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Archive for November, 2011

Deficit Commission Fantasies

November 29, 2011 2 comments

The failure of the deficit commission “supercommittee” generated a considerable amount of press coverage citing this failure as more evidence of government dysfunction. In fact, even if the committee succeeded, their success would have been empty because its goal for reducing the deficit was an exercise in political fantasy.  Some data from the 2011 Economic Report of the President, found on the Council of Economic Advisors web site (www.whitehouse.gov/cea) illustrates this fact quite clearly.

Table B78 from this report lists federal government spending in billions of current dollars for the fiscal years 1944 through 2012. In the table, federal government outlays (the sum of federal spending on goods and services, interest payments, and net transfer payments to the public) were $1.789 trillion (yes, that’s right, trillion) but, interestingly, the federal government had total tax receipts of $2.025 trillion, running a budget surplus of $236.2 billion. In 2010, the last year in the report where actual data is reported, federal government outlays were $3.456 trillion, with tax receipts of $2.162 trillion, implying a budget deficit of $1.293 trillion.  Between 2000 and 2010, government outlays increased by just over 93 percent!

The deficit commission had a target of $1.2 trillion which seems like a large sum until you realize that this sum was to arise over a ten year period. So the deficit was to be reduced by $120 billion each year which amounts to about 3.5 percent of federal outlays. Clearly this is a trivial amount and it makes no serious effort to address the future spending by the government caused by projected increases in Social Security and Medicare programs. This future spending will be discussed in a future post on this site.

So “success” would clearly have done nothing to address the long-term problems of federal government spending. What was revealed by this committee is the complete denial of reality by the political class in this country.

PIGS and the Eurobond

November 25, 2011 Leave a comment

The latest idea for dealing with the fiscal problems of the economies known as PIGS (Portugal, Italy, Greece, and Spain) is that bonds, backed by the entire Eurozone, be issued to finance government spending in the economies that are struggling to reduce their government deficits. One would think that the Germans would be opposed to this idea since the issuance of Eurobonds may result in the Germans paying for at least some of the spending by the PIGS.  However there seems to be some weakening in the German position as described in this article.

More on the Housing Meltdown

November 18, 2011 1 comment

The official government version of the causes of the housing crisis is contained in a report by a special commission appointed to determine the causes of the housing bubble. The report suffers from political influences meant to shield politicians from being implicated as the architects of the housing meltdown.  Peter J. Wallison, affiliated with the American Enterprise Institute, served on the commission which produced the report, a report which Mr. Wallison refused to endorse. To read Mr. Wallison’s version of events, read this article.

Obamacare Fines

November 9, 2011 Leave a comment

In a previous essay on Obamacare, I argued that the guaranteed issue requirement of Obamacare would result in the demise of many insurance firms since it would be rational to wait to buy a policy until you are sick. This explains why the law has an individual mandate requiring that people buy insurance. The caveat to this was that fines were to be imposed upon individuals who do not buy insurance. I pointed out in this earlier essay that the effectiveness of the fines would depend upon the size of the fines relative to the cost of the insurance. Having finally seen the details on the fines, it seems clear that the fines will not be effective in forcing people to buy insurance.

Obamacare imposes a fine of either $695 or 2.5 percent of income if an individual does not buy health insurance. A moment’s reflection reveals that the fines are not going to change behavior. Suppose that the fine is the larger of the two amounts. A person earning $60K will incur a fine of $1,500. It has been reported that a health insurance policy for a family in Massachusetts costs $12,000, far above the amount of the fine. It is much cheaper to pay the fine. The same will obviously be true for many, but not all, individuals with higher incomes. For a single individual, policies have been reported to cost $8,000, still well above the amount of the fine. It will only be true that for very high earners, say those earning a million dollars or more, that the fine might be large enough to induce them to buy health insurance but it is quite likely that such an individual would buy the insurance anyway. Thus there seems to be little chance that the fines will change people’s purchasing patterns. And of course we are assuming that the fines are completely enforceable which may not be the case.

The implication of this exercise is that guaranteed issue is likely to lead to financial losses for insurance firms due to adverse selection. If so, the only health insurer in the U.S. may ultimately be the federal government, thus giving us Medicare for all. The costs of such insurance will be staggering and it is impossible to think that such a system can be sustained without huge tax increases for most U.S. residents.

The Origin of the U.S. Housing Collapse

November 8, 2011 1 comment

The most recent U.S. recession that began in December 2007 was a unique one in that it originated in the housing sector of the U.S. economy. The narrative emanating from U.S. politicians is that this recession was caused by financial market participants (Wall Street firms and banks) motivated by greed and/or incompetence. However, experience teaches that one should be skeptical of statements by politicians since they may have an incentive to distort the record to avoid accountability for the economic problems that they cause. Two books have been written providing an account of the origins of the housing market-led recession and both clearly implicate the U.S. government as being the originator of this recession. Thomas Sowell has written a book detailing the federal government’s role in this recession but the most damaging account of the government’s role is the book by Gretchen Morgenson and Joshua Rosner.  This book provides a very detailed account of the risk put into the banking system by politicians using Fannie Mae as a source of campaign contributions while claiming that their actions were motivated by the desire to raise home ownership rates in the U.S. This is a book well worth reading for an unbiased account of the actions of various politicians (and yes the book names names). The book details what Congressman Paul Ryan has described as “crony capitalism” involving politicians and firms in the private sector. Specifically, politicians could claim that people at the lower end of the income distribution were being helped by the government to achieve home ownership while Fannie executives funneled campaign contributions to the politicians and enriched themselves while purchasing loans made to these targeted individuals.

Finally, if you are wondering how it is that mortgage lending standards declined, endangering the U.S. banking system, look no further than an article that appeared some time ago in the Wall Street Journal.  As made clear in the article, lending standards declined at the behest of the U.S. government so that mortgages could be obtained by individuals at the lower end of the income distribution.

Price Controls and Cancer Drug Shortages

November 2, 2011 1 comment

The press has reported on the fact that many cancer patients are having difficulty in getting drugs that are needed for the treatment of cancer. The Los Angeles Times has a recent story about the problem but, to an economist, the interesting part of the story is that the LA Times points out that, in 2003, the federal government imposed price controls in the market for these drugs. As any student of introductory economics should know, price controls can lead to shortages.  This fact was illustrated in Part II of my series on economic aspects of Obamacare.  By not allowing the price of a product to clear the market, the result may be a divergence between the quantity that buyers want and the quantity that sellers wish to sell.  It seems quite likely that this intervention by the federal government has a role to play in this drug shortage.

To an economist, price controls are always a bad idea. In the case of this cancer drug shortage, this mistake by the government may well result in the loss of life that need not occur if the market is left to work without these price controls.

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