In response to the signs of a weakening economy, the Federal Open Market Committee (FOMC) of the Federal Reserve System lowered on Tuesday its target for the federal funds interest rate. Today, the White House and Democrats from the House of Representatives announced a tentative deal on fiscal stimulus package that would likely provide tax rebates to low- and middle-income families.
The FOMC decision only directly affects the federal funds rate, the interest rate that banks charge each other when they lend through the Federal Reserve. However, many other interest rates key off the federal funds rate, so rates available to consumers are likely to fall. The stimulus package, should it actually pass, should put money directly into people's pockets.
Both actions are intended to spur people to spend more and reinvigorate the economy. This is likely to happen, at least to some extent.
For many Americans, however, it might be worthwhile to look at how lower interest rates and some extra cash might help their permanent personal finances.
According to the last Survey of Consumer Finances conducted in 2004, three-quarters of American families held some debt. Four out of nine American families had outstanding credit card balances. Families with incomes between $40K and $90K were especially likely to owe the credit card companies. If your family is in this group, it would be a good idea to use the tax rebate and the possibly reduced interest rate to attack that credit card balance. With current rates for many families at usurious rates of 18, 21, or even higher percentages, an extra payment toward the credit card balance would provide a much higher return in terms of the household's net worth than almost any investment on the market.
Lower interest rates also mean that it is a good time for households to refinance their mortgages and lower their indebtness. During the credit expansion that accompanied the housing bubble, many families took advantage of the lower interest rates and easy financing to borrow extra amounts against what they and the banks thought was the value of their homes. Refinancing, however, can also be used to decrease indebtedness. The simplest way to do this is to leave all of the terms of the mortgage the same, except the interest rate--that is, to refinance without taking any extra money out and without extending the period of the mortgage. Some people also took advantage of the lower rates to actually cut the length of their loans. For households with interest-only mortgages or amortizations greater than 30 years, a standard 30-year, fixed-rate mortgage may now be within reach.
Unsustainable run-ups in debt have been a big contributor to the current economic problems. Fixing some of those individual problems might reduce the immediate effects of the stimulus measures but would go a long way toward fixing the underlying, long-term problems in the economy. In any case, it would help some people sleep easier at night.
Thursday, January 24, 2008
Friday, January 18, 2008
Re-employment bonuses should be in the stimulus package
As the chorus for providing an economic stimulus grows louder, several plans are recommending an extension of basic Unemployment Insurance (UI) benefits beyond the current six months of coverage. There are good reasons for these plans. Most importantly, they are targeted toward people who are actually hurt by an economic slowdown--those who are involuntarily unemployed. The benefits are politically attractive because they only go to people with work histories and who continue to try to find employment. The benefits are somewhat calibrated with the magnitude of any slowdown; more benefits would be paid (there would be a stronger stimulus) the greater the extent of unemployment. Finally, they are skewed toward low-income households, so the money is likely to be spent rather than saved, again providing for a larger stimulus.
More generous or extended UI benefits, however, also have a serious drawback, which is that they reduce people's incentives to quickly find work. The benefits allow unemployed people to be choosier in accepting their next job, leading to longer unemployment spells and a slower overall recovery.
Given that unemployment appears to be headed up and that jobless spells are likely to grow longer, extending UI benefits to either nine months or a year seems both compassionate and reasonable. However, policymakers should consider an additional change to the UI system to mitigate the employment disincentives and that is to offer re-employment bonuses.
The way that a re-employment bonus would work is that a job seeker would receive a bonus payment if she accepted a job before her UI eligibility ran out and if she held that job for some period of time (that is, stayed off the UI rolls). The bonuses could be structured like exploding job offers in high-powered law and finance firms so that the amount of the bonus declined with the period of unemployment. For instance, the bonus could be half the value of someone's remaining and unused UI benefits. All or part of the bonus payment would be withheld until after the worker had worked a certain period.
The logic behind the re-employment bonuses is straightforward: they provide incentives to go back to work instead of staying out of work and provide those incentives earlier in an unemployment spell rather than later.
There is good evidence that re-employment bonuses not only shorten unemployment spells but also save the government money. With funding from the U.S. Department of Labor, the state of Washington experimented with (randomly assigned) different re-employment bonus amounts for unemployed workers there in 1988. An analysis of the Washington experiment found that it reduced both the length of unemployment spells and the overall amount of compensation. Bonus experiments conducted in Pennsylvania and Illinois also showed that unemployment spells could be trimmed.
Given the many existing strains on the federal budget, the stimulus package should be as effective as possible. Creating cost-effective incentives for out-of-work people to get back on their feet as quickly as possible should be an element in the current proposals.
More generous or extended UI benefits, however, also have a serious drawback, which is that they reduce people's incentives to quickly find work. The benefits allow unemployed people to be choosier in accepting their next job, leading to longer unemployment spells and a slower overall recovery.
Given that unemployment appears to be headed up and that jobless spells are likely to grow longer, extending UI benefits to either nine months or a year seems both compassionate and reasonable. However, policymakers should consider an additional change to the UI system to mitigate the employment disincentives and that is to offer re-employment bonuses.
The way that a re-employment bonus would work is that a job seeker would receive a bonus payment if she accepted a job before her UI eligibility ran out and if she held that job for some period of time (that is, stayed off the UI rolls). The bonuses could be structured like exploding job offers in high-powered law and finance firms so that the amount of the bonus declined with the period of unemployment. For instance, the bonus could be half the value of someone's remaining and unused UI benefits. All or part of the bonus payment would be withheld until after the worker had worked a certain period.
The logic behind the re-employment bonuses is straightforward: they provide incentives to go back to work instead of staying out of work and provide those incentives earlier in an unemployment spell rather than later.
There is good evidence that re-employment bonuses not only shorten unemployment spells but also save the government money. With funding from the U.S. Department of Labor, the state of Washington experimented with (randomly assigned) different re-employment bonus amounts for unemployed workers there in 1988. An analysis of the Washington experiment found that it reduced both the length of unemployment spells and the overall amount of compensation. Bonus experiments conducted in Pennsylvania and Illinois also showed that unemployment spells could be trimmed.
Given the many existing strains on the federal budget, the stimulus package should be as effective as possible. Creating cost-effective incentives for out-of-work people to get back on their feet as quickly as possible should be an element in the current proposals.
Wednesday, January 16, 2008
The CPI said what?
This morning, the Department of Labor reported that consumer prices rose 4.1 percent last year, the largest December-to-December increase since 1990. The consumer price numbers were in line with producer price figures that were reported earlier this month. Inflation was moderately high even after food and energy prices are taken out of the mix; the core rate rose 2.4 percent for the year.
One surprising component of the consumer price figures was that they showed shelter costs increasing at 3 percent for the year. The shelter figures are based mainly on changes in actual rents, which increased 4 percent last year, and imputed rents for owner-occupied housing, which were estimated to increase by 2.8 percent.
For nearly 25 years, the shelter component of the consumer price numbers has been based on this imputed rent figure rather than direct measurements of mortgage, house price, and property tax figures. The rent figure is intended to get at the consumption component of housing and to abstract from the investment element. However, there are times when rents diverge from these other fundamentals, leading to questionable results.
Shelter costs account for nearly one-third of the index. Raise your hands if you really believe that prices for owner-occupied houses increased last year. If we instead assume that there is a mistake in the CPI formula and that the change in shelter costs was essentially zero, the inflation rate drops by a full point down to 3.1.
One surprising component of the consumer price figures was that they showed shelter costs increasing at 3 percent for the year. The shelter figures are based mainly on changes in actual rents, which increased 4 percent last year, and imputed rents for owner-occupied housing, which were estimated to increase by 2.8 percent.
For nearly 25 years, the shelter component of the consumer price numbers has been based on this imputed rent figure rather than direct measurements of mortgage, house price, and property tax figures. The rent figure is intended to get at the consumption component of housing and to abstract from the investment element. However, there are times when rents diverge from these other fundamentals, leading to questionable results.
