Surprise! A Political Cheap Shot from "Think Progress"

Matt Yglesias opines:

Conservative Senators are currently saying that they will filibuster a middle class tax cut unless that tax cut is paired with tax cuts that exclusively benefit rich people. That’s because they care—a lot—about reducing taxes on rich people. If they cared about reducing the deficit they could threaten to filibuster tax cuts unless paired with spending cuts. But they’re not doing that because they don’t care about the deficit.

What’s more, conservative columnists could urge them to do this. So could Fox News hosts and conservative talk radio stars. So could the Heritage Foundation, the American Action Network, the American Enterprise Institute, or the Cato Institute. But none of them are doing so. It’s true, again, that they separately say they favor cutting spending but none of them are urging members of congress to make tax cuts contingent on offsetting spending reductions.

It’s a question of scope. Tax policy is a huge issue in itself, as is EACH of the big spending cuts favored by supporters of limited government. Policymakers can only grapple with so much at a time, and since the tax debate is occurring now, they’re focused on taxes.

Improving incentives for savings and investment is key to long-term growth. High-earners (i.e., high-producers) tend to save more and be more sensitive to tax rate changes than others (not to mention bearing the greatest direct burden of taxes). It is therefore good tax policy to reduce rates especially at the top, not for whatever goes to the rich, but because of the benefits to the rest of us from greater investment and productivity.

When this tax debate has passed, I expect free-market people will be happy to discuss spending cuts. But one thing at a time.

Why the Spending Fetish?

A headline on Bloomberg.com today blares, "Rich Americans Save Tax Cuts Instead of Spending, Moody's Says."

Timothy Homan reports:

Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy.

Later in the article, economist Chris Cornell is quoted, "Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues."

The entire article is based on a false premise. Why is it that we should care only what the wealthy spend?

What they save, after all, can become business investment, which is what has been hammered during this recession and especially by the extreme regime uncertainty that has characterized the past two years. The images below from this recent post by Cato scholar Mark Calabria reveals that consumption is back to normal, while fixed private investment is down by 20%. The fixation on spending reflects flawed neo-Keynesian reliance on over-aggregation and mythical "multipliers."

On the empirical point about the wealthy saving much of tax cuts, that seems consistent with the permanent income hypothesis, which postulates that we try to smooth consumption over our lives. Something that changes expectations of lifetime wealth tends to affect consumption patterns.

Tax cuts that are expected to be temporary, therefore, would mostly be saved, while those expected to be permanent would be mostly spent. If the wealthy save tax cuts, it's a clear sign they expect them to be raised again when the bills come due for the current government spending binge.

Constitutional Reform Needed Soon

It's been almost four months since I last blogged, courtesy of a rather heavy reading list for the final lap of grad school.

Twenty books and many discussions later, my grasp of constitutional economics has never been better. In a nutshell, constitutional economics has to do with how the basic rules of governance lead to different political and economic outcomes. The basic challenge is to escape anarchy or despotism by establishing the protective (military, police, courts) and productive (basic infrastructure, environmental protection, monetary policy) functions while constraining the ability of political actors to use the power of the state to redistribute. As it turns out, no advanced country seems to have figured out how to constrain redistribution very well.

In thinking about these issues, I've come to a few tentative conclusions. Politics as usual hasn't been very successful at limiting government. It looks like we need to think about constitutional reforms, such as
- Term limits (5 terms House, 2 terms Senate)
- Spending limits (inflation + population growth)
- Balanced budget requirements (spending = revenue two years before)
- Prohibition on new debt issue
- Two-year budgeting (budget odd years, oversight even years)
- Zero-base budgeting (all programs reconsidered each time)
- Periodic automatic program sunsets (without congressional reapproval, they go away)
- Putting all implicit debts (unfunded Social Security, Medicare, Medicaid, and pension liabilities) on the official annual budget

All of these are aimed at limiting the discretion of politicians. They're our employees, after all, so why do we let them get away with acting like our masters? Government doesn't give us meaning, it's just an instrument to accomplish those necessary things that cannot by provided by voluntary action.

Forcing government to live within its means would stop the intergenerational theft that has run rampant for the last eighty years and force politicians to make choices about priorities. It would also make it easier to say 'no' to the special interests.

How these reforms could be implemented is unclear. But unless Greece's situation looks like fun, we better figure it out soon.

Germany's Fusionist Election

Even as America's political class expands its dominance over the U.S. economy, German voters sent the opposite signal to Berlin in today's parliamentary elections.

Since Germany has proportional voting, the Bundestag has representation from five different parties. At the risk of major oversimplification, the major parties are roughly equivalent to the Republicans (Christian Democrats), Democrats (Social Democrats), Greens, Libertarians (Free Democrats, aka "Die Liberalen"), and Socialists. Of course, the latter three parties, though technically minor parties compared to the first two, bear little resemblance to their American brethren. Simply put, U.S. third parties have no prospect of attaining political power, so they radicalize much more than those in Germany and other proportional representation systems.

In any case, this election marks the end of the 'grand coaltion' of Social Democrats and Christian Democrats--a tenuous and relatively non-reformist coalition. The coming Christian Democrat and Liberal Democrat coalition is essentially a fusionist (in the Frank Meyer sense) coalition of conservatives and libertarians.

It's too soon to tell what policies they'll pursue, but tax relief and improving the business climate have been major parts of their platforms. This means casting off those regulations that are harmful, cutting spending, cutting taxes, and otherwise reducing the burden of government.

One hopes that they've learned from the Republicans that tax cuts without spending cuts doesn't really cut taxes, it just shifts that burden to the future. (Yes, my supply-side friends, I know that the dynamic effects of tax cuts can make up for part of the revenue loss, but rare is the tax cut that fully pays for itself.) Fortunately for Merkel and company, Germany's flabby welfare state offers plenty of fat to cut out.

Zum Wohl and viel Gluck!

Where are the Real Health Care Reforms?

For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.

The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.

At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.

While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.

Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.

Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.

When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.

Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?

Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.

Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.

Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.

Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.

Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.

Politicians: Missing the Point, Again

Ohio Congresswoman Marcy Kaptur (D-OH-Toledo) gave a speech on the House floor a few minutes ago lamenting the power that China, OPEC countries, and other unpleasant governments in Africa, Latin America, and Asia possess over the United States.

The source of that power? Their decision whether to buy U.S. government-issued debt. Here’s the argument: by selling off their accumulated U.S. Treasury Bonds or by simply refusing to buy more, they could cause the value of the dollar to crash relative to other currencies. They can supposedly use this leverage to influence U.S. policy.

Leaving aside the fact that a weak U.S. dollar would increase our exports (a policy she favors) because U.S.-produced goods would be cheaper for foreigners, it was striking that she railed against the symptom without even mentioning the cause.

If not for persistent deficits (column D), our government would have no need to issue debt in the form of bonds. Of course, eliminating the deficit requires cutting spending (the reasonable course), raising taxes (an especially bad idea during a recession), or some of both.

But then again, most politicians are known better for empty rhetoric than for making real decisions.