Meanwhile, also in response to my post on the permanent income hypothesis, Matt Yglesias writes that it isn't true. I think that's right--or rather, that it isn't perfectly true, and that its trueness varies across time. Peoples' ability to project their future income varies, and so does how much focus they put on projecting that income, relative to current flows.
It wouldn't necessarily bolster the case for stimulus to assume that people will not correctly estimate the costs--people could overshoot as well as undershoot, meaning that they'd actually oversave to pay for future taxes. What matters is, first, are people paying more or less attention to future taxes than they used to, and second, are their estimates more or less optimistic than they used to be?
It's armchair sociology, of course, but I'd argue that people have suddenly become much more focused on estimating their future income and expenses, rather than living paycheck to paycheck--hence the suddenly renewed interest in savings. They've also, empirically, become a lot more pessimistic--at least, if we can count consumer confidence indices as empirical evidence. That will impact how much of the stimulus they save. This does not mean that there will be no multiplier--only that it will be lower than in an era less future focused.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
"It's armchair sociology, of course,"
No, it is arrant nonsense sociology. Megan's notion that people lined up outside check-cashing storefronts are now going to be pinching pennies and setting up IRAs is just plain STUPID.
Megan has been looking down her (very long) nose at people who don't save and plan ahead for all of her privileged life, but now she pronounces that they will suddenly take up thrift and defer consumption.
Why does she say these silly things? Because she doesn't want the government giving money to people beneath her class, and she will cobble up any sophistry to serve her argumentative agenda, which is REWARD THE RICH AND PUNISH THE POOR.
Sigh. Paying off a paycheck loan, or credit card dept, is, for these purposes, saving--it's deferring consumption to improve the net asset position of your household.
Sigh,
McArdle asserts that "people" have suddenly developed a renewed interest in savings. To which I reply that this likely does not apply to those who are behaviorally disinclined to save. To which MM asserts that paying off debts is "saving." To which I would reply that the people at the lowest rungs of the economy HAVE NO ABILITY TO BORROW. That is why they are lined up to CASH their paychecks. They have no bank accounts, no savings, and no credit cards. They are not going to start saving because Megan decrees it from her armchair.
The asymmetry in Megan's blog is her consistent tilt against the poor and the incompetent in favor of the slick and well-off. Accidents of birth and talent for predation count for much more in her view of "economics" than justice and efficiency. She will defend her predator tribe to the end, using any available sophistry.
I can only speak for myself, but my horizon for planning is a lot closer in now. I don't think about where I am going to be 5-10 years from now, but rather, making it through another month. I am not so much 'saving' as I am eliminating unecessary expenditures. Cash is about the only thing I have any faith in anymore.
It is difficult to be poor at any time. In a recession we just have more poor people. But that still leaves 92% of the population employed. And upper income people will dramatically change consumption patterns based on how they think the world will look in the future.
The poor don't pay income taxes, so why would you expect them to be worried about the impact of increases in future taxes to pay for increase debt today. But if you are in a higher tax bracket you think about it.
The poor don't manage business, but business owners are very worried about increasing regulations and future taxes.
For the majority of workers in this economy, they go into debt when they are young, save as they get older, dip into savings as they retire.
If making the rich poorer is the best way to grow an economy, then Mao is the greatest economist that ever lived. Perhaps we should just take wealthy individuals away from their occupations and place them in a rice field producing food for the poor. How does that make us all better off?
Social Democrats, led by President Obama, dislike capitalism because they ignore the growth and opportunity it creates and concentrate on what they think are unfair outcomes. As shown by the stimulus bill, Democrats have a secondary interests in growing the economy and a primary interest in creating what they think is a fair economy.
But many people, those who control wealth and run companies, are very concerned and forward looking.
I dunno, erehwon, maybe I'm oversimplifying it, but it seems like a fundamental truth of humanity that when times are good, we live in the now, and when times are tough, we look forward to when times will be good again.
Down here in the lower income bracket that you boldly advocate, we are having a rough time, so thanks for your crusading efforts to smash the elite.
However, amongst myself and my equally poor friends, interest in Total Money Makeover has never been higher. Megan is right.
It is important to understand that Megan believes that rich people are fundamentally morally superior to the rest of us, and thus fully ENTITLED to control the world because of their natural fitness. Democracy is just a charming game that makes people more willing to be controlled by the wealthy.
Thus, the asymmetrical information she provides here largely consists of apologies for the increasingly egregious and destructive behavior of unconstrained rich people and "arguments" against shifting the balance of wealth away from her preferred class.
Like David Brooks and other eaters of crumbs from the table of the rich, she earnestly hopes to put together enough book deals, speaking engagements, and Society for the Protection of the Rich punditry to enter the august ranks of the big moolah people some day. This is her mission on Earth: protect the rich in order to become one of them.
