Obama Budget 2009

The full budget:

http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf


Very Readable, though heavily padded. Lots of repetition and cut and paste of the same rhetoric. I wonder if anyone read the whole thing (besides me).

The difference between the Obama budget proposal and the Bush budgets is wonderous. There are actually charts and graphs that show economic data to support the proposals rather than propaganda pictures of Bush and Cheney and other high party officials.

The budget demonstrates increased transparency and realism. It shows dramatically high deficits but only because it does not assume it will be saved by the AMT or by sunset provisions as was the practice under previous administrations. Further, it creates many allocations for emergency spending based on the likelihood that they will occur rather than pretending that nothing will ever happen. Included in this budget is war funding which the Bush administration routinely financed in a separate "emergency" bill.

The highlights below come from the first 42 pages of the budget request, which contain the President's message and summary. In future weeks, time permitting, I'll review the individual department budgets.


The Good


1. Investment in education and research:


Some studies show that for every dollar invested, there is a $4 to $9 return to society in higher earnings, higher graduation and employment rates, less crime, and decreased need for special education services, less use of the public welfare system, and better health.


Unfortunately the "studies" are not cited, but the sentiment is true. Education is one area where it is difficult to spend too much money (but like all areas important to spend the money properly). Education is the single most important factor in ensuring American liberty and prosperity in the decades to come.


The budget rightly does not intend to take action to "cut costs" in education. While college education expense has risen dramatically over the last 20 years (figure 8 on page 10), so have the rewards (figure 9 on page 11). We do have the best education system in the world, despite its faults and costs. We now merely have to ensure that our children have access.


The budget statement specifically encourages stem-cell research.


1a. $5 billion for key science program such as the DoE Office of Science and DoC National Institute of Standards and Technology

1b. Increased funding for Head Start and double enrollment in Early Head Start

1c. Encouragement of individual performace by teachers... more details?

1d. Double support for Charter Schools. I have been ambivalent on charter schools in the past. A large portion of the superior performance of these schools can be attributed to the selection of students and parents. Parenting is the first and most important contibuter to a child's successful education. If we can't make all parents good, then let's at least give the good parents a chance.

1e. Stable funding for Pell Grants. Now indexed to inflation + 1% and automatically funded.

1f. Huzzah! An end to government-guaranteed student loans, which served only as handouts to financial institutions, and a switch to direct lending.

1g. $2.5 billion to support low income students through college with the Access and Completion Incentive Fund

1h. Triple the number of graduate fellowships in science. This is how we grow the economy.


2. Culture of Life - more health care for children and workers

2a. Nurse-Home Visitation program to provide pre and post natal care for at-risk children and families

2b. Authorization of the Childrens' Health Insurance Program (CHIP) with a jab at Pres. Bush for vetoing it twice. It is retarded that we have free and subsidized healthcare for retirees who will never again be productive members of society while allowing our children to be hobbled preventable conditions through inadequate healthcare.

2c. More money for medical research on comparative effectiveness so that decisions can be made based on cost-effectiveness rather than simply cost.

2d. Pre-funding health care reform. He doesn't know what he's doing yet, but he's responsibly setting aide $630 billion because he knows it will be expensive.

2e. The budget strikes a balance between innovation and access. Inventors of new drugs retain their exclusivity period, but the process for access to generics is streamlined. (Not clear if the exclusivity period remains the same as before.)

2f. "Pay for Performance" Medicare will link a portion of the medical fee to quality standards. This is a step in the right direction. Should this "quality" be measured be impartial bureaucrats or untrained patients?


2g. 8 principles of the new health care system! (Page 27)


3. Tax increases for rich people

3a. Itemized deductions for families earning more than $250k/year will be deducted at 28% rather than 33-35% (and eventually 36-39.6%). Why should we be subsidizing mortgages and charities for the rich?

4. Tax cuts / subsidies for poor people

4a. Making Work Pay tax credit. This tax credit refunds 6.2% of income taxes for 95% of American workers so that they can use the refund to pay for the 6.2% employee-share of payroll taxes. Good idea, but poor implementation. We should just eliminate payroll taxes altogether.

4b. Extended and expanded unemployment benefits. This is especially important so that skilled workers are not forced to enter unskilled jobs by necessity of eating and can instead focus on finding a job that is right for them. America benefits by making sure the resources we've spent training our workforce are employed as effectively as possible.

