Archives: 04/2015

Government Spending: Accounting and Economics

A Wall Street Journal story today looks at government spending through the lens of the national income and product accounts (NIPA). The article says that as government spending rises, it is “no longer dragging on growth.” Unlike recent years when spending was supposedly cut, the government today “has ceased to be a drag on growth.” But that is an unwarranted conclusion from the NIPA data, which are produced by the Bureau of Economic Analysis (BEA).

The BEA includes government output within overall gross domestic product (GDP). The first thing to note is that measuring government output is guesswork because most of it is not sold in the marketplace. The BEA solution “is to value government output in terms of the input costs incurred in production.” So if the government hires a worker for $80,000 to administer food stamps or impose new regulations, government “output” would rise by $80,000. That seems rather optimistic.

More importantly, NIPA data does not tell us the overall effect of government spending on growth. Let’s say defense spending rises $10 billion from added weapons purchases. NIPA would show government output rising $10 billion. The Wall Street Journal would have you believe that overall GDP would rise as well, but that ignores the effect of the spending on private output. Higher defense spending ultimately requires higher taxes, which are resources sucked out of the private sector. Also, Pentagon contractors would hire engineers and other skilled workers to produce the new weapons, drawing those people away from private goods production. As government output rose, the output of private goods would fall.

In the long run, private GDP would probably shrink more than $10 billion, and thus overall GDP would also shrink. One reason is that extracting taxes to fund federal spending generates “deadweight losses” as people reduced their working, investing, and other productive efforts. Another reason is that added government output is likely to be worth less than the private output replaced. That’s because government spending decisions are based on guesswork, whereas private spending decisions are guided by the price system, which helps direct resources to the highest-value uses.

So in the Wall Street Journal chart reproduced here, the reporter implies that when the blue line (government output) rises, the red line (overall output) is pushed upwards. But that ignores the negative relationship between the blue line and the yellow line (private output). The reality is that as the blue line rises, the yellow line would be dragged down, and that in turn would tend to drag down the red line over time.

For more on measuring the government in GDP, see here.

Why Can’t We Have Great Trains? Because We Don’t Want Them

Why can’t America have great trains?” asks East Coast writer Simon Van Zuylen-Wood in the National Journal. The simple answer is, “Because we don’t want them.” The slightly longer answer is, “because the fastest trains are slower than flying; the most frequent trains are less convenient than driving; and trains are almost always more expensive than either flying or driving.”

Van Zuylen-Wood’s article contains familiar pro-passenger-train hype: praise for European and Asian trains; selective statistics about Amtrak ridership; and a search for villains in the federal government who are trying to kill the trains. The other side of the story is quite different.

What’s Really in the New Trade Promotion Authority Bill?

After months of internal wrangling, a trade promotion authority bill has finally been introduced in the Senate.  If passed, TPA could prompt conclusion of the Trans-Pacific Partnership negotiations and facilitate the deal’s eventual ratification by Congress.  The basic function of TPA is to affirm that future trade agreements will receive a timely up-or-down vote in Congress while setting negotiating objectives and procedures for congressional oversight.

Politically, the debate over TPA (and the TPP) has pitted the Obama administration and Republicans against congressional Democrats.  The reason the current bill took so long to devise is that proponents needed the support of Senate Finance Committee ranking member Ron Wyden (D–OR) in order to get at least a handful of other Democrats on board.

So, any differences between this bill and one that was introduced but scuttled by Harry Reid last year is due to Wyden’s influence.  His main concerns are not related to specific trade policy issues but to the role of congressional oversight and transparency in the negotiations.  Wyden has given the current bill his seal of approval, as have the White House and Republican leaders.

The first thing we should keep in mind when talking about TPA is that while its basic function is beneficial in facilitating the passage of trade agreements, the bill is 113 pages long because it’s full of caveats and reservations.

NYT on the Child Support-Jail Cycle

For 25 years the campaign against “deadbeat dads” has nestled at that political sweet spot where conservatives, women’s advocates and budget hawks could all join in one accord. But what happens when the dads don’t have the money? Following the shooting death of Walter Scott in South Carolina, whose reasons for fleeing police at a traffic stop may have included an outstanding warrant for $18,000 in child support, interest and penalties, the New York Times investigates:

“Every job he has had, he has gotten fired from because he went to jail because he was locked up for child support,” said Mr. [Rodney] Scott, whose brother was working as a forklift operator when he died. “He got to the point where he felt like it defeated the purpose.”

One problem is that many of the techniques used to pressure fathers to pay support – including seizing bank accounts, “suspending driver’s licenses and professional licenses,” and jail terms even when brief – is that they tend to make it harder for the targets to resume earning wages in the aboveground economy. Lockups are themselves common: “in 2009, a survey in South Carolina found that one in eight inmates had been jailed for failure to pay child support. In Georgia, 3,500 parents were jailed in 2010.”

