Monday, November 27, 2006

Truly sickening speculation

Budget expert Stan Collender predicts the following nauseating sequence of events in budgetary politics next year:

"The Republican ... [current] budget strategy points to a number of things happening early next year.

"First, there will probably be a big confrontation between the White House and Congress on the budget early in the year. The fighting and rhetoric could be vicious. No matter what spending levels are approved by the Democrat-controlled Congress, the White House and congressional Republicans will try to label them as excessive and Democrats will respond that they are better than what Republicans would have produced....

"Second, although few people are talking about it yet, a government shutdown early next year is possible. The best way for Democrats to take away the advantage the veto will give the president will be to send him bills that he will have a very hard time not signing. The way to do this on the punt, pass and kick strategy will be to combine the remaining FY07 appropriations into a single omnibus bill and to send it to the White House just hours before the continuing resolution expires.

"That would force the White House either to agree with the spending levels or to take the blame for shutting down almost all federal domestic departments and agencies. That proved to be politically devastating in 1995 for a group of congressional Republicans who were far more popular, had a higher job approval rating and better fiscal credentials and spokespeople than the current administration. It's hard to imagine how a government shutdown in 2007 would turn out any better.

"Third, the [Republican's current] budget strategy is almost guaranteed to eliminate any possibility of increased political comity at the start of the 110th Congress. Instead, it means that there will be a series of bitter fights between longtime rivals and few will be shaking hands with their counterparts at the end of the game."

Sounds all too plausible to me. Indeed, it's hard to imagine, given who they are, why Bush and Rove wouldn't do this.

Sunday, November 19, 2006

Current song fave

TV on the Radio, "Dirtywhirl."

Thursday, November 16, 2006

Milton Friedman

I gather that Milton Friedman died earlier today.

Friedman was a great economist and will long be remembered. One of my favorite bits in his work is the discussion in his book Capitalism and Freedom of converting transfer programs into cash and effectively creating a negative income tax in lieu of the welfare system.

I didn't know him personally. He was long gone from the University of Chicago by the time I joined the law school faculty there, having exemplified the neoclassical rational actor model by moving to warmer and sunnier climes. I did get to know his son David, a very interesting and quirky thinker.

My favorite story about Friedman, told by a law prof at another institution who has an Econ Ph.D. from an earlier career, concerns Friedman's Presidential lecture at the American Economics Association, famously refuting simplistic versions of Keynesianism that were then widely accepted in the profession. A transmogrified Keynesianism has survived, but with a lot less cant and pretend certainty, and with better if still imperfect microfoundations. Keynesianism today is to some extent a behavioral economics concept, though none the worse for that. Anyway, the story goes that this individual, who had been trained in standard 1960s Keynesianism, walked out of the lecture in a daze, telling himself that everything he had thought he knew was worthless.

Okay, one should never speak ill of the dead, but I do criticize Friedman a bit in my forthcoming book for what struck me as an opportunistic (for his side in politics, not himself) Wall Street Journal op-ed stance on deficits. In the 1980s, when Democrats controlled at least one house of Congress, he was agin 'em. Fast forward to 2001, and he was full speed ahead for tax cuts, blithely stating in the face of 20 years of contrary evidence that the politically allowable deficit is fixed so the only way to cut the size of the government is by cutting taxes.

One of my points in response to this endorsement of "starve the beast" was that it was based on a simplistic misunderstanding of the size of government concept in economic substance, relying on observed gross cash flows to or from the government rather than on actual allocative and distributional effects.

I would like to think I could have persuaded Friedman to view these matters differently, had I known him and had the chance to discuss them with him. And I would certainly be curious to know what he thought about the U.S. government's budget policy as it unfolded over the last few years. To put it mildly, I rather doubt he would have been much enthralled with either the Medicare prescription drug benefit or the Bridge to Nowhere, not to mention ambitious nation-building in far-off and hostile parts of the world.

UPDATE: According to Brad DeLong's post today: "There's a story that at lunch at the White House in 2002 he told George W. Bush exactly what he thought about Bush's unpaid-for tax cuts. We will miss him."


All knowledgeable people appear to agree that the outcome in Iraq is going to be an utter disaster, no matter what. The realistic choice lies between awful alternatives.

For politicians, of course, this means the key to success is to make sure the other guy gets the blame.

Now Bush reportedly wants to send 20,000 more troops there for "one last push." Anyone with half a brain should realize that the chance of this succeeding is zero - not one in a billion, but zero. I am not so fondly reminded of the serial escalations in Vietnam during the 1965 to 1968 period. Each time, we now had enough force. Only, Vietnam in truth was going much better than Iraq. There actually was a South Vietnamese government and army, and the mass murder was between organized political forces that could in theory agree to stop.

Joke I saw on-line recently: Q: "What's the difference between Iraq and Vietnam?" A: "Bush had a plan to get out of Vietnam."