Megan's current "concern" about the effectiveness of fiscal stimulus is simply her way of resisting putting money directly into the hands of the poor. She wants the poor to be squeezed, right up to the point of armed revolt, the better to fatten the rich. That is why she voted for Bush (twice!).
Let me save you a great deal of time and effort. After reading the following sentence, you will no longer need to read Megan's Asymmetrical Information:
PROTECT THE RICH AND PUNISH THE POOR.
I have some sympathy for Megan. What do you say to someone as clueless as erehwon?
Of course the hooker on the corner or the drug addict robbing old ladies are morally superior - because they are poor. Companies in this country would be much better managed if we just put the high school dropout or welfare mother in charge - after all the poor have much better insight into the real world.
Your employer only employees you to exploit you. Farmers - unless they are very poor - only want to exploit your weakness for food. Your psychiatrist is obviously exploiting you by failing to help you deal with reality.
Unless a person expects to live forever, he or she won't focus on "permanent" income, but the person's focus will be "long-term", to some extent. In practical terms, though, what we have now in America is a super SHORT-TERM focus: how can I adjust my spending so my kids and I don't lose our home and get thrown out into the cold?
My point is that "short-term" and "long-term" income expectations and relative, and sensitive to personal context. An unemployed person, scared to death of losing their home, who suddenly gets a job and their first paycheck, may spend a small amount of extra money on a luxury, not because of "long-term" income or "permanent" income expectations, but simply because their situation has improved, relative to their recent past unemployment.
People often care about income that outlives them. People save to provide for family, buy life insurance etc.
Americans have tended to save in the form of housing. For most Americans that is where they place most of their "savings". How good an investment strategy that is subject to debate, but that is what we do/did. Temporary measures are unlikely to change permanent, forward looking, housing spending.
If you give poor people a temporary increase in income, they will spend most of it. If you give rich people a temporary increase in income, with the threat of future tax increases, they will invest more and spend less.
What if you spend a trillion dollars on temporary stimulus projects using debt? Then future taxes will increase. Krugman assumes that the debt burden spread over many years will not have much affect on future investment choices if we just consider it another temporary expenditure that just takes 30 years to pay. Sort of like buying a house and assuming you ignore the interest payments when you budget expenditures for the next 30 years.
If Americans can fully support the debt, then some Americans just owe other Americans money. Taxpayers pay bondholders. But if we need foreign money things change. The current loose monetary policy will lead to inflation. These means that we will need to hike interest rates to attract foreign investment. We have a very high risk ARM on our future.
If inflation does occur, and the Fed contracts causing a recession, but we have this financial obligation that must be serviced, don't we become GM?
The Krugman argument seems to be that we can boost the economy today in exchange for lower growth rates in the future. He thinks that is a fair trade. I worry that the added uncertainty of the future growth potential (look at the stock market) combined with the certainty of future tax increase and higher interest rates, will keep businesses and individuals from investing in worthwhile future projects.
So Krugman has us chasing our tails. We need stimulus (and what we have is a spending package) because the private sector is uncertain how to plan for the future because of the threat of the stimulus package. In contrast the impact of tax cut on profits is much easier for firms and individuals to incorporate in future planing, especially in the short run.
Which of these are absolutely true?
- The Permanent Income Hypothesis
- The Ricardian Equivalence Theorem
- The Efficient Markets Hypothesis
None are absolute. Also, different people (in differing social/economic classes) will behave in different ways. A really poor person - one who will pay little income tax and leave nothing to their heirs cares not a whit for Ricardian Equivalence (er - that government debt is not wealth) Give them money - from deficit spending - and they will spend all of it of course.
These types of hypothesis do not apply all the time and they certainly do not apply to every body.
These stylized "laws" are meant to characterize the behavior of people who read The Economist, perhaps, and even then only the weaker forms of these laws apply (EMH in particular)
If I get a windfall from the government, unless my circumstances are extraordinary, I know they will come looking for me in 2-3 years wanting to be paid back with interest. Although we are now in the midst of a populist hate-fest, I'd like to think that intelligent people - even Matt Yegasisas and Barney Frank - realize that the people the government needs to influence are upper middle class and wealthy people. People who already spend 105% of their income cannot get the economy moving.
I am glad Megan discusses such subjects: it is nice to see islands of rational thought left in the media; but when I read the comments on Mayy Y's blog it was really scary how poisoned the voices of ignorance and populism really are.
I remember thinking a lot about the Permanent Income Hypothesis when I lost 75 pounds.
Even though I did feel more pleasure when I drank and smoked, I quit both when I lost the weight. Also, I spent much less cash (Greg Mankiw linked to a study which argued that people spend less when they lose weight).