5. Increased financing for our efforts to change the world, ie Defense and State

6. Reduction of stupid spending

6a. Specifically cuts in farm producer subsidies

The Bad


1. Continuing subsidies based on geography rather than income or population

1a. $1.3 billion in USDA loans and grants for "expanded broadband ... in rural areas". What does broadband have to do with Agriculture?

1b. Susidies for commerical flights to rural areas. People can live where they want to live, but they have no right to tax the rest of us to provide them more convenient transportation.

2. $15 billion in additional cash payments to retirees and the disabled. "These vulnerable populations are the first ones to feel an economic downturn." Why? They're not working so they can't lose their jobs.

3. Continuing subsidies for producers of "renewable energy", defined based on politics rather than sciene. This policy should be implemented as a tax on pollution rather than a subsidy for specific kinds of non-pollution. The effect is similar but does not limit creativity in finding new methods of non-pollution.

3a. $6.3 billion in subsidies for states to become more energy efficient. If energy efficiency were cost-effective, states already have an incentive to do this. If it's not cost effective, then why are we doing it?


4. Bury it! "The Energy Department will also scale up its demonstration projects for
geologic storage for carbon dioxide." Are you kidding?


5. Continuing subsidies for the low income nanny state. Wherever possible, subsidies should be in cash, not kind.

5a. Continued funding for the DoE "home weatherization" program. If people cannot afford to own and maintain their own homes, they should consider renting. We need to stop subsidizing homeownership in favor of other poverty-fighting priorities.

The Ugly - Ideological Errors

1. The budget correctly identifies that the illiquidity in the financial markets caused by a burst of the credit bubble is the proximal cause of the current economic turbulence. No provisions are made however to prevent such bubbles from occuring the in the future. Rather by endorising actions by the Federal Reserve and the TARP, the administration effectively "solves" this problem by encouraging a new bubble.

2. The budget focuses too much on job losses as a problem. The macro problem is a loss of economic production. If the economy can produce more without higher employment, that means we can consume more without working as hard. The micro problem is greater inequality due to loss of jobs and therefore income at the lower strata of our economy, but if growth is achieved, this can be solved by additional efforts at wealth redistribution. The budget addresses this issue in part with a more progressive tax code. (Figure 9 on page 11 is interesting.)


3. Health care. The budget notes that healthcare costs are rising faster than wages, as illustrated by Figure 11 on page 13, but this is a misleading statistic. As incomes rise and medical technology advances, individual choose to spend more money on healthcare because they like it better than spending their money on other things.


That there are more uninsured now than there were previously is a consequence of this choice not to spend on healthcare and the requirement that premiums remain the same regardless of health. If premiums are set by the average cost of care, healthy individuals will self-insure while individuals with chronic illnesses will seek insurance. This is exactly what is happening. We cannot fault the healthy for choosing not to pay for the healthcare of the sick when given that choice. What we can do is use the power of the state to tax and provide a minimum level of health insurance for all.


4. "... still preserving the important principle of a dedicated revenue source for Social Security." Why does Social Security need a "dedicated revenue source"? Does that make it any more or less important or stable? The Social Security Tax is regressive. The extra 12.4% places a highe marginal tax rate on those making less than $106k per year than those in the top tax bracket! The cost of this dedicated revenue source is the prevention of any meaningful reform. As inequality increases in society, the tax code must become more progressive, but the separate Social Security tax remains a special burden for lower income families. The "Making Work Pay" refundable tax credit that applies against payroll taxes further illustrates that this is stupid.


I hope you enjoyed it as much as I did!

How would you invest? An interesting microeconomic scenario

http://www.knowingandmaking.com/2009/02/confiscated-savings-and-bank-runs.html


The problem is much deeper than that. The loss averse individual you describe makes two mistakes not one. The second, as you describe might be to withdraw his or her money, but the first was to invest the money in the first place.

Most people do not have the market knowledge to invest their money properly. If this individual was looking for principal protection, then he or she should not have invested the money in an account where it could be lost.

In the United States, many retirees or other investors with no risk appetite invested their money in bonds of Enron or other highly rated companies without understanding that highly rated does not mean risk-free, and that the rating agencies are not actually good at their jobs. Then these same investors were upset that they lost money that they thought was risk free.
As recently as 2004, President Bush advocating the conversion of Social Security into personal accounts where workers could invest in "a conservative mix of stocks and bonds". All of these people would be in a great deal of trouble today if this change had taken place.