Shelter costs account for nearly one-third of the index. Raise your hands if you really believe that prices for owner-occupied houses increased last year. If we instead assume that there is a mistake in the CPI formula and that the change in shelter costs was essentially zero, the inflation rate drops by a full point down to 3.1.
A simple misunderstanding
In an interview with ABC News yesterday, President Bush said, "I'm sure people view me as a warmonger and I view myself as peacemaker." Where, oh where could people ever have gotten such an idea.
Maybe this misapprehension came from this Feb. 7, 2004 interview with Tim Russert when the President said, "I'm a war president. I make decisions here in the Oval Office in foreign-policy matters with war on my mind."
Maybe it came from this "aw shucks" restatement in a Aug. 6, 2004 campaign speech. "I wish I wasn't the war President. Who in the heck wants to be a war President? I don't. But this is what came our way. And this is our duty, to protect our people. It's a solemn duty, and I'll continue doing it to the best of my ability."
Or maybe from this Sept. 9, 2004 campaign speech. "I never thought I'd be a war President. As a matter of fact, you know, I was hoping I wouldn't be a war President. But the enemy attacked us on September the 11th. It's an event that I will never forget. It is a duty that I will honor, which is to keep America safe."
Or maybe from this Oct. 26, 2006 speech. "I said, I want to be a war President. [sic] No President wants to be a war President, but I am one."
Or maybe this Aug. 10, 2004 speech, this Aug. 11, 2004 speech, this Aug. 12, 2004 speech, this Aug. 13, 2004 speech, this Aug. 28, 2004 speech, this Sept. 4, 2004 speech, this Oct. 10, 2006 speech, or this July 10, 2007 speech (well, you get the idea).
Maybe this misapprehension came from this Feb. 7, 2004 interview with Tim Russert when the President said, "I'm a war president. I make decisions here in the Oval Office in foreign-policy matters with war on my mind."
Maybe it came from this "aw shucks" restatement in a Aug. 6, 2004 campaign speech. "I wish I wasn't the war President. Who in the heck wants to be a war President? I don't. But this is what came our way. And this is our duty, to protect our people. It's a solemn duty, and I'll continue doing it to the best of my ability."
Or maybe from this Sept. 9, 2004 campaign speech. "I never thought I'd be a war President. As a matter of fact, you know, I was hoping I wouldn't be a war President. But the enemy attacked us on September the 11th. It's an event that I will never forget. It is a duty that I will honor, which is to keep America safe."
Or maybe from this Oct. 26, 2006 speech. "I said, I want to be a war President. [sic] No President wants to be a war President, but I am one."
Or maybe this Aug. 10, 2004 speech, this Aug. 11, 2004 speech, this Aug. 12, 2004 speech, this Aug. 13, 2004 speech, this Aug. 28, 2004 speech, this Sept. 4, 2004 speech, this Oct. 10, 2006 speech, or this July 10, 2007 speech (well, you get the idea).
Tuesday, January 15, 2008
Crummy economic numbers
The start of 2008 has brought a slew of negative economic reports. On January 4, the Department of Labor reported that the national unemployment rate in the U.S. had risen to 5.0 percent in December, up from 4.7 percent in November and 4.4 percent a year earlier. From December 2006 to December 2007, the estimated ranks of the unemployed grew from 6.8 million to 7.7 million people, and the percentage of the population employed dropped from 63.4 to 62.7 percent.
New data from the Census Bureau indicate that seasonally adjusted retail sales dipped 0.4 percent from November 2007 to December 2007, though December's sales were still up from a year earlier.
The job and sales figures suggest that economic growth is slowing. Whether the slow-down amounts to a recession is still a 50-50 proposition. Regardless, it appears that the economy is no longer growing fast enough to keep up with population growth.
The stock market is reacting negatively. For the year, the S&P index is down just over 5 percent. The index has already dropped more than 12 percent from its recent high and is near its 52-week low.
To compound the bad numbers, the Labor Department today reported that the Producer Price Index (wholesale prices) rose 6.3 percent in 2007, the largest yearly increase in a quarter of a century. The prices of crude food and feed materials rose by just over 25 percent for the year, while the prices for crude energy materials rose by just over 20 percent. President Bush spent part of his day pleading with OPEC to increase oil supplies.
The consumer (retail) price numbers will be released tomorrow, but already consumer prices for the year are up about 4 percent without the December figures. The Federal Reserve's Beige Book, describing local economic conditions will also be released tomorrow.
Although the price increases appear to be largely confined to the food and energy sector (for now). The prospect of a flat or sinking economy and escalating prices resurrects concerns about 1970s-style stagflation.
New data from the Census Bureau indicate that seasonally adjusted retail sales dipped 0.4 percent from November 2007 to December 2007, though December's sales were still up from a year earlier.
The job and sales figures suggest that economic growth is slowing. Whether the slow-down amounts to a recession is still a 50-50 proposition. Regardless, it appears that the economy is no longer growing fast enough to keep up with population growth.
The stock market is reacting negatively. For the year, the S&P index is down just over 5 percent. The index has already dropped more than 12 percent from its recent high and is near its 52-week low.
To compound the bad numbers, the Labor Department today reported that the Producer Price Index (wholesale prices) rose 6.3 percent in 2007, the largest yearly increase in a quarter of a century. The prices of crude food and feed materials rose by just over 25 percent for the year, while the prices for crude energy materials rose by just over 20 percent. President Bush spent part of his day pleading with OPEC to increase oil supplies.
The consumer (retail) price numbers will be released tomorrow, but already consumer prices for the year are up about 4 percent without the December figures. The Federal Reserve's Beige Book, describing local economic conditions will also be released tomorrow.
Although the price increases appear to be largely confined to the food and energy sector (for now). The prospect of a flat or sinking economy and escalating prices resurrects concerns about 1970s-style stagflation.
Wednesday, January 9, 2008
Pointless voter ID laws?
Walter Dellinger and Sri Srinivasan had a nice analysis yesterday in Slate.com of the inefficacy of voter identification laws--requirements that people show poll workers a valid government-provided ID before being allowed to vote. The principal argument in favor of these provisions is that they cut down on voter fraud and thereby increase the integrity of the electoral process. The primary argument against the provisions is that they impose burdens on voters, especially low-income and elderly voters, which reduces participation and representation in elections. Republicans tend to favor the laws, while Democrats tend to oppose them.
If we can move past the purely self-serving aspects of these provisions, the arguments essentially come down to a cost-benefit analysis. Proponents claim that there are large potential benefits in terms of reduced voter fraud and only small costs because IDs are so ubiquitous. Opponents claims that voter fraud is negligible and that the laws disenfranchise tens of millions of people who lack IDs. What Dellinger and Srinivasan bring to this debate is a nice discussion of the mechanics of these procedures and thus of the marginal impacts.
To impersonate a registered voter, an impostor would have to already know the voter's name and address and provide these details to a poll worker. Poll workers could further ask the person for the registrant's birth date (states require this data to verify that the person is actually old enough to vote). This creates a very high informational hurdle for a potential impostor.
In addition to these informational barriers, there are a couple of other practical issues. Most importantly, there are laws and penalties against voter fraud, so the impostor would need to take steps to avoid detection. For example, he or she would need to be sure that the actual voter had not already shown up at the polls and cast a ballot, otherwise the fraud would immediately be discovered. Along these same lines, there are limits on the number of times that a single individual could commit this crime (it's not like he or she could immediately get back in the queue at the same precinct and pretend to be someone else). Finally, as mentioned above, the impostor would have to have a fairly sharp mind, needing to commit all of the victim's personal details to memory (a person who needs to consult a cheat-sheet before providing basic identifying information tends to rouse suspicion).
To be sure, forms of reliable, current identification are needed in other circumstances, including the initial registration process and certainly in the case of same-, or election-day registration (North Carolina has such a procedure). However, once registration has taken place, a subsequent requirement to produce a valid government ID does almost nothing to stop fraud and therefore confers little benefit.