Something else I read on line recently noted that you'd need 500,000 to 600,000 U.S. troops in Iraq for there even to be a chance of success. Even at that troop level, we almost certainly wouldn't succeed. But it would at least make the U.S. forces relevant. At lower levels, the U.S. troops simply do not matter so far as resolving the basic civil war issues is concerned.

Bush is cynical enough to play the blame game by making sure that he asks for more than he can get, so that when he doesn't get it someone else gets the blame.

But I gather he is delusional enough to think that the extra 20,000 actually will work, and thus to demand something that he can actually get. But when it doesn't work, I imagine he will be looking for ways to make sure that the Democrats get the blame.

It's not very edifying for the Democrats to respond by saying to themselves: We need to give him more rope, so he will hang himself instead of us. Probably the best they can do, however, at least until he ups the ante further.

Generally speaking, I think Bush's current strategy is one of deliberately trying to provoke the Democrats. That would be one interpretation of the Bolton renomination (sent to the Senate just 7 minutes after he finished meeting with Pelosi), and of his renominating all the most extreme judges that even the current Congress wouldn't approve. Bush is acting just like the little kid who pinches the boy next to him while the teacher isn't looking, with the plan of starting to screech if the other boy pinches back.

Childish, yes, but certainly more sophisticated strategically than anything he has tried in the Middle East.

There's a lot of stupidity in this country, with a disproportionately large share of it lying inside the Beltway. So it will be interesting, though painful, to see how all this plays out.

Tuesday, November 14, 2006

Medicare prescription drug prices

The question of whether the U.S. government should use its monopsony power on the consumer side of the prescription drug market to negotiate lower drug prices is truly a no-brainer. I verge on thinking that one has to be financially involved with the drug companies, or else woefully uninformed about the U.S. healthcare market, to think otherwise.

In a well-functioning competitive market, the exercise of monopsony power, no less than of monopoly power, leads to inefficiency, from suppressed transactions that would have created social surplus (i.e., value to the consumer in excess of cost to the supplier).

In the market for healthcare services including prescription drugs, however, we have a reasonably competitive market (subject to patents and the like) except for one little detail: consumers are not paying at the margin for what they get.

When you have a functioning market except that consumers aren't paying at the margin for what they get, it can be worse than not having a market to begin with. But certainly, in these circumstances, the argument that exercising monopsony power inefficiently suppresses demand has no credibility.

Wednesday, November 08, 2006

Significance of the election, part 2: the role and meaning of bipartisanship

One of the recurrent themes in this election cycle was "bipartisanship," which I have put in scare quotes for a reason.

Out-of-touch buffoons such as David Broder have this as their mantra, ditto Joe Lieberman, and they interpret it to mean such silly things as (a) if the Republicans commit crimes and election fraud (Abramoff, robocalls, etc.) we must say that both parties do it equally, and (b) if Bush wants to trash the Constitution while actually undermining public safety, and if he wants to say that anyone who opposes him is a traitor, we must be willing to go along with him so that we are not "partisan."

Defining bipartisanship relative to where the players actually stand gives them an incentive to go as far to the extreme as possible, since placating them becomes the norm without regard to whether they are being reasonable. One needs an independent definition of how reasonable each side is being, in order to create incentives to be reasonable.

Actual bipartisanship is needed in this country, however. On foreign affairs, since it's not my specialty I'll just say that we need a rational debate about the various choices we have that is not hamstrung by ugly aspersions. Domestically, we need a deal in which the Republicans agree to raise taxes and the Democrats agree to cut entitlements growth. Neither party can prescribe bad medicine by itself, even the one that it is more willing to prescribe.

This type of public-spirited dealmaking has happened before. Indeed, in the 1980s it happened repeatedly. The 1983 Reagan-O-Neill Social Security compromise is the classic example, but consider as well the 1982 and 1984 deficit reduction packages, Gramm-Rudman Hollings, and the 1990 budget deal. Not to mention the 1988 enactment of catastrophic coverage in Medicare, which, while a political disaster that led to its repeal the following year, involved responsible bipartisanship (the new benefit was fully financed not only in budgetary terms but generationally - seniors didn't get a freebie as in 2003).

You need responsible adults on both sides for this to happen, however. We don't know for sure if the Democrats are willing to be responsible adults, but we know beyond any possible doubt that the current Republican leadership is not willing to do anything even remotely fiscally responsible.

The most important thing about Democratic victories is the following. One can hope and pray that defeat leads the Republicans to reconsider their course, throw out the current cabal of incompetent, criminal lunatics, and go back to where they were with the likes of Reagan, Bush Sr., Dole, Baker, Darman, Stockman, etc.

This is a lot to hope for, and I don't know if the party's internal dynamics permit it. But one trigger of their march to madness (although there were surely deeper sociological causes) was the "lesson" of 1992, whether true or false, that Bush Sr. lost because he raised taxes, and then the "lesson," again whether true or false, that the other course led to their 1994 victories.