Lastly, the individual you describe could have been cheated. Perhaps he was told that this was a deposit in a bank. The word "bank" for common people means "safe". In truth, the practice of fractional reserve banking means that the bank is not safe and depends on a Ponzi scheme for its liquidity. Fractional reserve banking is what makes a bank vulnerable to bank runs. Fractional reserve banking is what causes dramatic swings in liquidity during recession (and not individuals collectively saving).

I hate the stimulus

Full Text

CBO Summary

1. Increased deficit spending hurts long-term wages and GDP

An interesting observation by the CBO:


To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt would tend to reduce the stock of productive private capital....
The reduction in GDP is therefore estimated to be reflected in lower wages rather than lower employment, as workers will be less productive because the capital stock is smaller.


http://www.cbo.gov/ftpdocs/99xx/doc9987/Gregg_Year-by-Year_Stimulus.pdf

2. Buy American

If two contractors make the same quality government product or service, but one can do it at a lower price, the government should chose the lower price. By restricting competition to only American contractors, the legislation allows contractor to charge higher prices for the same service. We will pay higher taxes all to promote greater inefficiency and lower productivity.

If the goal is to spread some cash around the US economy, we'd do better hiring the cheaper foreign contractor and dumping the savings out of a helicopter.

3. Wage restrictions

Further, the legislation requires that all workers on a project must be paid the same as any other worker in the same locality. We will pay higher taxes to pay for less productive workers.

Again, if the goal is to spread some cash, give it away and be honest about it.

4. A whole lot of dumb tax credits $200B +

For the most part, many of the tax credits serve simply to make the tax code more progressive. Specially stupid ones include increased "home-buyer" tax credits as if a new housing bubble would save us.

Then there are several tax credits awarding good behavior. Generally, policy should not be made in the tax code.

Lastly, taxes are cut on new automobile purchases. What happened to energy policy? Subsidizing the purchase of new cars won't save the US auto industry. This is clearly an example of a provision that was made for the benefit of the manufacturers (few) rather than the consumers (many).

5. Limits on Executive Compensation

This is stupid. Companies took or were pressured to take TARP funds and now find themselves under strong restrictions. The law includes an exception for employment contracts written before February 11, 2009. This type of legislation will only further encourage future employees to demand longer contracts in case further limits are placed in the future.

(This paragraph previously incorrectly stated that "It's probably unconstitutional, both in terms of its infringement on the freedom of contracts and its ex post facto nature." Corrected thanks to an observation by a devoted reader.)

The only good that can come out of this is that companies will seek to exit the TARP as fast as possible that that previous error can be corrected.

Excessive executive compensation is a principal/agent problem. Those that are best suited to correct this version of the problem are not seated in the Capitol but are in fact the shareholders of these Corporations. Already steps are being taken to form independent compensation committees or to require formal shareholder votes on CEO compensation. The government should not be involved either as a shareholder through the TARP or through random wage ceilings.

6. Quibbles on Education Spending

The legislation pours new money into Education, including $13B for the Elementary and Secondary Education Act of 1965, currently reauthorized as the No Child Left Behind Act of 2001, $11.3B for the Individuals with Disabilities Education Act, and $15.8B for the Higher Education Act of 1965.

I have no objection to the last and little objection to the first. The US economy, as a developed economy, grows primarily by increases in productivity technology and not by increases in capital stock per capita. In order to promote that growth the US needs as many highly educated individuals devising new ways to be productive as possible. We should invest heavily in ensuring that our best minds receive the best education possible.

Financing education at the elementary and secondary level provides a lower return for the national economy than financing graduate school, but it is also an effective way to break the cycle of poverty, and to reduce crime, both equally important economic targets. Families in poverty cannot afford to increase their human capital with further school or training, and property rights are fundamental to the competitive market model.

Spending on disabled children helps to soothe a bleeding heart, but does it do any more than that? Each dollar used to train a genius generates far more wealth for society than a dollar used to train a dullard. Families with disabled children deserve our sympathy, but can they be said to be a national priority?