Whatever the pluses and minuses of such methods when aimed at the sorts of dads who have lawyers on retainer and access to offshore accounts, much of the laws’ punitive edge falls on those whose ability to pay is often notional at best:  

A 2007 Urban Institute study of child support debt in nine large states found that 70 percent of the arrears were owed by people who reported less than $10,000 a year in income. They were expected to pay, on average, 83 percent of their income in child support — a percentage that declined precipitously in higher income brackets.

In welcome if belated coverage, the Times and other press outlets have lately been documenting some of the ways in which low-level law-enforcement can snowball into life-changing consequences for those caught up in the system; last week, the paper documented how drivers’ license suspensions push many people who owe court debts further under water. Inevitably, some reformers on the legal Left wish to address these problems by adding new layers of government endeavor, such as new squadrons of tax-paid civil defense lawyers to fight child support and court-fine cases on behalf of debtors. Libertarians tend to ask more radical questions about whether government already tries to do too much – whether, for example, it makes sense to cross-criminalize between debt offenses and licensing, and whether an 83 percent marginal “tax” rate is likely to work out any better for low earners than it does for high ones. Isn’t it time the political class began catching up with these debates? 

Dealing with the California Drought

California has had several years of record low rainfall, resulting in a severe water shortage. Gov. Jerry Brown (D) has responded by ordering a 25 percent reduction in urban water system use.

Are there any solutions to the state’s water shortage other than government mandates? Gary Libecap, professor of environmental management at the University of California, Santa Barbara, argues in a recent issue of Regulation that the restoration of clear water ownership rights and the cultural and political acceptance of water markets is an easier solution.

Conventional accounts of water problems in the West often blame farmers and their excessive use of water in places like the vegetable-farming Central Valley. But according to Libecap, “farmers are not the source of the problem. … Most would be pleased to sell or lease water that could earn more than is generated in agricultural production.”

But farmers haven’t traded away some of their water rights because of the “public trust doctrine,” as first described in a 1970 Michigan Law Review article by Joseph Sax. Libecap explains:

You Ought to Have a Look: “Sustainability” Not Sustainable

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.


This week, as Pope Francis announced the Vatican will host a climate change summit later this month focusing on “sustainable development,” the conventional wisdom of “sustainability” came under fire.

For example, New York Times’ report Eduardo Porter penned an article “A Call to Look Past Sustainable Development” with this provocative introduction:

The average citizen of Nepal consumes about 100 kilowatt-hours of electricity in a year. Cambodians make do with 160. Bangladeshis are better off, consuming, on average, 260.

Then there is the fridge in your kitchen. A typical 20-cubic-foot refrigerator—Energy Star-certified, to fit our environmentally conscious times—runs through 300 to 600 kilowatt-hours a year.

American diplomats are upset that dozens of countries—including Nepal, Cambodia and Bangladesh—have flocked to join China’s new infrastructure investment bank, a potential rival to the World Bank and other financial institutions backed by the United States.

The reason for the defiance is not hard to find: The West’s environmental priorities are blocking their access to energy.

Porter’s article announced the release of “An Ecomodernist Manifesto”—a work by a collection of “scholars, scientists, campaigners, and citizens” who “write with the conviction that knowledge and technology, applied with wisdom, might allow for a good, or even great, Anthropocene.”

Sounds interesting.

How the Fed Ended Up Fueling a Subprime Boom

Plenty of writers have claimed that the Federal Reserve fueled last decade’s subprime boom by holding interest rates too low for too long after the dot-com crash. But hardly anyone has tried to explain why the Fed did so.

Yours truly has taken a stab at it, together with my former student (and now eminent Market Monetarist) David Beckworth and my former University of Georgia colleague (and current Özyeğin University faculty member) Berrak Bahadir. Here is our just-published article in the Journal of Policy Modeling.

Our argument, in brief, is that the Fed blew it by not treating the exceptionally high post-2001 productivity growth rate as warranting an upward revision of the Fed’s interest-rate target (as neoclassical theory would suggest). Instead, Fed officials believed they could maintain a below-natural interest rate target without risking a corresponding increase in inflation.

We supply lots of evidence supporting our interpretation and, thereby, supporting the view that excessively easy Fed policy did indeed contribute substantially to the subprime boom. We also show how nominal gross domestic product targeting would have prevented this outcome, and that it would have done so to an even greater extent than strict adherence to a Taylor Rule.

Readers familiar with my arguments favoring a “productivity norm,” as presented in Less Than Zero and elsewhere, will understand the claims made in our paper as a specific application of those more general arguments.

The publishers have kindly allowed us to make the article available here without a pay wall for a brief period only, so consider saving it if you might want to have it for longer.

[Cross posted from Alt-M.org]

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