I don't know how many defeats it will take for the Republicans to get there. One bad set of midterm election results might not be enough. But a lot rides on whether the Republicans can once again become capable of responsible bipartisanship, so that at least there is a chance of rational policymaking. Just having the Democrats run everything is not the answer, due both to the flaws in their policies, such as their resistance to making the entitlements sustainable, and to the political difficulties they would face even if they tried to be responsible all by themselves.

In the interim, fake bipartisanship has nothing to offer either the Democrats tactically or the nation substantively.

Significance of the election, Part 1: the next 2 years

Obviously I'm glad about the election results, but more for negative than positive reasons. It should help to slow down the criminal, totalitarian cabal that had seized control of both the Republican Party and the country, each of which deserves better (in the former case, referring to honest conservatives). But a healthy political system that can deal with actual social and economic problems is still a long way off, and little progress is likely to be made in anything substantive over the next 2 years. So the good news amounts to, "If you're in a hole, the first thing to do is stop digging."

I have read speculation that the Democrats will restore the paygo rules in the Federal budget. This is a stated part of their public position; the speculative part is that enough Republicans will feel they have to go along. That would certainly be a constructive first step.

Bush's Social Security plan would appear to be dead for the next 2 years, which is fine with me although I hold no brief for the current system. His plan was at best a distraction from addressing Social Security's fiscal problems. It amounted to lending people money so they could buy stock and bond funds on margin. If you think this is a good way to address the fiscal problem here, you should also address your own future expenditure needs (such as saving for retirement) by buying lots of stocks and bonds on margin instead of actually saving anything. Not the course that I would recommend.

The expiring tax cuts need to be addressed at some point, if only so people will know what to expect. The Democrats will not want to extend them, and Bush is probably unamenable to anything else. So perhaps we can expect the chicken games on this to continue through the 2008 election, with everything still unresolved. Likeliest exception: I could imagine an estate tax compromise (much higher exemption amount, lower rate as part of a "permanent" new regime), but only if Bush will sign on to make it veto-proof. Meanwhile the AMT will be growing, and I don't see how they are going to be able to make a deal addressing this, especially with paygo rules in place.

On Medicare, just a wild guess: fix the donut hole in benefits even though it blows a further hole in the budget (with paygo suspended for this purpose), and make a small gesture towards paying for it by authorizing the government to use its monopsony power in negotiating with drug companies? (Which power the Administration might then make sure it did not use.) This of course would amount to digging the hole deeper.

Often I prefer gridlock to the alternatives. But here we have both the contrived crisis of the sunsetting tax cuts and the growing AMT, and the broader march towards insolvency. I will start a fresh post to address the question of how, as a political matter, we might get towards addressing those at some point past the 2008 window.

Tuesday, November 07, 2006

TV notice

Gore Vidal once said that there are only two things you can never do enough. One is to be on TV, amd the other is - well, never mind that.

It's possible that I will be on Bloomberg TV this afternoon at 2 o'clock, speaking fearlessly on the election and entitlements as my remarks are beamed out live to a nationwide audience of hundreds.

Then again, maybe not - I may have gotten back to the bookers a bit too late.

UPDATE: No dice today; maybe at some point in the future.

I had brought my tie in to work, just in case, but at least I didn't get to the point of unnecessarily putting it on.

Sunday, November 05, 2006

Blah versus evil

That, at least, is how I see Tuesday's elections.

Wednesday, November 01, 2006

Reporting without context

The media really has to do better than this brainless, context-less, "he said, she said" pseudo-"balanced" journalism that led them to treat the libelously false Swift boat allegations of the 2004 campaign, disseminated by the campaign of a deserter and draft dodger, as a straight-up news story.

This time around, the White House is gleefully, desperately jumping on Kerry for having said that, if you don't get an education, you could end up in Iraq. This supposedly insults the troops.

Let's start by noting that, beyond any possible dispute, the statement is objectively true. With less education you have less opportunities, and signing up for military service becomes much more relatively attractive. The military option, in turn, looked better in the days when it seemed that one would only risk combat if a genuine miliitary problem arose in the world, as opposed to an Iraq-style war of choice. So the Administration has taken one of the better options that people with low education previously had, and made it far less appealing.

Now we have Bush smirking about how Kerry has insulted the troops and needs to apologize, and the media report it straight up. Bush is the guy who sent the military to Iraq without a plan to establish security, and has had them there as sitting ducks, for several years now, without even giving them adequate body armor. Kind of him to be so protective of their dignity when Kerry makes a true statement about how he has wrecked one of the better opportunities that young people with limited high-wage employment prospects previously had.

Is it too much to ask that the media place this charge in proper context?

If Bush said that Kerry's statement was a code signal to warriors from the planet Zircon, telling them that it was time to invade Earth, and Kerry then denied this, would they report this, too, as he-said-she-said without pointing out that the Bush position was preposterous? No? Then we have established that judgment is needed at some point about which charges are too preposterous to report straight up without context. We are quibbling only about degrees. But degrees are quite important, and the Bush accusation is only a scintilla, if that, distinct from the planet Zircon scenario.