Ha!!!, I wouldn't call myself suicidal or anything when I was overweight. But I didn't think much about the future.
So yeah, of course, addicts (both food and drugs) tend to be counterexamples of PIH. But most people who are addicts tend to become not addicts.
"What do you say to someone as clueless as erehwon?"
You just shout "glory to the working class!" and walk off while he's busy saluting/touching himself. ;)
I think Matt's post misses the mark somewhat...he's confusing a lack of information for a lack of rationality. For instance, a lot of young people simply don't appreciate the long-term health effects of tanning/smoking/fast food because they don't even recognize them as real. That's part of what made that "30 Days on McDonald's food" so damn interesting: the guy went from perfectly healthy to severe health problems in a month.
But we DO know that people sock away tax returns, and if you get a government job that you are pretty sure isn't going to be there in 2 years (and you think this is the next Great Depression) you might be socking away that money, too. I sure as hell would be.
Re: But that still leaves 92% of the population employed.
More like 84% if we take U6 into acount.
Re: The poor don't pay income taxes
If you are poo rand have kids, you may not. But if you are single and not destitute you will pay income taxes. Standard deduction plus personal exemption for a single person is about $8500. Above that and you're paying income tax.
Re: rich vs poor. I suspect the rich have a longer time horizon than the poor (though still not infinite of course). The rich can afford to. If your main worry is paying next month's rent, or next week's groceries, you're not going to give a damn about taxes five years out. If you have a trust fund you want to also use for retirement in twenty years you will pay some atention.
Re: If inflation does occur, and the Fed contracts causing a recession, but we have this financial obligation that must be serviced, don't we become GM?
No, because no legal means exists to force a nation-state into bankurptcy and receivorship. In fact, the concept does not even exist. Historically other nations have blown off their foreign debts with impunity (England in the 1300s; Spain in the 17th century; the Jacobins in France in the 1790s; the Bolsheviks in the 1920s, etc.). And when a nation-state has he world's largest military and is armed with nuclear weapons it can get away with just about anything short of full bore genocide.
"different people (in differing social/economic classes) will behave in different ways. A really poor person - one who will pay little income tax and leave nothing to their heirs cares not a whit for Ricardian Equivalence (er - that government debt is not wealth) Give them money - from deficit spending - and they will spend all of it of course."
This is the point that Megan stubbornly neglects: that fiscal stimulus directed at the poor tends to be spent IMMEDIATELY, and thus has a high multiplier effect. Thus she resorts to baseless generalizing about how "people" are saving more and thus fiscal stimulus will be ineffective.
Make no mistake. Megan McArdle is a class warrior 7x24, dedicated to protecting the class to which she expects to belong - after a few more years of loyal service.
Life is going to seem hard for the collegiate types when we stop importing low cost labor. "seem" hard, that is. They are still going to be making twice as much as low cost labor people. But not four times as much.
They will whine like anything.
Megan:
Aren't you conflating the the permanent income hypothesis with Ricardian equivalence? People may engage in consumption smoothing, but that doesn't necessarily mean that they take future tax increases into account.
Also, it's not even necessarily true that borrowing now means tax increases later. In principle it could just constrain future spending. There's no reason--no financial reason, anyway--why we can't keep taxes at current rates and let economic growth carry us back into the black, as long as we don't blow it all on new spending.
It really bugs me when libertarians and Republicans treat future tax increases as a given. I expect this from lefties; they don't know any better. But it's your job to point out that there's a better way.
Also, it's pretty much a given that the burden of debt, insofar as it does lead to tax increases, will fall mostly, if not entirely, on the top 5-10% of income earners. Raising taxes on the middle class is political suicide, which is why even Obama's been proposing middle-class tax cuts. So most people don't have to take future tax increases into account.
The only way I see this changing is if the Democrats get their way and tax the rich back down to 1960s levels of richness, killing the proverbial golden goose and making it impossible to raise the kind of revenue they want solely by taxing the rich.
McArdle asserts that "people" have suddenly developed a renewed interest in savings
No, but the fact that we are in a deflationary evironment and consumer demand is DOWN, with personal savings rates UP, indicates that those of us with more disposable income on our hands are not conusming, but are saving.
Let's just assume, simply, that in a time of increased focus on financial instability and restricted credit, that the majority of credit-based consumers are tuned into the need to pay down debt and save cash.
Also - I realize that downward pressure on demand is what creates macroeconomic deflation, but if the pysche of the consumer has not changed in some substantive manner, then an increase in disposable income should result in a proportional increase in consumer demand...unless we are talking about demand for credit-based goods (houses, cars), which continues to plummet.
General Recommendation: Don't feed the troll.