Given that IDs are required at the time of registration, one might claim that there also is little cost of an election day ID requirement, but this overlooks the fact that considerable time can pass between the registration and election days. During this span, people could lose their driving privileges, or especially in the case of the elderly, could simply let their licenses lapse. These people would clearly be disadvantaged by a voter-ID provision. Also, while it might be worthwhile to bring an alternative form of ID, such as a passport, one time to the registration office, it would be more costly to dig these same documents out every election day. Finally, even if one buys into the argument that the costs are low, this hardly justifies enacting a law with such little practical benefit.
Republicans regularly complain about "feel good" legislation that sounds nice but accomplishes little. That criticism applies in spades to voter-ID laws.
If we can move past the purely self-serving aspects of these provisions, the arguments essentially come down to a cost-benefit analysis. Proponents claim that there are large potential benefits in terms of reduced voter fraud and only small costs because IDs are so ubiquitous. Opponents claims that voter fraud is negligible and that the laws disenfranchise tens of millions of people who lack IDs. What Dellinger and Srinivasan bring to this debate is a nice discussion of the mechanics of these procedures and thus of the marginal impacts.
To impersonate a registered voter, an impostor would have to already know the voter's name and address and provide these details to a poll worker. Poll workers could further ask the person for the registrant's birth date (states require this data to verify that the person is actually old enough to vote). This creates a very high informational hurdle for a potential impostor.
In addition to these informational barriers, there are a couple of other practical issues. Most importantly, there are laws and penalties against voter fraud, so the impostor would need to take steps to avoid detection. For example, he or she would need to be sure that the actual voter had not already shown up at the polls and cast a ballot, otherwise the fraud would immediately be discovered. Along these same lines, there are limits on the number of times that a single individual could commit this crime (it's not like he or she could immediately get back in the queue at the same precinct and pretend to be someone else). Finally, as mentioned above, the impostor would have to have a fairly sharp mind, needing to commit all of the victim's personal details to memory (a person who needs to consult a cheat-sheet before providing basic identifying information tends to rouse suspicion).
To be sure, forms of reliable, current identification are needed in other circumstances, including the initial registration process and certainly in the case of same-, or election-day registration (North Carolina has such a procedure). However, once registration has taken place, a subsequent requirement to produce a valid government ID does almost nothing to stop fraud and therefore confers little benefit.
Given that IDs are required at the time of registration, one might claim that there also is little cost of an election day ID requirement, but this overlooks the fact that considerable time can pass between the registration and election days. During this span, people could lose their driving privileges, or especially in the case of the elderly, could simply let their licenses lapse. These people would clearly be disadvantaged by a voter-ID provision. Also, while it might be worthwhile to bring an alternative form of ID, such as a passport, one time to the registration office, it would be more costly to dig these same documents out every election day. Finally, even if one buys into the argument that the costs are low, this hardly justifies enacting a law with such little practical benefit.
Republicans regularly complain about "feel good" legislation that sounds nice but accomplishes little. That criticism applies in spades to voter-ID laws.
Saturday, December 29, 2007
Setting a horrible example
It's astonishing how low some people will stoop.
The following heart-tugging essay won a six-year-old girl from Texas four tickets to a Hannah Montana concert along with airfare and a makeover.
The only problem with the essay was that it was a fabrication. As the girl's mother helpfully explained,"We did the essay and that's what we did to win...We did whatever we could do to win."
Every element of this story is disgusting, beginning with the mother entering a six-year-old into a contest to receive a makeover, moving on to the falsified essay, and then lying about the child's father being killed in Iraq. You have to feel most sorry for the little girl who was led into this fraud and who is still living with a parent with such a skewed moral compass.
The contest sponsors have withdrawn the prize. However, that does not even begin to address the harm that this fraud has caused. Fitting compensation would be to require the mother to hand-write apologies to the families of each of the nearly 4,000 service people who have perished in Iraq and whose cherished memories she has traded on.
The following heart-tugging essay won a six-year-old girl from Texas four tickets to a Hannah Montana concert along with airfare and a makeover.
- My daddy died this year in Iraq. I am going to give mommy the Angel pendant that daddy put on mommy when she was having me. I had it in my jewelry box since that day. I love my mommy.
The only problem with the essay was that it was a fabrication. As the girl's mother helpfully explained,"We did the essay and that's what we did to win...We did whatever we could do to win."
Every element of this story is disgusting, beginning with the mother entering a six-year-old into a contest to receive a makeover, moving on to the falsified essay, and then lying about the child's father being killed in Iraq. You have to feel most sorry for the little girl who was led into this fraud and who is still living with a parent with such a skewed moral compass.
The contest sponsors have withdrawn the prize. However, that does not even begin to address the harm that this fraud has caused. Fitting compensation would be to require the mother to hand-write apologies to the families of each of the nearly 4,000 service people who have perished in Iraq and whose cherished memories she has traded on.
Friday, December 21, 2007
President Bush gets two presents, our kids get the bill
This week Congress wrapped up the year by passing several major budget bills. One bill gave the President an additional $70 billion to continue trying to unbungle the Iraq war over the next six months. Another bill temporarily adjusted the Alternative Minimum Tax (AMT) so that it won't reach so far down into the upper middle-class. Two disparate pieces of legislation, but at President Bush's and the Republicans' insistence they had one important thing in common--neither was accompanied by any offsetting revenue adjustments.
As mentioned, the war spending bill (calling it a war funding bill would be something of a misnomer) will add $70 billion to the national debt between now and next May. The one-year AMT patch will add a further $50 billion to the debt. With two strokes of the pen, the debt--which was already projected to grow this year--will balloon by $120 billion.
The national debt currently stands at about $9 trillion. If we divide that equally across the population of the U.S., the share owed by a household of four comes to $120,000 (or if you would like, $60,000 for mom and dad and $60,000 for the kids). As a result of the new legislation, the household's bill just went up by another $1,200.
When the holidays are done and the kids are writing their thank you notes, make sure they save one for the President.
As mentioned, the war spending bill (calling it a war funding bill would be something of a misnomer) will add $70 billion to the national debt between now and next May. The one-year AMT patch will add a further $50 billion to the debt. With two strokes of the pen, the debt--which was already projected to grow this year--will balloon by $120 billion.
The national debt currently stands at about $9 trillion. If we divide that equally across the population of the U.S., the share owed by a household of four comes to $120,000 (or if you would like, $60,000 for mom and dad and $60,000 for the kids). As a result of the new legislation, the household's bill just went up by another $1,200.
When the holidays are done and the kids are writing their thank you notes, make sure they save one for the President.
Thursday, December 20, 2007
Observations from Seoul
I just got back from a "short" trip to attend an economics confernce in Seoul. As the flights to and from Seoul took nearly the same amount of time as the stay, it probably wasn't the most rational itinerary in the world, but it was a good conference and a nice, albeit brief, visit.
One of the striking things about Seoul and its environs is the tremendous amount of transportation infrastructure--a huge international airport, a vast port system, numerous bridges and causeways, and an extensive public transportation network. The infrastructure is all the more amazing when you consider that a half century ago South Korea was a poor, undeveloped country just emerging from a devastating war. While the country has developed rapidly since then, its per capita GDP is still only five-ninths that of the U.S.
Some of the investment in infrastructure is a simple matter of need. The Republic of Korea has a population of just under 50 million and roughly half of that population is concentrated in and around Seoul. Even with the infrastructure, traffic grinds to a standstill in many parts of the city during the rush hours.
A considerable amount of investment was also spurred by the 1988 Summer Olympics, which were held in Seoul. While we usually think of the Olympics as prompting investments in sporting venues, they also lead to transportation improvements (and in the case of South Korea, the games also contributed to the transition to democracy).
Whatever the reason, Seoul's example shows that these types of investments owe at least as much to societal will and character as they do to simple cost-benefit calculations. When societies set goals and pull together, they can accomplish great things.