7. A stupid way to build national infrastructure

The legislation appropriates $27.5B for highways, rails, and ports. Rather than spending the money on the most important roads and bridges, the law requires the money to be spent as fast as possible without regard to the usefulness of the infrastructure. Rather, it is to be spent only in "economically distressed" areas. The DoT only has 21 days to parcel out the cash and the States have only 120 to start using it. So much for time to think and do the right thing! A state failing to meet this timeline will have its funding redistributed to other states.

8. The end of state government

The legislation awards $53.6B to be distributed among the several states for the primary purpose (81.8%) of education. At $11k per kid (tied for highest among developed countries), that would fund the education of just under 4 million children, but so what?

As any economist knows, all this means is that states can cut education budgets and spend the money elsewhere. All that is happening is that we're saving incompetant state governments from having to raise taxes or borrow because the federals are doing it for them.

This is ok if you don't care for federalism at all. If states get into this habit, then the federal government will start attaching strings to the money it passes down.

One good thing though is that this money is apportioned based mostly on population (overall and schoolage) rather than political power.

9. Liberal Wish list

Much of the rest of the legislation, $1B here and another there, reads like a wish list of government programs that were starved during Republican rule and now are being funded.

It isn't big money, so it's not worth going through the details. I'm sure some of them, at least, are worth funding, but please, let's not pretend we're funding the projects to "create jobs" or revive the national economy.

10. It's not a stimulus

Government cannot bring the economy out of recession. It never has, and it never will.

And really, perhaps it shouldn't.

Obama's pitch

http://my.barackobama.com/page/invite/recoveryvid

I agree with much of the spirit of what he says. There is much to be done increasing our educational and transportation infrastructure. Unemployment benefits and health insurance should be expanded.

Handing out $500-$1000 to people who are already employed would be a waste. Rather, as income inequality increases, we should enact permanant changes to the tax code that make it more progressive.

As our economy increases is its technological complexity, unskilled workers are the first to exerience a lower relativel livelihood. We should use government power to make sure our children, tomorrow's workers, are as skilled as possible.

Obama receives full points for increased transparency. Whether you construe his messages and his website as public service or propaganda, at least he is engaging with the People and encouraging continued interaction of the governed with the government.

Effect of taxes on work and leisure

We previously discussed the effect of changes in income on spending habits. Let's now consider how taxes affect the decision to work.

Given a particular income constraint, there is a maximum level of achievable utility that each individual will pursue (by definition).

That is, U = U(I), where I = income.

I = earnings + wealth - net taxes

Rather than including "return on savings" as a portion of income, we are considering lifetime income and consumption. At any consumption decision, the individual will redetermine whether to reallocate savings to consumption.

Wages are limited by time. An individual only has so many hours a week, so many weeks per year, and has an expecation of so many years per lifetime. Depending the relative value of leisure and consumption, an individual will determine how much to work:

U = U (I, L) = U (E(1-L) + W - T, L) where E is maximum future earnings, L is the fraction of available time spent on leisure, W is wealth, and T is net taxes.

A lump sum increase or decrease in T has the same effect as increasing or decreasing W. An individual becomes less likely to work. (Exception: If an individual can use W to increase E, for example by going to school, then increasing W may increase time spent working.)

If T = tE(1 - L), where t is an income tax rate, then decreasing t has the same effect as increasing E. An individual becomes more likely to work.

So which is better in a time of recession? When demand for labor is down, should we increase supply or decrease it? It seems to me that increasing the supply of labor will offset the apparent increase in earnings by decreasing equilibrium wages through tax cuts or subsidy. A one-time subsidy will increase wages but be offset by required tax increases whether now or later.

I conclude then that in the exception is the rule. Our government action should be centered around enabling individuals to increase or maintain E by avoiding starvation, exposure, disease and death and pursuing educational opportunities and job training. Unemployment benefits, national health insurance, and subsidized tuition serve this purpose and should be pursued.

Daniel Gross knows nothing

Daniel Gross' recent post carries with it the same nonsense spouted by politicians and members of the popular press who are not economists.
http://www.slate.com/id/2210570/

Speaking as an authority, he begins with:

There are three options government can pursue when the economy goes south.

He assumes without discussion that the government should do something to boost economic growth. This is the same guy who wrote that bubbles are great for the economy.
http://www.slate.com/id/2165929

Does he not realize that every bubble is followed by a burst? Gross credits bubbles for implementing new technology, but he's only right so far as the bubble increases awareness. It's the recession that destroys companies who cannot or do not implement the new technology correctly, and it's recession that enables those who do to expand into the voids left by their bankrupt competitors. Without recession to sweep away the old, there can be no recovery to implement the new.

