Do We Really Need Smaller Government?

Yesterday's New York Times had an op-ed piece entitled "Our Hidden Government Benefits." The article summarized a 2008 survey.

"A 2008 poll of 1,400 Americans by the Cornell Survey Research Institute found that when people were asked whether they had “ever used a government social program,” 57 percent said they had not. Respondents were then asked whether they had availed themselves of any of 21 different federal policies, including Social Security, unemployment insurance, the home-mortgage-interest deduction and student loans. It turned out that 94 percent of those who had denied using programs had benefited from at least one; the average respondent had used four."

I confess. I have used government services all my life. Still do.

Did you put your hurricane debris out in front of your house to be picked up? FEMA pays most of that bill, the state of North Carolina a big chunk and town government the rest. How would we deal with that without government? Not very well. Today I received a check from FEMA and one from my insurance company (to be repaid from the National Flood Insurance Program). There will be more payments. I also received my monthly social security check.

This afternoon I have a doctor's appointment to review my annual blood test results. Who pays? The U.S. Government. Earlier this week the town's mosquito control operation fogged mosquito breeding areas. Who pays? Town government, supplemented by state government.

The list goes on. We all use government programs.

We live in a democracy. The government isn't "they," it is us.

Rising Tide?

President Lyndon Baines Johnson was fond of saying that "a rising tide lifts all boats."

Perhaps that was so in the 1960's. Much has changed since then.

A graph prepared by the Center on Budget and Policy Priorities shows that from 1947 until 1975, income gains increased at about the same rate for all income groups. Rates of increase for the bottom fifth of families, median income families and wealthy families were almost indistinguishable.

Since 1975, though, there has been no income gain for the bottom one-fifth of families (2010 income same as 1973); about a 15% increase in incomes of median income families over the same 35 year period, and more than fifty percent increase in income for wealthy families.


If people who work for a living believe they have not got ahead at all in the past three and a half decades, they seem to be right.

The 95th percentile, of course, refers to families with income greater than 95% of the population. What about those in the top 1%? How about the top 0.1%? Here's another graph showing who has really made out. Based on slightly different data, but it tells the same story.

So if there is class warfare, who's winning? Billionaire Warren Buffet got it right: "my class is winning."

Why The "Dismal Science" Is So Dismal

I have to share the following post from yesterday's blog by economist Jared Bernstein:

There's No Market For Good Economic Policy

Sep 19, 2011

A few weeks ago I referred to austerity economics—fiscal or monetary tightening when we need both to be expanding—as akin to the medicine of medieval times.  Bleeding patients was thought to cure them, but it generally made them weaker and less resistant to disease.

Paul Krugman uses the same analogy today and I was reminded of an aspect I hadn’t thought of before, having just finished a (great) historical novel covering the period in history when medicine was just beginning to wake up (World Without End by Ken Follett).

The way Follett tells it, by the end of the 14^th century, private hospitals began offering alternative treatments to those in the monasteries.  Monks were still practicing bleeding and other “austerity” measures, but early physicians were beginning to understand that such practices were…um…contractionary to your health.
So people began to migrate away from the monks and their ancient ways.

In other words, there was a market—you could choose, and once people were able to assess the different results, the choice was obvious.

And here is where the analogy breaks down.  Unemployed workers, families unable to make their budgets on shrinking paychecks and falling incomes, small businesses suffering from a lack of foot traffic—they can’t go across the street and try a different macroeconomic policy.
They have to accept the austerity whether it’s coming from the Fed (“we’ve got some other tools here but we’re just not ready to use ‘em”), the Congress (“the President’s jobs plan won’t work”), the European Central Bank (“price stability uber alles!”), or the medievalists of Europe (“only by contracting will you grow!”).

I guess one could argue there’s an election market for such choices, and in some sense, the “throw the bums out” dynamic fulfills that role.  But it’s a slow, cumbersome, and noisy process—there’s so much misinformation that it’s hard for people to sort out the facts, so you end up with politicians who claim to be different but have their leeches and bleeding bowls at the ready (see Republican field).

The only way out of this mess is to reach more people—voters—with the evidence-based facts of the case.  It won’t always work—the noise machine is powerful and well-funded.  But the truth will out.
I mean…I hope it will…it will…um…right??  Hello…anyone there??!!

Risks of Risk Avoidance

Life is full of risks. It may be that most risks can be avoided. Avoiding risks also avoids benefits.

Take, for example, the case of Wikileaks. The failure to share information among government agencies contributed to the attacks of September 11. But sharing information carries the risk that someone with access will abuse that access.

Or take the case of Solyndra, the risk of government guaranteed loans against the possibility of a technological breakthrough. No risk, no breakthrough. That outcome is certain.

The best comment on that issue, and the most appropriate cautionary advice, was posted today by economist Jared Bernstein:

Solyndra, Risk, and Risk Aversion

Sep 17, 2011

The bankruptcy of Solyndra, a solar panel manufacturer that got a government loan of over $500 million from a (GW Bush era) loan-guarantee program, is garnering a lot of headlines.   Opponents of the administration are salivating at the opportunity to use this as an example of all things bad about activist economic policy, “picking winners,” and so on.

De facto, this was a bad investment choice.  And if it was influenced by anything other than the objective risk analysis, as some critics are alleging, that should be brought to light.

But if this episode, amped up by the intense private market ideology of our time, leads us to become totally risk averse in terms of government’s investment agenda, to shut down our efforts to foster innovation in clean energy, for example, we will deeply undermine our economic future.

Solyndra’s potential edge was that the company figured out a way to make solar panels without polysilicon, a key ingredient in solar panel construction, and one whose price looked high and volatile through the mid-2000s, making the Solyndra investment an interesting and potentially useful hedge.