It seems like this basic model (when people see deficit-financed increases in spending, they weigh in the expected additional taxes in their evaluation of it) is contradicted by politics. Consider two proposed ways to fund the same program:
a. Just deficit finance the whole thing.
b. Raise taxes by the same amount as we spend on the thing, so that it's revenue-neutral.
Now, it looks to me like these two ought to look the same politically, if voters account for the future higher taxes (or lower spending on other stuff) to cover the costs. But they're not equivalent politically--raising taxes or cutting other spending to cover the cost of new spending is much more politically painful--it's much more likely to lead to voters offering your job to someone else, in fact.
Is there some way to make this model consistent with what we see politically? For example, I guess you could imagine an explanation in terms of income redistribution across time (I get the medicare, kids now too young to vote have to pay extra taxes, but why do I care about them?), or in terms of voters having a higher discount rate than the T-bill rate (which is income-redistribution across time, but you're redistributing from yourself tomorrow to yourself today at a rate you think reasonable).
But I think there's a much more parsimonious explanation: Government budgets and accounting and political decisionmaking is complex and (often intentionally) opaque as hell. So human beings, of limited knowledge and limited time to spend trying to predict future government budgets, probably approximate the future costs too low. As with the subprime mortgages' risk evaluation, we've run deficits for a long, long time, and we've seen very few painful consequences of this so far, so it's easy enough to assume that will always be true. (Logically, it can't always remain true, and anyone can see that, but when will it stop being true? If that day's past my time horizon, its cost is zero to me.)
killing the proverbial golden goose
There has been very little correlation between reducing marginal tax rates for high earners in the US and historic economic performance. The political motivation for reducing these rates has been simple greed, cloaked in voodoo economics.
If the USA were a corporation, it would now have to restate its financial results, since much of the "earnings" produced in the financial sector have been shown to be fraudulent.
Pointing to the "prosperity" of the Bush era is like boasting about Enron's performance before it went bust. Let me say it plainly:
1. SUPPLY SIDE ECONOMICS HAS BEEN PUBLICLY DISCREDITED.
2. TRICKLE-DOWN PROSPERITY HAS BEEN PUBLICLY DISCREDITED.
3. RELIANCE ON SELF-REGULATION OF THE FINANCIAL SECTOR HAS BEEN PUBLICLY DISCREDITED.
McArdle, who no longer even attempts to defend these discredited notions, is now reduced to sniping at contrary theories, a task for which she is poorly equipped.
killing the proverbial golden goose
There has been very little correlation between reducing marginal tax rates for high earners in the US and historic economic performance. The political motivation for reducing these rates has been simple greed, cloaked in voodoo economics.
If the USA were a corporation, it would now have to restate its financial results, since much of the "earnings" produced in the financial sector have been shown to be fraudulent.
Pointing to the "prosperity" of the Bush era is like boasting about Enron's performance before it went bust. Let me say it plainly:
1. SUPPLY SIDE ECONOMICS HAS BEEN PUBLICLY DISCREDITED.
2. TRICKLE-DOWN PROSPERITY HAS BEEN PUBLICLY DISCREDITED.
3. RELIANCE ON SELF-REGULATION OF THE FINANCIAL SECTOR HAS BEEN PUBLICLY DISCREDITED.
McArdle, who no longer even attempts to defend these discredited notions, is now reduced to sniping at contrary theories, a task for which she is poorly equipped.
It is perfectly possible that people's long term view of the present values of their future incomes have not changed a bit. They rationally expected economic downturns sooner or later and one has come along now. What has changed now is that income streams are temporarily more uncertain. Therefore the risk of hitting an expensive cash constraint has risen; so they save more.
The only people who could have behaved like that in practice are fully rational economic men and women, and they are about as numerous in the real world as unicorns. But I would guess that the predominant motive for saving more just now is greater uncertainty; not long term pessimism. Real folk's views and feelings tend to be a bit more level-headed than the blogsphere.
The Ricardian Equivalence Theorem requires an ability to plan with some idea about what the future holds. If the future is uncertain, if you correctly doubt that huge spending programs will encourage long term growth, then you will save more today against the uncertain future. The multiplier can be negative as the degree of uncertainty about the future increases. Simply you don't know how much to budget to cover future tax increases.
If you borrow to finance the current spending bill, then people who have an ability to plan for the future - the people who drive the investment market - will be forward looking and adjust their actions.
The Permanent Income Hypothesis says that people adjust their spending to fit their expected life time earnings. If you have a great deal of confidence in your earning powers, or your assets, you may save less then a worker dependent on seasonal employment or less secure assets.
If the value of your assets drop, you will adjust spending down, for example, the ability of your home to finance your retirement has declined so you adjust your spending to reflect this real decline in assets. If you think the drop in the value of your home is transitory, you may make little changes to your spending.