Government should not try to stop recessions. It should treat the symptoms with unemployment benefits and subsidized education and healthcare, and let the disease run its course. Excess government action will only endanger the patient. No drastic action is necessary because this disease is not anywhere close to devastating or terminal. Even Gross admits that in his next column: http://www.slate.com/id/2210619/

Next he writes:

They have forgotten Richard Nixon's famous line that "we're all Keynesians now."

Suddenly, a statement from a compromised fallen President is now a statement of economic truth. Yes, it's true that politicians have a penchant for economic theories that prescribe greater government action, such as mercantilism or Keynesianism but that doesn't make those theories true or just.

Even Keynesian economists don't think that fiscal policy can be swift or efficient enough to react to recessions.

Contra DeMint, borrowing and spending are pretty much how the government has pulled itself out of every modern recession.

Stated without proof. It's true that the government has borrowed and spent during every modern recession, but there's hardly any reason to believe cause and effect. In fact, our government has been borrowing and spending forever whether recession or expansion. How are the two even related? We borrow more during recessions because tax revenues are lower. We spend more during recessions because the politics allow for it. There is no prescription here.

There's plenty of legitimate argument over the stimulus—too much, too little, not fast enough, too fast, the proper mix of tax cuts and spending.

Except the one that matters: Whether there should be a stimulus at all.

Tax cuts don't work

A description of the cost of the Senate version of the stimulus:
http://cboblog.cbo.gov/?p=204

Approximately $96 billion is spent on a $500 tax credit for workers. In Neoclassical economic theory, a lump sum tax (and likewise a lump sum subsidy) has no effect on the proportion of income spent on one activity or another. An individual is no more likely to work more or less. An individual is no more likely to save more or less. This follows under the parsimonious assumption that all goods have utility functions similar to U(x, y) = -1/a(x-h)^2 - 1/b(y-k)^2 where x and y are much less than the optimal spending h and k respectively. X and y are measured in dollars as are the costs of those goods, a and b. The sign is negative to reflect optimal consumption as one reaches (h, k).

With an income constraint I = x + y or y = I - x, we can solve for the optimal consumption:
U(x, I - x) = -1/a(x - h)^2 - 1/b((I - x) - k)^2. Set marginal utility = 0 to find max.
Ux = -2/a(x - h) +2/b((I - x) - k) = 0. Multiply through by a and b. Divide by 2.
x = (h/a - k/b+I/b) (a+b)

dx/dI = (a+b)/b. Increases in Income do not affect the relative spending. (This is based on relative costs only.)


In reality, there are certain goods for which a minimum amount of consumption is necessary, and consumption in greater quantities may not be utile. That is, for example, h is on the order of magnitude of x. In a developed country like the United States, this could be "Calories". Rather than a smooth utiliy function like U(x) = -1/a(x-h)^2, a stepwise function such as U(x) = -infinity if x/a < 1000 Calories/day and the usual otherwise where h/a = 1600 Calories/day. (1 "Calorie" is 1,000 "calories".)

In this type of good, decreases in income beyond a certain point will start to affect other goods more than calories once the minimum 1000 Calories/day is reached.

"Saving" for an individual merely constitutes consumption in the future. The above model can be readily adopted by x current consumption and y future consumption with the factor b including the discount for the difference in time.

This suggests that welfare should be provided to ensure that everyone can eat. This also suggests that paying every worker $500 or cutting taxes for those already employee will have little effect on their relative spending or on saving habits. Though more will be spent/saved after the minimum consumption levels have been reached.

There is something to be said for the argument that welfare affects an individual's decision to work more or less. But we'll say it next time:


Also:

Featured on the NY Times Freakanomics Blog:
http://freakonomics.blogs.nytimes.com/2009/02/03/chicago-economists-on-the-stimulus-package/#more-3887

More once I've had a chance to watch it.

No such thing as stimulus

Republicans are right on most of this stuff. Even if it's justifiable spending it isn't stimulus. (Admittedly, I have a bias that there is no such thing as stimulus.)

That said, they're complaining about less than $20 billion out of $900 billion.
http://www.cnn.com/2009/POLITICS/02/02/gop.stimulus.worries/index.html