One of the striking things about Seoul and its environs is the tremendous amount of transportation infrastructure--a huge international airport, a vast port system, numerous bridges and causeways, and an extensive public transportation network. The infrastructure is all the more amazing when you consider that a half century ago South Korea was a poor, undeveloped country just emerging from a devastating war. While the country has developed rapidly since then, its per capita GDP is still only five-ninths that of the U.S.
Some of the investment in infrastructure is a simple matter of need. The Republic of Korea has a population of just under 50 million and roughly half of that population is concentrated in and around Seoul. Even with the infrastructure, traffic grinds to a standstill in many parts of the city during the rush hours.
A considerable amount of investment was also spurred by the 1988 Summer Olympics, which were held in Seoul. While we usually think of the Olympics as prompting investments in sporting venues, they also lead to transportation improvements (and in the case of South Korea, the games also contributed to the transition to democracy).
Whatever the reason, Seoul's example shows that these types of investments owe at least as much to societal will and character as they do to simple cost-benefit calculations. When societies set goals and pull together, they can accomplish great things.
Sunday, December 9, 2007
Rationality in marriage
In his new book, The Bridge of Sighs, Richard Russo has a terrific passage that skewers two assumptions at the core of the rational model of marriage, namely, that people can identify the actual costs and benefits and that their preferences remain stable over time.
Compared to Russo's character, family economists almost seem to be quaint romantics.
- Matrimony, she explained, was based on two fallacies, both real doozies. The first was the ridiculous notion that people knew what they wanted. There was no evidence in support of this contention and never had been, but they seemed to enjoy believing it anyway, blinded as they were by love and lust and hope, only the last of which sprang eternal. The second fallacy, built on the shifting sands of the first, was equally seductive and even more idiotic--that what people thought they wanted today was what they'd want tomorrow. Sarah's mother filed this under the general heading of "Failures of Imagination," which was probably the biggest category in the entire history of categories, its origin almost certainly divine... Divorce, she maintained, made a better sacrament than marriage, if you had to have one. It signaled that at least one person and probably two had come to his or her senses and taken a long hard look at not only their spouse but the institution that had encouraged such irrational behavior.
Compared to Russo's character, family economists almost seem to be quaint romantics.
Thursday, December 6, 2007
Rationality in Iran
One of the most widely recognized tools of rational analysis is the cost-benefit comparison in which a decision-maker balances the advantages and disadvantages of alternative choices before pursuing a course of action. Rationality implies that decision-makers make choices that they believe are in their net best interest. A corollary of this is that decision-makers respond in relatively predictable ways to incentives and penalties.
Earlier this week, the National Intelligence Council released a National Intelligence Estimate (NIE) on Iran's nuclear intentions and programs. NIEs are reports that summarize the judgements of the nation's different intelligence agencies. The most recent NIE made headlines because it reversed a previous intelligence conclusion that Iran was actively pursuing a nuclear weapons program--the new NIE concludes that the country halted that effort in 2003 (key differences in the earlier and most recent NIEs are summarized on the last page of the report).
What's the connection to rationality, you ask. Well, tucked away inside the report is a reassessment of Iran's decision-making process. Specifically, the report states
The report indicates that Iran's decisions going forward might be influenced by appropriate carrots and sticks, though it cautions that the precise inducements are hard to determine.
As the NIE points out, a problem for U.S. and international policymakers is that Iran's decision to halt its pursuit of nuclear weapons "is inherently reversible." So the country's future behavior is critical. Oddly, though, the NIE applies rationality only to the country's past behavior. In describing Iran's future actions, the report states that
In essence, the government responded to international pressure before but likely won't again. Moreover, the report justifies its assessment in terms of Iran's past behavior--behavior that the NIE also concluded supported rational decision-making.
There are few issues that are more serious than the spread of nuclear weapons, especially among countries like Iran with clear links to terrorism. While the NIE is loaded with caveats and is contradictory in its assessment of Iran's past versus future motivations, the report nevertheless suggests an additional set of instruments that could help rein in Iran's behavior. So far, there is no indication that the Bush administration's policy has budged one inch in response to the new analysis. A rational response would be to consider these additional tools.
Earlier this week, the National Intelligence Council released a National Intelligence Estimate (NIE) on Iran's nuclear intentions and programs. NIEs are reports that summarize the judgements of the nation's different intelligence agencies. The most recent NIE made headlines because it reversed a previous intelligence conclusion that Iran was actively pursuing a nuclear weapons program--the new NIE concludes that the country halted that effort in 2003 (key differences in the earlier and most recent NIEs are summarized on the last page of the report).
What's the connection to rationality, you ask. Well, tucked away inside the report is a reassessment of Iran's decision-making process. Specifically, the report states
- Our assessment that Iran halted the program in 2003 primarily in response to international pressure indicates Tehran’s decisions are guided by a cost-benefit approach rather than a rush to a weapon irrespective of the political, economic, and military costs.
The report indicates that Iran's decisions going forward might be influenced by appropriate carrots and sticks, though it cautions that the precise inducements are hard to determine.
As the NIE points out, a problem for U.S. and international policymakers is that Iran's decision to halt its pursuit of nuclear weapons "is inherently reversible." So the country's future behavior is critical. Oddly, though, the NIE applies rationality only to the country's past behavior. In describing Iran's future actions, the report states that
- convincing the Iranian leadership to forgo the eventual development of nuclear weapons will be difficult given the linkage many within the leadership probably see between nuclear weapons development and Iran’s key national security and foreign policy objectives, and given Iran’s considerable effort from at least the late 1980s to 2003 to develop such weapons.
In essence, the government responded to international pressure before but likely won't again. Moreover, the report justifies its assessment in terms of Iran's past behavior--behavior that the NIE also concluded supported rational decision-making.
There are few issues that are more serious than the spread of nuclear weapons, especially among countries like Iran with clear links to terrorism. While the NIE is loaded with caveats and is contradictory in its assessment of Iran's past versus future motivations, the report nevertheless suggests an additional set of instruments that could help rein in Iran's behavior. So far, there is no indication that the Bush administration's policy has budged one inch in response to the new analysis. A rational response would be to consider these additional tools.
Tuesday, December 4, 2007
Hit and run
Some acts defy rationality. Tonight a young life in nearby High Point hangs in the balance because a driver didn't stop for a school bus. The driver didn't stop afterword either.
Maybe it was one of those days--too many things to get done, too little time. All you want to do is get to the extra stop that was added to tonight's packed schedule. But the drive home is just as bad as the day was. Cars are dawdling through the short-timed traffic lights. Every driver is an idiot, and their collective inattention accretes into a slow rolling road block. Finally, you whip around the moron who's stopped at the head of the pack. You glare back over your shoulder as you accelerate...
Maybe you and your teen buddies are rushing home from school. Everybody is pumped and trying to get into the conversation. Nobody can believe what Ted did in Chemistry class. "I know, did you see how he..." "No, and then Mr. Morris was right behind him." "And Ted was reaching for Alyson like this." "Like what?" "Like this"...
Maybe the cell phone started to ring. It always goes off while it's in your pants pocket. On the second ring, you're still fighting to get past the seat belt. On the third ring, you reach it, but it's stuck. By the fourth ring, it's out. As you flip it open, the caller hangs up. You look down to check the "missed caller" number...
Maybe the baby in the back seat is making THAT sound. You turn your head back and see her looking surprised and wearing her lunch...
Maybe it was just too hard to stay out of the bar today. You didn't feel right stumbling out, and you recognize your mistake as you're heading down the road. But if you can just keep it together for another two miles...
Maybe you saw the bus's flashing lights and stop sign but thought that there was still time to get by...
It's easy to comprehend how a tragedy unfolds when our lives and everything that happens in them is so important.
Maybe it was one of those days--too many things to get done, too little time. All you want to do is get to the extra stop that was added to tonight's packed schedule. But the drive home is just as bad as the day was. Cars are dawdling through the short-timed traffic lights. Every driver is an idiot, and their collective inattention accretes into a slow rolling road block. Finally, you whip around the moron who's stopped at the head of the pack. You glare back over your shoulder as you accelerate...