If you give people a temporary tax cut, it does not change the long term spending plans of people who have a long term view and higher incomes. Depending on where they are in their life cycle and how they view future expenditures, they will adjust how much they spend vs safe. The poor will tend to spend more of a windfall.
However what happens if the poor have a high multiplier because of the permanent income hypothesis and the wealth have a negative multiplier because they think they will get stuck with the bill, with interest, in the future.
Megan is right to ask the question.
xyz, will you PLEASE STOP WRITING IN ALL CAPS. We are not deaf blind
Caps is cruise control for cool
Also, your capped statements are not technically correct. Supply-side economics and trickle-down economics haven't been disproved: what's been proven has that cutting income taxes from 38 to 35 percent and reducing capital gains in an era of appreciating asset prices will not lead to more investment.
If you want to practice "trickle-up economics," you need only look at the pro-labor politicians of Latin American nations, who produced massive inflation and bled foreign reserves dry within a few years. Or how raising taxes on the wealthy in a depression killed the private sector.
Supply-side ain't dead. It's in hibernation, pending revision. The next era of supply-side, hopefully, will focus more on targeted tax policies as opposed to a general tax cut.
As for self-regulation on the financial industry: well perhaps that concept is somewhat dead, but, like Greenspan said, the massive failings of the financial industry has led to a severe lending crackdown. The point isn't that the private sector gets it right every time, it's that the private sector will adjust to failings and hopefully will avoid MASSIVE failure (unfortunately, no one saw a disaster of this magnitude coming, not even pessimists).
Self-regulation is still the most reliable method we have. You can't regulate a sector very long if it doesn't want to want to be regulated anyways: it will simply shrug them off and find loopholes.
Ireland proved Supply-side can work, if done under the right circumstances.
China is giving it a big tryout too.
Very little economics will work under ALL circumstances.
"people at the lowest rungs of the economy HAVE NO ABILITY TO BORROW."
Huh? What planet do you live on?
The free marketeers here are sailing along blissfully, like Wile E. Coyote, convinced that as long as they don't look down, gravity will not take hold. The American banking system is insolvent. We now have the worst aspects of both a nationalized banking system and a private system: massive taxpayer subsidies and fat bonuses for pathologically irresponsible managers.
Plenty of people saw the crash coming. Roubini of NYU has called the cards with extraordinary accuracy for two years. But anyone with his head screwed on straight understood that hedge funds couldn't return 25% year after year and consumers couldn't run with a negative savings rate indefinitely.
The beauty of economic ideology is that, like religious faith, it is self-validating. Just as there are still hardcore Marxists who believe in the inevitable advent of the worker's paradise, there are nutjob libertarians who believe in shutting down the government.
As confused and wrongheaded as McArdle may be, the ragged band of die-hard free marketeers supporting her is even more pathetic. Like some horrible auto-immune disease, they will ceaselessly attack their own government until our society is destroyed. The magic of the marketplace will take care of everything, because their wishing will make it so.
@doctorpat
What circumstances are those? Lowering your tax rates while receiving billions in transfer payments from the European Union? The Irish miracle would hardly be as miraculous as it is were it not for the EU pumping money into the Irish economy so that the Irish could then lower their tax rates while still affording a fairly large amount of government spending. When I worked in Germany and England in the late 90s the Germans and Brits I worked with were quite bitter about this. On the one hand the Irish were telling everyone how poor they were and how they really needed those EU subsidies and on the other hand they were saying "Come to Ireland, it's the best place in Europe to do business", and constantly touting the performance of their economy, all the while continuing to hoover up those subsidies.
Wile E Quixote is very wrong about Ireland
Read
http://www.cato.org/pub_display.php?pub_id=3070
when people see deficit-financed increases in spending, they weigh in the expected additional taxes in their evaluation of it) is contradicted by politics. Consider two proposed ways to fund the same program:
a. Just deficit finance the whole thing.
b. Raise taxes by the same amount as we spend on the thing, so that it's revenue-neutral.
I posted this below too, but I dont see why government spending cant be profitable in and of itself. For example, if the government borrows $200,000 to say replace all the regular lightbulbs at a series of hospitals, and over the long term saves more $400,000 dollars. It has borrowed money, but has no need to raise taxes. I should think the same would be true of other stimulus type investments - healthcare, infrastructure, etc. In fact i think many projects could be revenues minuses in pure monetary terms, but provide benefits that outweight the direct economic cost (say the government spends 2 trillion on universal healthcare, but that then saves consumers 6 trillion on healthcare, even though the government has increased spending by 2 trillion, its freed up a large amount of resources to enter the economy and be used for other purposes, thus expanding the tax base). Someone with a finance degree or whatever tell me why i am wrong.
