Monthly Archives: June 2013

Debt is bad (all else equal).  But not everything that purports to control debt is good.

There are spending cuts and tax increases that would be counterproductive.  There are budget process proposals that would tie the Congress in knots for no real gain.  And then there is the statutory debt limit.

After approving separately every individual debt issuance until World War I, the Congress simplified and streamlined debt finance by setting a dollar limit.  It made some sense, although the Department of Redundancy Department might question why the Congress, having voted to spend money, should then be required to vote again to allow the issuance of the public debt that results.  Some might wonder whether the opportunity to vote for gratifying spending programs and tax cuts that increase the debt, and then to refuse to vote to honor that debt, might confront the Congress with the temptation to play both sides of the political street – to the detriment of the full faith and credit of the United States of America.

One might also note a peculiarity of the precise statutory definition of our debt subject to the limit.  It includes the amounts of non-marketable Treasury “special certificates” in the federal government’s more than 100 trust funds.  In the best of times, those trust funds will accrue surpluses – and therefore, the federal government’s debt subject to limit will tend to go up, not down.  Consider the late 1990s, the happiest period in modern federal fiscal history.  If the budget had stayed on the track that was anticipated as of February of 2000, the Treasury over the succeeding four-plus fiscal years would have continued its then-current practice of buying back outstanding public debt in the open market, and by the end of 2004 would have retired almost $900 billion of public debt.  It also by 2004, paradoxically, would have violated the statutory debt limit (see the following chart).  So to put it mildly, the debt limit is a highly imperfect measure of the nation’s fiscal behavior.

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Members of the business community and economists generally think of market capitalism as competition.  You build a better mousetrap, and the world beats a path to your door.  Competition drives you to explore every possible way to succeed.

This basic philosophy is one reason why we at CED prefer a system of market-based competition among competing health-insurance plans to the current law, including with respect to Medicare.  Take the Independent Payment Advisory Board, or IPAB.  In concept, such a cloistered committee of smart people thinking about ways to save money while delivering quality health care would be harmless enough.  (For today’s purposes, let’s set aside some people’s concerns about the authority of this group to impose its decisions on – rather than merely recommend its ideas to – providers.)  But assume in an abundance of fairness that the IPAB bats 1.000 – that every idea it promulgates turns out to be a winner.  Could we conceivably stretch our imaginations even further to assume that this limited group would think of every productive idea to deliver quality health care efficiently?  Probably not.

So under the current system, IPAB will send its ideas to what is mostly a sea of solo-practice, fee-for-service healthcare providers.  If instead we had competing armies of health plans, each with its own designers trying to find new ways to improve care delivery – and to copy every useful idea that they see in every competitor – we quite likely would have a much richer flow of innovation leading to a more rapidly improving overall healthcare system.

So a key point – by no means the sum and total of our argument – is that a fixed agenda of improvements from one entity will be no match for what could emerge from a large number of innovators seeking every possible way to compete and succeed in a competitive market.

But let’s turn back one page to those apparently positive – or even compelling – words: “every possible way.”

Using the proverbial “better mousetrap” image again, suppose that one entrepreneur finds a way not to improve his own mousetrap, but to create a media buzz that his competitor’s mousetrap does not work as well as it in fact does – or that his own works better than it in fact does.  He gains business at the expense of his competitor, perhaps even driving him or her out of operation.  Is that what market capitalism is all about?  Is that what competition is supposed to yield, through Adam Smith’s “invisible hand,” for the benefit of all of society?

Creating such a media buzz could entail illegal activity, such as the perpetration of fraud.  But suppose that this entrepreneur found a legal way to create such a buzz – which in this world of instantaneous communication of free speech (you get what you pay for) – might not be all that difficult.  Is that what market capitalism is all about?

What protects us from such abuse of the free market – not through outright crime, for which our criminal justice system is the obvious and designated remedy, but rather from the legal manipulation of fellow economic actors?  Well, at one level, it is accepted and observed standards of behavior – “norms” is one term that this concept evokes.  We may expect that those with whom we do business will behave in the same manner that we do.  In fact, we may well count on the mutual observance of such unwritten, even unstated rules to facilitate everyday commerce to long-run mutual benefit.











I’m going to venture my own opinion that a significant part of the deterioration in economic and especially political conditions in recent years has come from an erosion of previously accepted norms – and that once such erosion has begun, there is an unfortunate natural tendency of that deterioration to continue and even accelerate in a “race to the bottom.”  After presenting this demoralizing observation, I will try very hard to present some sufficient and efficient remedies for this process.  It won’t be easy, because as I speak to you right now, I have not yet thought of very many.

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There is a vigorous ongoing debate about inequality in the United States.  Battle cries range from “It’s my money” to “We are the 99 percent.”  There are reasons why inequality matters, and why it should be the subject of careful analysis more than sloganeering.  Let’s look at some of the many sides of this issue.

First, to motivate the discussion:  Why should greater inequality bother us?  There are several legitimate reasons.  First, to put it in the mildest terms (using the word of two theoreticians in taxation going back more than half a century), extreme inequality is “unlovely.”  Few – even those who take great satisfaction in their own relative achievement – like to be confronted with others living painful lives.  And there is even an element of self-interest in shared success.  If you believe that our society will respond to people living below some level of income – even if you may not agree with that response – your own tax burden will be less if everyone succeeds in some measure.

Greater concentration of income means a narrower consumer base; and anything that stands on a narrower base becomes less stable.  In this connection, fewer decisions by fewer people – or fewer unexpected declines in people’s prospects – could have a bigger impact on the prospects for the whole economy.  There can even be an economic case that the decline of a mass market reduces the need for investment, which over time snowballs negatively into continuing reductions of income and output (relative to what otherwise could be achieved).

And over the very long haul, increasing concentration of income and wealth can reduce the initiative and motivation of generations of the most successful – the very people who might be expected to lead the way to continuing growth and prosperity for society as a whole.  The extreme vision would be an uninvolved economic aristocracy, living luxuriously just by clipping coupons.  But we could imagine a far less outrageous but nearly as damaging pattern in political “rent seeking,” in which those who have made fortunes from the innovations of yesterday use their wealth to seek legislative and regulatory protection against competition from the innovations of today and tomorrow.  There are many examples of such behavior in the past and around the world.  We 21st century Americans tend to think of ourselves as exceptional, and immune to such temptations that would lead to hardening of the societal arteries.  But the history books would tell us that we would need to be truly exceptional to avoid that fate.

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Release of the annual reports of the Social Security and Medicare Trustees last week was met with resounding hallelujahs.  It was as though our nation’s fiscal problems were declared officially over.

In a prominent cheer, Paul Krugman in the New York Times announced that “The Geezers Are All Right.” Various news stories portrayed the campaign for a budget “grand bargain” to be dead.

I don’t see it quite that way.  I will concede that the prospects for a fiscal deal in Washington are perhaps even a little more dead than they were before the reports.  But the good news in the Trustees’ reports goes no further than buying Washington a little more time – and perhaps not as much time as Washington needs to head off the ultimate, unavoidable (as even Krugman acknowledges) Social Security and Medicare problem.

To start with a broad overview of the reaction:  What you see in the mirror of the Trustees’ reports depends heavily on who you are – and in particular, what you believe about the meaning of the Social Security and Medicare Trust Funds.  The people who reacted most positively and strongly to the reports were those who believe that Social Security and Medicare can pay their benefit obligations with their trust funds, and the full-faith-and-credit Treasury special certificates in those funds.  Those who reacted most skeptically believe that the assets in those trust funds cannot costlessly be realized to meet the benefit obligations of those programs.

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