Maybe you and your teen buddies are rushing home from school. Everybody is pumped and trying to get into the conversation. Nobody can believe what Ted did in Chemistry class. "I know, did you see how he..." "No, and then Mr. Morris was right behind him." "And Ted was reaching for Alyson like this." "Like what?" "Like this"...
Maybe the cell phone started to ring. It always goes off while it's in your pants pocket. On the second ring, you're still fighting to get past the seat belt. On the third ring, you reach it, but it's stuck. By the fourth ring, it's out. As you flip it open, the caller hangs up. You look down to check the "missed caller" number...
Maybe the baby in the back seat is making THAT sound. You turn your head back and see her looking surprised and wearing her lunch...
Maybe it was just too hard to stay out of the bar today. You didn't feel right stumbling out, and you recognize your mistake as you're heading down the road. But if you can just keep it together for another two miles...
Maybe you saw the bus's flashing lights and stop sign but thought that there was still time to get by...
It's easy to comprehend how a tragedy unfolds when our lives and everything that happens in them is so important.
Wednesday, November 28, 2007
Romney's cabinet quota?
In yesterday's Christian Science Monitor, Mansoor Ijaz provided a pretty damning story regarding former Gov. Mitt Romney. Mr. Ijaz wrote:
Gov. Romney's response, if it has been accurately reported, is disquieting in several ways. First, he seems to be ruling out an entire class of potentially qualified and relevant advisors for cabinet-level service on the basis of religion. This smacks of discrimination against a particular religious group--an odd stance given that the Governor himself is arguing elsewhere that people shouldn't discriminate against his own religious views.
Second, Gov. Romney's statement further suggests that certain types of representation will be a factor in making cabinet-level appointments. Were a Democratic candidate to express the same views, he or she would immediately be accused of establishing quotas. In the Governor's mindset, some groups are justified in getting cabinet positions based on their population numbers, and other groups aren't.
Finally and most importantly, the statement undermines Gov. Romney's claim that "defeating the jihadists" is his primary policy goal. For example, Gov. Romney has previously stated that, "as we stare at the face of radical violent Jihad and at the prospect of nuclear epidemic, our military might should not be subject to the whims of ever-changing political agendas." However, his response to Mr. Ijaz indicates that qualifications for contributing to national security concerns are trumped by another agenda, religious belief.
P.S. Governor Romney has made a similar statement against Muslims serving in the cabinet before.
- I asked Mr. Romney whether he would consider including qualified Americans of the Islamic faith in his cabinet as advisers on national security matters, given his position that "jihadism" is the principal foreign policy threat facing America today. He answered, "…based on the numbers of American Muslims [as a percentage] in our population, I cannot see that a cabinet position would be justified. But of course, I would imagine that Muslims could serve at lower levels of my administration."
Gov. Romney's response, if it has been accurately reported, is disquieting in several ways. First, he seems to be ruling out an entire class of potentially qualified and relevant advisors for cabinet-level service on the basis of religion. This smacks of discrimination against a particular religious group--an odd stance given that the Governor himself is arguing elsewhere that people shouldn't discriminate against his own religious views.
Second, Gov. Romney's statement further suggests that certain types of representation will be a factor in making cabinet-level appointments. Were a Democratic candidate to express the same views, he or she would immediately be accused of establishing quotas. In the Governor's mindset, some groups are justified in getting cabinet positions based on their population numbers, and other groups aren't.
Finally and most importantly, the statement undermines Gov. Romney's claim that "defeating the jihadists" is his primary policy goal. For example, Gov. Romney has previously stated that, "as we stare at the face of radical violent Jihad and at the prospect of nuclear epidemic, our military might should not be subject to the whims of ever-changing political agendas." However, his response to Mr. Ijaz indicates that qualifications for contributing to national security concerns are trumped by another agenda, religious belief.
P.S. Governor Romney has made a similar statement against Muslims serving in the cabinet before.
Tuesday, November 27, 2007
Stand by your salaryman?
According to an 11/26 Washington Post article, divorce rates in Japan spiked following a recent change in divorce laws that allows ex-wives to claim up to half of their former husbands' pensions. The change went into effect in April, and divorce rates immediately rose 6.1 percent.
The news seems like a clear cut story of incentives. Standard economic theory posits that spouses contemplating a divorce compare the benefits of remaining married with those of divorcing. In this case, the benefits of divorce for women have increased, while the benefits of marriage have stayed the same. Consistent with theory, divorce rates shot up.
Part of the increase probably just represents a change in the timing of divorce rather than a change in the overall incidence. The change in pension distributions was part of a law that was passed in 2003, but the pension provisions did not go into effect until April. The timing of the implementation appears to have been well-known. Wives who had already made up their minds to divorce their husbands would have had strong incentives to wait until April. This would have contributed to a decrease in divorce rates just prior to April and a spike immediately afterward.
More interesting, perhaps, are the secondary changes in incentives that are created by this policy. The simple economic analysis given above is one-sided in that it ignores the possible responses of husbands. Husbands, especially older husbands, derive tremendous benefits from the care that their wives can provide. The change in policy should cause husbands to make accommodations within marriage that are more favorable to wives. Thus, the initial assumption that the benefits of marriage for wives would remain constant may not be a good one. The article indicates that Japanese men are aware that accommodations may be required but also that they have been slow to change.
The change also has implications for the people's decisions to marry in the first place. Marriage rates in Japan (and other industrialized countries) have been steadily declining, with people waiting longer and longer to get married. Marriage has been an especially raw deal for women in Japan. Japanese men tend to work long hours and then socialize with colleagues well into the evening. Japanese women are much less likely than American women to work outside the home (using U.S. labor force definitions, see Table 5, about 57 percent of American women were employed in 2006 versus 46 percent of Japanese women). According to a 2001 Japanese time use survey, Japanese women spend an average of 3 1/2 hours a day in housework, while comparable 2003 figures for American women indicate that they spend closer to 2 hours a day in housework.
The change in divorce laws gives single women a pecuniary incentive to marry. It may also increase other incentives by improving the conditions within marriage. Both of these factors could lead to an increase in Japanese marriage rates.
Overall, Japanese women stand to benefit a great deal from this policy--either directly from better divorce settlements or indirectly from more accommodating husbands. At the same time, men will bear considerable consequences. The policy change should provide substantial grist for the family-relations research mill.
(Thanks to Bryan Boulier for the story tip).
The news seems like a clear cut story of incentives. Standard economic theory posits that spouses contemplating a divorce compare the benefits of remaining married with those of divorcing. In this case, the benefits of divorce for women have increased, while the benefits of marriage have stayed the same. Consistent with theory, divorce rates shot up.
Part of the increase probably just represents a change in the timing of divorce rather than a change in the overall incidence. The change in pension distributions was part of a law that was passed in 2003, but the pension provisions did not go into effect until April. The timing of the implementation appears to have been well-known. Wives who had already made up their minds to divorce their husbands would have had strong incentives to wait until April. This would have contributed to a decrease in divorce rates just prior to April and a spike immediately afterward.
More interesting, perhaps, are the secondary changes in incentives that are created by this policy. The simple economic analysis given above is one-sided in that it ignores the possible responses of husbands. Husbands, especially older husbands, derive tremendous benefits from the care that their wives can provide. The change in policy should cause husbands to make accommodations within marriage that are more favorable to wives. Thus, the initial assumption that the benefits of marriage for wives would remain constant may not be a good one. The article indicates that Japanese men are aware that accommodations may be required but also that they have been slow to change.
The change also has implications for the people's decisions to marry in the first place. Marriage rates in Japan (and other industrialized countries) have been steadily declining, with people waiting longer and longer to get married. Marriage has been an especially raw deal for women in Japan. Japanese men tend to work long hours and then socialize with colleagues well into the evening. Japanese women are much less likely than American women to work outside the home (using U.S. labor force definitions, see Table 5, about 57 percent of American women were employed in 2006 versus 46 percent of Japanese women). According to a 2001 Japanese time use survey, Japanese women spend an average of 3 1/2 hours a day in housework, while comparable 2003 figures for American women indicate that they spend closer to 2 hours a day in housework.
