:

Textbook Keynesian theory says that tax cuts are less potent than spending increases for stimulating an economy. When the government spends a dollar, the dollar is spent. When the government gives a household a dollar back in taxes, the dollar might be saved, which does not add to aggregate demand.

The evidence, however, is hard to square with the theory. A recent study by Christina D. Romer and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the G.D.P. by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases.

Why this is so remains a puzzle. One can easily conjecture about what the textbook theory leaves out, but it will take more research to sort things out. And whether these results based on historical data apply to our current extraordinary circumstances is open to debate.

Finally, we also have an obvious question from Arnold Kling:

It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.

Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?

(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline

If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.

So to talk about "the" multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.

Personally, I can't see how all the inflating of the economy doesn't lead to a lot of, well, inflation. It doesn't if you think that there is an offsetting amount of deflation (say, somewhere between $5 and $10 trillion), but we really have no idea, do we?

Might not be a terrible time to buy some gold.

A New Way to Regulate

Somebody's probably already thought of this but I hadn't, so here goes:

Today, we regulate for anti-trust by looking at market share in important industries. Today we regulate banks largely by looking at their total leverage. But, despite the media nattering on about companies that are "too big to fail," that's not really the problem. The problem is that some companies are too connected to fail. If you rip them out of the network of financial and supplier relationships, the damage done cascades through the whole network.

So why not regulate from a graph-theoretic basis? We not only want to know about leverage and market share, we want to know about how many other entities that hold debt or credit, or how many suppliers and customers, will be hurt if a given entity goes belly-up. If we had this information in a standardized reporting structure, regulators could look for excessively connected nodes or nodes whose average network distance was substantially shorter than the network diameter.

These are the companies that are most likely to cause trouble if they fail. Regulators could concentrate on these companies and, if necessary, take preemptive action to reduce the damage they could do to the rest of the network.

No idea whether this is feasible or what the unintended consequences are.