Hi Megan,
I think it is a good question, and I think I would argue from the adjacent armchair that you are correct. I have no solid data but that is my sense of the feeling, at least in my area.
But a better question might be "How forward looking should policy makers assume we will be?". I think the answer to that question is not to worry about short term effects, but rather to make sure the government behaves in a consistent and predictable way. That behavior should attempt to optimize long term quality of life. The reasons for this should be obvious.
PS: I actually find your troll quite amusing. He embodies the Platonic ideal of what a troll is; the perfect specimen of which all others are a shadow representation.
If it was so profitable for hospitals to replace light bulbs they would do it themselves without government intervention. If a hospital could borrow $200,000 to save $400,000, the CEO should be fired for not financing the project.
How can the government pend 2 trillion on health care and save 6 trillion? By having the power of government ration care? By forcing hospitals to take lower reimbursements? The government is not a magic money machine where you put in one dollar and get out three dollars. The government is more like a machine that takes one dollar, then takes 40 cents for overhead, and distributes 60 cents.
If it was that easy to save money on health care costs, health care providers would compete away that waste. Not all waste would be removed, but the notion that government could remove the waste is contrary to experience.
More common is that the government mandates some actions that no sane person would undertake on their own. Politicians are concerned with earning votes and raising taxes, not market effiency (just listen to Pelosi and Franks on this topic) So they will push a questionable program that will take up resources that could have been spent on programs with a better return on your investment. The program they support may have some merit on some level, but we live in a world with limited resources. Undertaking one project means not undertaking another project. In a free market people compete for those resources. In a government controlled market resources flow based on political muscle.
Look at housing. Government set up a system were if you save money in the form of real estate, a home, the gains for most people are tax free. Plus the government will subsidize the interest on your home loan.
So why should we be shocked that people came to view their home as a tax sheltered savings account that they could tap if needed. And why are we shocked that this contributed to people investing huge sums into their homes. If you view your home partially as shelter and partially as savings, you are more willing to stretch to buy a home beyond prudent levels.
It made sense for people to stretch to buy a home, if homes were giving you a 9% tax free rate of return and your tax subsidized loan was at 5%. And the government encouraged it.
But that meant that way too many resources started to pour into the housing sector. Resources that could have been spent on other sectors were diverted to housing because of tax policies. The government meant well but the incentives were wrong
If a hospital could borrow $200,000 to save $400,000, the CEO should be fired for not financing the project.
During a credit crunch, even quality borrowers with worthy projects have trouble obtaining funding. That is, after all, what makes it a "credit crunch."
How can the government spend 2 trillion on health care and save 6 trillion? By having the power of government ration care?
The US health care system is riddled with inefficiencies, thanks to the overhead created by the middlemen who stymie the process. The fact that US healthcare spending could be so high while returning mediocre overall results and denial of service to so much of the population, despite the high level of medical training, is a strong hint that the US system is not a particularly good one.
If it was that easy to save money on health care costs, health care providers would compete away that waste.
There are systems abroad that deliver good care to more people at a lower cost, so no, competition doesn't necessarily result in lower costs, despite whatever theory that may indicate that it should. There are times when the invisible hand wields a baseball bat and uses it to break heads.
The beauty of economic ideology is that, like religious faith, it is self-validating. Just as there are still hardcore Marxists who believe in the inevitable advent of the worker's paradise, there are nutjob libertarians who believe in shutting down the government.
Alas, that's the tragedy of the whole affair. There should be no such thing as "economic ideology" in the first place. Economics are supposed to deal with resource allocation. Economic theory should be ultimately measured by what works, not by what would appeal to the narcissistic bloated novelist who penned (and penned and penned) The Fountainhead.
We can all have our ideas of how our political lives should be, of course. But no matter what those ideas may be, no one can afford to pay for them if the underlying economic system doesn't work. Ideologues who ignore reality in order to preserve their fragile worldviews are dangerous, indeed. Even profound failure doesn't seem to deter them, apparently.
RW already hit many of the things i wanted to but i will add some comments.
How can the government spend 2 trillion on health care and save 6 trillion? By having the power of government ration care?
Private american firms already ration care, this is how they ensure profitablity, in fact they sacrifice health for profitability. Other countries pay half what americans do and get better health outcomes, the american system is inefficient and has troublingly negative effects on the economy.
If a hospital could borrow $200,000 to save $400,000, the CEO should be fired for not financing the project.
During a credit crunch, even quality borrowers with worthy projects have trouble obtaining funding. That is, after all, what makes it a "credit crunch."
Eqaully, public institutions are almost never well funded, I know of many projects that were better and more efficient in the long term, but are were rejected due to immediate budget constraint and demand for balanced budgets.
If you need a new building, and can only secure 8 million dollars, you get an 8 million dollar building, even if a ten million dollar building would be cheaper in the long term.