The change in divorce laws gives single women a pecuniary incentive to marry. It may also increase other incentives by improving the conditions within marriage. Both of these factors could lead to an increase in Japanese marriage rates.
Overall, Japanese women stand to benefit a great deal from this policy--either directly from better divorce settlements or indirectly from more accommodating husbands. At the same time, men will bear considerable consequences. The policy change should provide substantial grist for the family-relations research mill.
(Thanks to Bryan Boulier for the story tip).
Sunday, November 25, 2007
Voting with their feet
On Friday, the Washington Post reported some of the most hopeful news to date regarding the Iraq war, namely that some of the country's 2.2 million refugees were beginning to trickle home. It's not clear from the article whether the number of people returning exceeds the number of people leaving. The article also notes that many are returning because they've exhausted their resources outside the country. Nevertheless, the fact that many people feel secure enough to return and attempt to resume their lives in Iraq is good news. This is literally a case of people being willing to "walk the walk."
This news should remove most doubts that the surge has been successful with respect to its military objective of improving security. Military and civilian casualties are now back to levels last seen in 2005. These levels are still unacceptably high (Iraq in 2005 wasn't exactly a "safe" country), but if they represent a trend, further improvements may be possible.
Despite this evidence of important benefits from the military surge, it is still not clear whether the policy is or was worthwhile as a whole. The security benefits that we are seeing now have to be balanced against the enormous costs--hundreds of additional U.S. troops killed and thousands more wounded, the depletion of military readiness, and billions of dollars each month in additional taxpayer costs. While a small draw down of troops is beginning, troop levels are still substantially above their pre-surge levels, and we will be adding to the costs of the surge for many more months to come. An analysis by Democrats on Congress' Joint Economic Committee puts the current tab for the Iraq war at $1.3 trillion (around $4,250 per person) and projects the complete tab if administration policies are continued at $3.5 trillion (just over $9,000 per person).
More disappointing is that the primary objective of the surge, which was to enable political reconciliation among the Iraqis, still has not been met. There have been some hopeful signs, such as the cease-fire by the Madhi militia and the increased willingness of some Sunni groups to cooperate with the government. These and other developments could mean that when the surge exhausts itself this spring, the Iraqis may fall into an uneasy, informal living arrangement--something well short of the civil war that the country was experiencing earlier this year but also well short of full and permanent reconciliation. At this point, informal arrangements may be all that we can hope for.
We also have to acknowledge that some elements of the administration's strategy are working at cross purposes. The "bottom-up" approach of working with (and arming) local groups who currently support some of our objectives may be undercutting the "top-down" strategy of national political reconciliation. There are considerable risks that when our troop levels are reduced, the informal arrangements will quickly collapse, with much more terrible levels of violence owing to the influx of arms. We may be buying temporary security at the cost of even greater violence down the road.
The returning Iraqi refugees appear to be betting on some type of reconciliation. Let's hope they're right.
This news should remove most doubts that the surge has been successful with respect to its military objective of improving security. Military and civilian casualties are now back to levels last seen in 2005. These levels are still unacceptably high (Iraq in 2005 wasn't exactly a "safe" country), but if they represent a trend, further improvements may be possible.
Despite this evidence of important benefits from the military surge, it is still not clear whether the policy is or was worthwhile as a whole. The security benefits that we are seeing now have to be balanced against the enormous costs--hundreds of additional U.S. troops killed and thousands more wounded, the depletion of military readiness, and billions of dollars each month in additional taxpayer costs. While a small draw down of troops is beginning, troop levels are still substantially above their pre-surge levels, and we will be adding to the costs of the surge for many more months to come. An analysis by Democrats on Congress' Joint Economic Committee puts the current tab for the Iraq war at $1.3 trillion (around $4,250 per person) and projects the complete tab if administration policies are continued at $3.5 trillion (just over $9,000 per person).
More disappointing is that the primary objective of the surge, which was to enable political reconciliation among the Iraqis, still has not been met. There have been some hopeful signs, such as the cease-fire by the Madhi militia and the increased willingness of some Sunni groups to cooperate with the government. These and other developments could mean that when the surge exhausts itself this spring, the Iraqis may fall into an uneasy, informal living arrangement--something well short of the civil war that the country was experiencing earlier this year but also well short of full and permanent reconciliation. At this point, informal arrangements may be all that we can hope for.
We also have to acknowledge that some elements of the administration's strategy are working at cross purposes. The "bottom-up" approach of working with (and arming) local groups who currently support some of our objectives may be undercutting the "top-down" strategy of national political reconciliation. There are considerable risks that when our troop levels are reduced, the informal arrangements will quickly collapse, with much more terrible levels of violence owing to the influx of arms. We may be buying temporary security at the cost of even greater violence down the road.
The returning Iraqi refugees appear to be betting on some type of reconciliation. Let's hope they're right.
Saturday, November 24, 2007
Consider the source
It's an information jungle out there. Between books, journals, newspapers, magazines, web sites, and the rest, there's just too much information for any one person to digest. We should read widely from a variety of sources. However, to be reasonably informed and make sense of that information, we need to understand the strengths and weaknesses of different media.
The thing to recognize is that anybody can write anything, and with the web, anybody can post anything. Blog providers like www.blogger.com (the service that hosts this blog) are easy to use and lead to astonishingly attractive content. The services offer great publishing tools in the form of spell checkers, standard templates, easy formatting, and HTML features. It's just as easy to put up other types of web sites and to publish great looking pages. The process is truly democratizing and leads to a tremendous variety of content and points of view.
However, this strength--that anybody can now publish like a pro--is also a potential weakness that we need to keep in mind when reading material. Just because someone writes something doesn't mean that it is true, correct, or well-reasoned.
If the author is unfamiliar, there are also some reputational and review cues that you can look to. A first check is whether someone is writing or posting under their own name. Occasionally there are good reasons to use a pseudonym or to remain anonymous, but the reasons mostly involve authors who are taking genuine risks with their writing. More often, however, posting anonymously or under an unidentifiable handle is a way to avoid responsibility for what's being written.
The types of editorial and expert review that go into a source are other indicators that can help. Blogs, working papers, self-published reports typically don't have to go through the editorial gauntlet. This means that they can be "published" very quickly and inexpensively, but it also means that the reader needs to bring considerable caution to bear. Editing and peer-review don't lead to perfect or even necessarily sound analyses, but they do provide some level of screening. It also means that the editor and publisher are willing to lend some of their reputation to the author.
Ultimately, however, it comes down to carefully reading and considering what's written. Regardless of the source, critical reading and independent evaluation are necessary. An author who wants you to make that evaluation will provide sources and reveal his/her analyses.
The thing to recognize is that anybody can write anything, and with the web, anybody can post anything. Blog providers like www.blogger.com (the service that hosts this blog) are easy to use and lead to astonishingly attractive content. The services offer great publishing tools in the form of spell checkers, standard templates, easy formatting, and HTML features. It's just as easy to put up other types of web sites and to publish great looking pages. The process is truly democratizing and leads to a tremendous variety of content and points of view.
However, this strength--that anybody can now publish like a pro--is also a potential weakness that we need to keep in mind when reading material. Just because someone writes something doesn't mean that it is true, correct, or well-reasoned.
If the author is unfamiliar, there are also some reputational and review cues that you can look to. A first check is whether someone is writing or posting under their own name. Occasionally there are good reasons to use a pseudonym or to remain anonymous, but the reasons mostly involve authors who are taking genuine risks with their writing. More often, however, posting anonymously or under an unidentifiable handle is a way to avoid responsibility for what's being written.
The types of editorial and expert review that go into a source are other indicators that can help. Blogs, working papers, self-published reports typically don't have to go through the editorial gauntlet. This means that they can be "published" very quickly and inexpensively, but it also means that the reader needs to bring considerable caution to bear. Editing and peer-review don't lead to perfect or even necessarily sound analyses, but they do provide some level of screening. It also means that the editor and publisher are willing to lend some of their reputation to the author.