But as this NYT article points out, the price fell steeply and the decline appears to have largely occurred before the loan was finalized:

“…the price drop meant that before Solyndra had received a single DOE loan guarantee dollar, a major part of its cost proposition had been undermined, if not erased.”

I’ll get back to that part of the case in a moment.  My point here is to remind us why it’s important for gov’t to make these investments and why the wrong lesson from this case would be to turn tail and run from such public/private endeavors.

There are many reasons for the federal government to play a role in this part of the market, ways in which the market historically fails to adequately invest in potential technological advances.  They come under the rubric of negative externalities—barriers that block market forces from delivering what we need, including barriers to entry, expansion, coordination, and innovation that no single, private firm can solve on its own.

–Research Barriers: R&D can be prohibitively expensive and few firms can support the amount of research needed to advance new endeavors, like advanced battery or solar technology.

–Coordination Barriers: No single firm could coordinate national projects like the internet or smart grid

–Innovation-to-Production Barriers: Firms need help getting out of the “valley of death,” that period between discovery of an innovation and the development of the production processes that enable it to be affordably adopted by society.

–Credit Barriers: Markets will underinvest when returns are particularly uncertain—it’s a classic externality in that firms cannot typically recover the costs of R&D in new areas of research.  Eg, when the internet was just an idea, too few private lenders, including venture capitalists, would support basic research on the idea.

–Exports: Firms need the federal government to help open export markets and pushback against unfair trade practices.

So how do we square these perfectly reason rationales, ones adhered to in every advanced economy, with our perfectly reasonable desire not to waste valuable taxpayer dollars on bad choices?

The answer is that we must recognize and accept some credit risk.  There will be cases when research goes down fruitless paths and when a hedge like Solyndra turns out to be trumped by ensuing events.  Risk analysts deciding to guarantee the loan in this case may have legitimately believed the price decline in polysilicon would soon reverse and that it made sense to foster an alternative.  But they may also have missed an important structural shift in supply and demand.

Either way, the key word is “risk.”  We can totally avoid such risk, but in so doing, we will unquestionably hurt our long term economic prospects.  Think about the development of early machine tools that gave rise to manufacturing, railroads, transistors, lasers, satellites, and the internet.

In every case, some or all of the above externalities/barriers were present.  Had the gov’t practiced the level of risk aversion now being advocated in the wake of the Solyndra bankruptcy, the private market would not have developed them, at least not here in America.

Think about that the next time you use a cellphone, GPS, or post or read a blog.  We should always strive for better, more accurate risk analysis.  But if we try to avoid any risk at all…well, then we can enjoy ourselves kicking back and watching the rest of the world pass us by.

Employment to Population Ratio

Here's a graph from the St. Louis FED showing changes in the ratio of working age employed to the population. The ratio began falling in 2007, plunged in 2008 and only stabilized about eight months after President Obama was inaugurated. The graph doesn't address wages or quality of employment.

Death Panels?

My sister would have become eligible for Medicare three and a half months from now. She didn't make it.

I don't blame anyone in particular for her early death. She had health insurance. She received excellent care. But she might have lived a longer and still productive life except for two failures of our health care system. Both were caused by our reliance on market mechanisms to provide solutions to health problems.

There are seemingly endless choices of pharmaceutical products for chemotherapy. Sharon's oncologist, based on extensive diagnostic tests, chose one particular treatment. It worked well. Her cancer seemed under control.

As time passed, the manufacturer and medical practitioners learned that, though the drug was effective for my sister, it wasn't effective for many others. The manufacturer withdrew it from the market.

My sister's condition worsened.

The oncologist searched the pharmacopeia and found another treatment that he thought might be effective, though not as effective as his (no longer available) first choice.

As he expected, the second choice was not quite as effective, but seemed to be working.

Then a few weeks ago when another round of chemotherapy was scheduled, the hospital informed my sister that they were unable to find any of the necessary medication. A few days later, on August 19th, I read in the New York Times that government officials, the drug industry and doctor's groups were "rushing to find remedies for critical shortages of drugs to treat a number of life-threatening illnesses, including bacterial infection and several forms of cancer."

By mid August of this year, 189 drugs crucial to treatment of childhood leukemia, breast cancer, colon cancer and certain infections were in short supply. The drug for treating my sister's cancer was among them.

Weakened from lack of treatment and related complications, my sister passed away September 2d.

There were many factors affecting her death, some out of our control. But the final straw was the failure of the drug market reliably to supply life saving medications. Does the drug industry have death panels?

In any case, when the drug companies withdrew one medically necessary, safe and effective drug from the market and drastically reduced the availability of another, not for medical reasons but for marketing reasons, they had no regard for my sister's life.

"Do not ask for whom the bell tolls -
It tolls for thee."

-John Donne

Hurricane? What Hurricane?

In case you missed the news, today North Carolina Senator Burr joined 37 other Republicans and voted against funding disaster relief for Hurricane Irene.

Just reflect on what our communities would look like now and in the coming weeks without FEMA and SBA efforts in disaster assistance. What would businesses do in Eastern North Carolina? Has anyone in Pamlico County seen Senator Burr lately? If you do, you might want to ask him what he was thinking about the needs of his constituents.

Jobs? Income?

The poverty and income statistics released today look pretty bad. The headline is that real median income (in 2010 dollars) since 2007 has been pretty much in free fall. Median income peaked at the end of the Clinton administration and went into decline during most of the George W. Bush administration, bottoming out in 2005 and beginning a moderate improvement until 2007. Then free fall. The rate of decline slowed a bit in 2008 and 2009, leading some political figures to prematurely declare recovery at hand. Any economist who joined that chorus should lose his or her economist license (if there is such a thing).

Just a reminder: President Obama was elected in November 2008, but was not sworn in until Tuesday, January 20, 2009.