The government is not a magic money machine where you put in one dollar and get out three dollars. The government is more like a machine that takes one dollar, then takes 40 cents for overhead, and distributes 60 cents.
but that sounds like private health care, which takes one dollar, spends around 25% on administrative costs (ads etc) and then only a portion of the rest on health care, as opposed to say medicare which spends about 1% on administration and the majority of the rest on health costs.
private does not equal efficient.
To get back to my question - since the government is capable of investing money in ways that decrease costs or increase tax profits (without raising them), which should we assume that every dollar the government spends will result in higher taxes? To give another example, lets say the government gives a school graduate $12000 in pell grants, she gets a degree and over the course of her career pays back far more in taxes than she would have otherwise. IF she pays back more than the 12000 (plus interst etc) over the course of her career, than the government has made money without raising taxes.
Megan, I like this overall analysis your making on the PIH, although, there are a couple of things to consider. For instance, one thing that perhaps hasn't been considered is the demographic component of the life cycle hypothesis. It is typically those at the peak of their earnings who will turn to saving, and perhaps those slightly younger. However, for aging populations, saving declines as consumption increases. Now, look at the current make-up of the age demographics in the population (and more importantly perhaps where it's going). So, consumption is extremely important right now, based on the point that the majority of the population is in within the life cycle model. Either way, I think your analysis is good, but just like I told Brad DeLong that it's wrong to just make a blanket statement that "you're wrong," it's also a tough argument to apply on this side too.
What set of incentives do you trust more Young James?
A system where a person is motivated toward efficiency (although perhaps never fully achieving it) by profit. The more efficient the more you put in your pocket.
Or a system that says it values efficiency, but is then populated with people that have a budget given to them by the government and are told they must spend 100% of it and ask for more next year.
Both systems exist. One in the private market, and the other in education. I imagine health care at best, would mimic education if taken over by the gov. That doesn't mean it will be horrible. But it does means costs will continue to grow and more and more resources are seen as the only way to "fix" the problem. How do I know this? My wife is a teacher and I have friends who are administrators and they all freely admit the problems, but participate anyway because of the incentive structure (why should their class/school take one for the team). Teachers and schools get budgets every year, and they are encouraged to spend 100% of it every year and come back asking for just a little bit more year after year. What you don't spend one year, you lose the next. So you spend it all before the end of the year.
In addition to the variety of mandates placed on them health care would be no different. Budgets would ballon and there would be little to keep them in check.
At least in a private system you have shareholders/investors who only have so much money to put in. In gov. health care you not only have all the resources of the tax system, you have all the resources of the citizens at the point of a gun, as well as all the future resources of the citizens, even the world as the US continues to borrow more to pay for its projects.
I'd love great, easy access health care provided by the government that got everyone what they needed the vast majority of the time in an efficient way. I'm no different from you in that regard.
Where I AM different, is I don't believe its possible.
I'd love great, easy access health care provided by the government that got everyone what they needed the vast majority of the time in an efficient way. I'm no different from you in that regard.
Where I AM different, is I don't believe its possible.
Most of the industrialized world has already figured some means of accomplishing this. They often get better results, and they get them at a lower cost.
It's odd for Americans to act as if operating a functional health care system is as daunting as defying the laws of physics, when there are many variations on the theme being used elsewhere today. If I posted a comment along the lines of "Gee whiz, I would love it if we could just figure out how to get milk from cows, but I don't believe that we'll ever do that" or "Wouldn't it be terrific if people could build devices that would allow us to travel faster than we can on horseback, but that won't ever happen!", those remarks would be derided for obvious reasons.
The issue isn't whether it is possible, but why the US refuses to get its act together and do what many others have already figured out. The problem isn't with the concept, it's with us.
RW,
Do you suggest the other industrialized countries receive no benefit from the US, which might perhaps subsidize, to an extent their care?
How many biotech CFOs of European companies have you spoken with whose primary market is the United States (ie where they make all their money) but also supply products to European nations? I've spoken to 2 in the last 3 months.
It's not uncommon in the slightest for the rest of the world to benefit from technology we are paying through the nose for.
That's just one side of the coin, the other is a good friend of mine who lives in Europe has been turned away from hospital after hospital because they don't want to treat him and told him he needs to go to a specialist. Unfortunately the specialists appointments are all 5 weeks away.
Hmm.... No care when he needs it, and if he wants care he has to wait 5 weeks.
Is it always like this? No. But he's been to every major hospital in the area (4 of them).
That's just one side of the coin, the other is a good friend of mine who lives in Europe has been turned away from hospital after hospital because they don't want to treat him and told him he needs to go to a specialist. Unfortunately the specialists appointments are all 5 weeks away.