Ultimately, however, it comes down to carefully reading and considering what's written. Regardless of the source, critical reading and independent evaluation are necessary. An author who wants you to make that evaluation will provide sources and reveal his/her analyses.
Sunday, November 18, 2007
Call me irresponsible
In his weekly radio address yesterday, President Bush promised to veto legislation that was passed by the House to temporarily fix the Alternative Minimum Tax (AMT) without driving up the deficit. Said the President, "I will veto any bill that raises taxes as a condition of fixing the AMT. Members of Congress must put political theater behind them, fix the AMT, and protect America's middle class from an unfair tax hike."
Sadly, it looks like Sen. Majority Leader Reid is likely to go along.
The AMT was originally designed to keep high-income households from avoiding taxes. A problem with the tax, however, is that it was never indexed for inflation, the way that other parts of the tax code are. As a result of price inflation over time, more and more households have found themselves potentially subject to the AMT. Congress has enacted a series of temporary patches. Without a similar fix this year, some 25 million households could be affected by the AMT.
The government should raise the AMT threshold and more generally find a permanent solution to the AMT problem. However, given our enormous deficit and the need to finance the wars in Afghanistan and Iraq, it would be irresponsible to do this without replacing the $50 billion in revenue that the AMT would have brought it. The House plan fixes the AMT, extends several other tax breaks, but also closes a loophole that allows hedge fund and other investment managers to treat their earnings as lower-taxed capital gains.
The President, who has already proposed a budget with a gaping deficit and then returned to Congress to ask for $46 billion more in supplemental war funding, is essentially asking for an additional $50 billion tax cut. Earlier this week the President vetoed another revenue-neutral bill, urging "Congress to send [him] a fiscally responsible bill that sets priorities."
The House legislation is fiscally responsible. We cannot afford to go $50 billion farther into the hole to provide yet another upper-income tax cut. The AMT patch should be balanced by other revenue increases.
Sadly, it looks like Sen. Majority Leader Reid is likely to go along.
The AMT was originally designed to keep high-income households from avoiding taxes. A problem with the tax, however, is that it was never indexed for inflation, the way that other parts of the tax code are. As a result of price inflation over time, more and more households have found themselves potentially subject to the AMT. Congress has enacted a series of temporary patches. Without a similar fix this year, some 25 million households could be affected by the AMT.
The government should raise the AMT threshold and more generally find a permanent solution to the AMT problem. However, given our enormous deficit and the need to finance the wars in Afghanistan and Iraq, it would be irresponsible to do this without replacing the $50 billion in revenue that the AMT would have brought it. The House plan fixes the AMT, extends several other tax breaks, but also closes a loophole that allows hedge fund and other investment managers to treat their earnings as lower-taxed capital gains.
The President, who has already proposed a budget with a gaping deficit and then returned to Congress to ask for $46 billion more in supplemental war funding, is essentially asking for an additional $50 billion tax cut. Earlier this week the President vetoed another revenue-neutral bill, urging "Congress to send [him] a fiscally responsible bill that sets priorities."
The House legislation is fiscally responsible. We cannot afford to go $50 billion farther into the hole to provide yet another upper-income tax cut. The AMT patch should be balanced by other revenue increases.
Tuesday, November 13, 2007
President Bush's fifth veto in context
For the fifth time in his Presidency, George Bush today vetoed a bill--this time it was a $606.4 billion bipartisan bill that would have funded the Departments of Education, Health and Human Services, and Labor--claiming that the "bill spends too much."
According to the President, the bill's main sin was that it spent $9.8 billion more than he originally requested. Given the large size of the bill, this amounts to less than a 2 percent difference between what the President and Congress proposed. Overall, spending would have gone up relative to last year's level by 4.3 percent; in real terms the spending increase would have been less than the total growth in the economy. So even with the higher spending under the bill, the share of economic output going to the three departments would have gone down.
The growth hardly seems irresponsible, especially when compared to the spending growth that the President green-lighted under previous Republican Congresses. In FY 2003, spending for Education, HHS, and Labor rose 8.9 percent over the previous year's level. In FY 2004, spending growth for these departments was 5.5 percent. In FY 2005, growth was 6.0 percent, and in FY 2006 (the last year for which we have final figures), growth was 10.1 percent.
Not only was growth in the proposed bill less than in previous years, but the bill followed the Democrats' "pay as you go" strategy, meaning that it included revenue increases to match the spending increases and thus wouldn't have contributed to the deficit.
There are many more pressing problems in Washington; the President should stop playing political games with these modest differences in spending bills and begin cooperating with Congress.
According to the President, the bill's main sin was that it spent $9.8 billion more than he originally requested. Given the large size of the bill, this amounts to less than a 2 percent difference between what the President and Congress proposed. Overall, spending would have gone up relative to last year's level by 4.3 percent; in real terms the spending increase would have been less than the total growth in the economy. So even with the higher spending under the bill, the share of economic output going to the three departments would have gone down.
The growth hardly seems irresponsible, especially when compared to the spending growth that the President green-lighted under previous Republican Congresses. In FY 2003, spending for Education, HHS, and Labor rose 8.9 percent over the previous year's level. In FY 2004, spending growth for these departments was 5.5 percent. In FY 2005, growth was 6.0 percent, and in FY 2006 (the last year for which we have final figures), growth was 10.1 percent.
Not only was growth in the proposed bill less than in previous years, but the bill followed the Democrats' "pay as you go" strategy, meaning that it included revenue increases to match the spending increases and thus wouldn't have contributed to the deficit.
There are many more pressing problems in Washington; the President should stop playing political games with these modest differences in spending bills and begin cooperating with Congress.
Saturday, November 10, 2007
Thompson grabs ahold of the third rail
Republican Presidential candidate Fred Thompson is boldly going where none of the other current Presidential hopefuls has yet dared to tread and courageously offering a comprehensive plan for fixing the Social Security retirement system. Unless changes are made, the Social Security system will begin drawing down its trust fund balance in 10 years and will exhaust that balance by about 2041. Politicians have generally shied away from specific proposals because they necessarily involve uncomfortable choices between revenue increases or benefit decreases to bring the system back into balance. Because the trust fund has already effectively been spent, a successful reform must also address how future trust fund inflows can be put beyond the reach of government spenders.
Thompson's proposal has two main parts to it. First, he would create voluntary "add on" retirement savings accounts. Workers would contribute 2 percent of their wages into the accounts, and each dollar of personal contributions would be matched by $2.50 in government contributions on the first $1000 of monthly wages and matched by 50 cents of government contributions for higher amounts. The government's contribution would be drawn from social security taxes that workers and employers already pay. For instance, a worker earning $2,000 per month would contribute $40 on her own (= .02 x $2,000) and be subsidized $60 by the government (= (2.50 x $20) + (.5 x $20)). For the year, this worker would have $1,200 added to her retirement account, which she could then invest into stocks, bonds, or some combination just like a 401(k) defined contribution plan. The funds would be available to the worker beginning at age 62, and any unused funds could be passed on to heirs.
The second part of Thompson's plan is to slow the growth in Social Security outlays by changing the initial retirement year benefit formula so that a person's history of wage contributions would be adjusted for inflation using the Consumer Price Index (price inflation) instead of the current wage index (wage inflation). Wages have usually grown faster than prices, so pegging initial benefits to price inflation should reduce benefits. For workers with the new voluntary retirement accounts, their Social Security benefits would be further reduced by the amount of the government matching contributions.
Thompson's plan would only affect current workers who are at least several years from retirement; it would not affect current retirees or older workers nearing retirement.
Thompson's plan addresses all three elements of reform. It would move Social Security closer to balance by gradually reducing benefits. It would also, however, strengthen overall retirement savings by bringing in more revenue--the workers' own contributions, which would come on top of taxes they are already paying into the Social Security system. If long-run trends in stock returns continue, the funds invested in those private accounts should also grow faster than the funds in the government's accounts, also adding revenue. Finally, the plan protects those new revenues from government spenders by moving them from public to private accounts--in effect individuals will hold portions of the trust fund.