No one claimed that foreign systems were perfect. There is no perfect system, and selective anecdotes don't prove or disprove the aggregate.
The issue is that on the whole, those systems abroad provide good care to more people for less money, more often. It would behoove us to figure out why the US lags many other nations by many measures.
We would like to think that we are leaders in this area, yet we are laggards whose results don't match up. Until we are willing to admit that many others do it better, albeit imperfectly, we will be unable to improve what we have here.
This is off topics but
1) Capital markets are not that inefficient, even in a credit crunch that has lasted a few months, money is being lent.
2) Other health care systems are good at providing basic care to their populations, the United States is the best in the world for delivering high quality care. To debate that is silly. Even the most rabid national health care advocates are concerned with improving access not quality.
3) You have obviously never held to deal with medicaid. They ration care all the time, have silly rules, and are increasingly difficult to deal with as more states impose stricter rules to control costs. A physician can reject dealing with an insurance company that becomes difficult to deal with, what do you do when you are forced to deal with the government only?
4) If you increase Pell grants what happens? Colleges just raise their tuitions. Why do we have such rising higher education costs? Because we keep finding more ways to get them money. Plus you encourage some people to go to college who should not be there. They would have better earnings and brighter prospects if they acquired a skilled trade. Read Gary Becker on this.
5) Why don't you support the same type of education and health care system? Universal access, payed by the state?
but this has gotten too far off topic
Capital markets are not that inefficient, even in a credit crunch that has lasted a few months, money is being lent.
Obviously, the market is inefficient enough that credit gets denied to worthy borrowers during a credit crunch.
The issue of the moment is capital hoarding. Banks are accumulating capital in order to deal with (and mask) balance sheet issues with historical causes. A quality potential borrower seeking credit today could be denied not because of his own credit, but because the bank has reduced its lending activity in general. It isn't just about borrower quality at this point in time.
the United States is the best in the world for delivering high quality care.
To a select group of outliers, yes. To the average citizen, not even close.
You have obviously never held to deal with medicaid.
I have dealt with family members who used the Medicare system. It worked well and kept the family from filing bankruptcy. I am forever grateful for having received that benefit.
Other health care systems are good at providing basic care to their populations, the United States is the best in the world for delivering high quality care. To debate that is silly. Even the most rabid national health care advocates are concerned with improving access not quality.
no, were good at providing expensive interventions, not necessarily better care. every other OECD nation provides healthcare cheaper than we do, and their outcomes are far better than ours. Americans roughly spend double per capita what other nations spend, Healthcare spending accounts for roughly 1/5 of US GDP, this is money that isnt being invested in other areas, and its money thats not even being spent efficiently.
The reason i support universal health coverage is because its efficient, including everyone in health care creates enconomies of scale (like the government buying drugs wholesale), it allows for effective implementation of preventative medicine (far cheaper than interventions, and reduces strain on emergency facilities) andincreases productivity (Unhealthy laborers=unproductive laborers - think especially, diabetes. If you catch diabetes early, its relatively cheap and easy to treat, if you wait its expesnive. If you deny diabetics care (just try and get into an american health care plan with diabetes) then your going to be seeing huge drops in productivity (advanced diabetes takes body parts) and as well increased burdens on society.
Of all the systems I've been involved in (4-5 in the US over the course of my life, and now 2 overseas) my american health insurance was the generally the most expensive and in general the least user-friendly (access to limited range of doctors, large numbers of procedures not covered, and most importantly extremely high co-pays)
A physician can reject dealing with an insurance company that becomes difficult to deal with, what do you do when you are forced to deal with the government only?
what do you do when your forced to deal with only your insurance company (most people cant change theirs short of switching jobs, and most people cant afford private insurance on their own)? Remember your insurance company does not make money by keeping people healthy, it makes my money by insuring the most healthy (the people who least need care) and rationing care (denying treatment).
If you increase Pell grants what happens? Colleges just raise their tuitions. Why do we have such rising higher education costs? Because we keep finding more ways to get them money.
Right, but the cost of education doesnt rise very much on a per student basis, tuitions at public institutions can be capped, and competition can be enforced through higher entry requirements. The goal is to increase access to higher education, not give everyone the same education.
Plus you encourage some people to go to college who should not be there. They would have better earnings and brighter prospects if they acquired a skilled trade. Read Gary Becker on this.
send more kids to technical and agricultural colleges. The problem isn't necessarily more education, its a focus thats solely on liberal arts education. (which it think is in part a failure to properly teach science, math and technical skills). This is a cultural issue more than just an educational issue.
The reason we are off track is because no one has answered my question. If the government can invest tax money in ways that do not result in higher taxes, why should we treat government investment as crowding out private investment? isnt government investment just another form of private investment?