There are downsides to be sure. Higher income households will benefit more than lower income households. The current benefit formula pays a higher return to low-wage earners than to high-wage earners, providing a considerable degree of redistribution. This redistribution would be reduced. Also, high-income households would be more likely to participate in the voluntary savings component than lower-income households. So the benefits from the savings component would flow mainly to them while the decreases in the benefit formula from the new indexing scheme would fall more heavily on the poor. Lastly, the plan shifts more financial risks toward households.
There is also a little distraction going on as each element of this plan could be proposed on its own. The voluntary contribution portion does nothing to "save" Social Security; indeed, it would do the opposite if only high-wage workers participate. So absent the voluntary component, it might be possible to get by with smaller benefit cuts. Also, we still need to see a bottom-line analysis on the Social Security system's finances.
Thompson's plan is a good first start that could form the basis for an ultimate reform. As written, the costs of his plan fall too heavily on the poor. Modifications to better protect the poor would make his plan a hands-down winner. Watch for all sorts of demonizing rhetoric, especially from the Democratic candidates. However, Thompson has put out an important marker, and it's up to the other candidates to improve on his plan and not just complain about its inevitable sacrifices.
Thompson's proposal has two main parts to it. First, he would create voluntary "add on" retirement savings accounts. Workers would contribute 2 percent of their wages into the accounts, and each dollar of personal contributions would be matched by $2.50 in government contributions on the first $1000 of monthly wages and matched by 50 cents of government contributions for higher amounts. The government's contribution would be drawn from social security taxes that workers and employers already pay. For instance, a worker earning $2,000 per month would contribute $40 on her own (= .02 x $2,000) and be subsidized $60 by the government (= (2.50 x $20) + (.5 x $20)). For the year, this worker would have $1,200 added to her retirement account, which she could then invest into stocks, bonds, or some combination just like a 401(k) defined contribution plan. The funds would be available to the worker beginning at age 62, and any unused funds could be passed on to heirs.
The second part of Thompson's plan is to slow the growth in Social Security outlays by changing the initial retirement year benefit formula so that a person's history of wage contributions would be adjusted for inflation using the Consumer Price Index (price inflation) instead of the current wage index (wage inflation). Wages have usually grown faster than prices, so pegging initial benefits to price inflation should reduce benefits. For workers with the new voluntary retirement accounts, their Social Security benefits would be further reduced by the amount of the government matching contributions.
Thompson's plan would only affect current workers who are at least several years from retirement; it would not affect current retirees or older workers nearing retirement.
Thompson's plan addresses all three elements of reform. It would move Social Security closer to balance by gradually reducing benefits. It would also, however, strengthen overall retirement savings by bringing in more revenue--the workers' own contributions, which would come on top of taxes they are already paying into the Social Security system. If long-run trends in stock returns continue, the funds invested in those private accounts should also grow faster than the funds in the government's accounts, also adding revenue. Finally, the plan protects those new revenues from government spenders by moving them from public to private accounts--in effect individuals will hold portions of the trust fund.
There are downsides to be sure. Higher income households will benefit more than lower income households. The current benefit formula pays a higher return to low-wage earners than to high-wage earners, providing a considerable degree of redistribution. This redistribution would be reduced. Also, high-income households would be more likely to participate in the voluntary savings component than lower-income households. So the benefits from the savings component would flow mainly to them while the decreases in the benefit formula from the new indexing scheme would fall more heavily on the poor. Lastly, the plan shifts more financial risks toward households.
There is also a little distraction going on as each element of this plan could be proposed on its own. The voluntary contribution portion does nothing to "save" Social Security; indeed, it would do the opposite if only high-wage workers participate. So absent the voluntary component, it might be possible to get by with smaller benefit cuts. Also, we still need to see a bottom-line analysis on the Social Security system's finances.
Thompson's plan is a good first start that could form the basis for an ultimate reform. As written, the costs of his plan fall too heavily on the poor. Modifications to better protect the poor would make his plan a hands-down winner. Watch for all sorts of demonizing rhetoric, especially from the Democratic candidates. However, Thompson has put out an important marker, and it's up to the other candidates to improve on his plan and not just complain about its inevitable sacrifices.
Friday, November 9, 2007
Who benefits and who loses from the Rangel Tax Bill
The Tax Policy Center, which is jointly run by the Urban Institute and the Brookings Institution, has analyzed H.R. 3970, Rep. Rangel's "Tax Reduction and Reform Act." Rep. Rangel's bill is a revenue-neutral proposal that would eliminate the Alternative Minimum Tax, increase the standard deduction for household tax filers, expand the Earned Income Credit for low-income families, and make the Child Tax Credit refundable. To keep the country from going further into debt, it would balance these decreases by increasing tax rates for high-income households, returning some restrictions on deductions and exemptions for high-income households, and changing the way that investment fund managers can treat their income so that their income is taxed as earnings rather than as capital gains. The bill would also simplify corporate taxes, eliminating several deductions but also lowering overall rates.
Researchers at the Tax Policy Center looked at how households in different income groups would be affected. They concluded that 57 percent of households (86 million households) would end up with lower tax bills as a result of this proposal, while only 2.4 percent of households would end up with higher bills. On average, households with annual incomes below $500,000 would pay less under Rep. Rangel's proposal, while households with higher incomes would pay more. The researchers calculated that "almost no one earning below $100,000 would receive a tax increase."
On average, the benefits would be highest--both in absolute and in percentage terms--among households with incomes between $100,000 and $500,000. Many households in this income range would gain from the elimination of the AMT; however, some other offsetting tax increases would also kick in in this range.
Among households with incomes above $500,000, about 80 percent would see a tax increase. Average payments for households with incomes between half a million and a million dollars would rise 2.2 percent, while average payments for households earning over a million dollars would rise 4.5 percent.
Math-challenged Republicans continue to criticize Rep. Rangel as proposing "the largest individual income tax increase in history." For most sensible people, that would be an odd way of describing a plan with no net revenue impact, that benefits 57 percent of households, and that leaves another 40 percent untouched. Of course, it's not so odd at all if your goal is to steer more money to America's richest and most powerful households and you have no qualms about sticking today's children with the bill.
A permanent fix to the AMT is long overdue. Given the large existing budget deficit, our ongoing military commitments, and the swelling and underfunded entitlements for the elderly, we cannot afford to put another tax cut for rich households "on the tab." Rep. Rangel's responsible plan deserves serious consideration.
Researchers at the Tax Policy Center looked at how households in different income groups would be affected. They concluded that 57 percent of households (86 million households) would end up with lower tax bills as a result of this proposal, while only 2.4 percent of households would end up with higher bills. On average, households with annual incomes below $500,000 would pay less under Rep. Rangel's proposal, while households with higher incomes would pay more. The researchers calculated that "almost no one earning below $100,000 would receive a tax increase."
On average, the benefits would be highest--both in absolute and in percentage terms--among households with incomes between $100,000 and $500,000. Many households in this income range would gain from the elimination of the AMT; however, some other offsetting tax increases would also kick in in this range.
Among households with incomes above $500,000, about 80 percent would see a tax increase. Average payments for households with incomes between half a million and a million dollars would rise 2.2 percent, while average payments for households earning over a million dollars would rise 4.5 percent.
Math-challenged Republicans continue to criticize Rep. Rangel as proposing "the largest individual income tax increase in history." For most sensible people, that would be an odd way of describing a plan with no net revenue impact, that benefits 57 percent of households, and that leaves another 40 percent untouched. Of course, it's not so odd at all if your goal is to steer more money to America's richest and most powerful households and you have no qualms about sticking today's children with the bill.
A permanent fix to the AMT is long overdue. Given the large existing budget deficit, our ongoing military commitments, and the swelling and underfunded entitlements for the elderly, we cannot afford to put another tax cut for rich households "on the tab." Rep. Rangel's responsible plan deserves serious consideration.
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