Will Stimulus Become a $3 Trillion Nightmare?

A huge threat from the $800 billion stimulus plan in front of Congress this week is that much of the spending may morph into a permanent expansion of government. If the bill is signed into law, lobbyists will immediately start pressing for the long-term extension of all the new spending on health care, transportation, education and other items.

Let’s look at the Senate bill to illustrate the fiscal impact of such a nightmare scenario. The CBO finds that the Senate bill would increase outlays by $546 billion and cut taxes $292 billion over fiscal years 2009-2019.

Figure 1 shows CBO’s assumed pattern of spending under the bill. Since we are already part way through 2009, outlays peak in 2010 at $206 billion and taper off after that. Note that 41 percent of total spending occurs after 2010 because federal and state agencies have limits on how fast they can spend the huge pile of cash. (Thus 41 percent of spending in the bill is certainly not short-term “stimulus” even if you believe in Keynesian theory).

What if special interest groups successfully lobby to extend all the new benefits and subsidies? One possibility would be that the 2010 funding level of $206 billion is extended permanently, as shown in Figure 2. Rather than the stimulus bill costing $546 billion through 2019, it would trigger spending totaling $2.2 trillion over the period.

In sum, here are the budget effects through 2019 of the stimulus nightmare scenario:

- Temporary tax cuts in the Senate bill: $292 billion

- Spending continued permanently at the 2010 level: $2.2 trillion

- Rough guess at the additional federal interest costs: $500 billion

- Total increase in federal debt under nightmare scenario: $3 trillion

Extending the (mainly useless) tax cuts in the stimulus package would make deficits even larger. And, of course, all this increase in debt would come on top of the debt piling up from financial industry bailouts and regular budget spending. It’s madness.

Enzi Lays Down Health Care Marker

Sen. Mike Enzi (R-WY), the ranking Republican on the Senate’s Health, Education, Labor, and Pensions Committee, has a good op-ed in today’s edition of The Hill.

Enzi rather interestingly does not see Medicare Part D as an example of Congress “simply throwing more money at Medicare.”

That aside, Enzi stakes out a position against creating a new Medicare-like program to compete with private insurance, and against price controls in health care.  Those are two of the three positions I advised free-market advocates to take in this op-ed.

The third is a firm opposition to mandates that require individuals to purchase health insurance, whether directly or through an employer.  I’m sure Enzi’s saving that for his next op-ed.

Latin Americans Are Fed Up With the War on Drugs

Today, the Latin American Commission on Drugs and Democracy released a report providing more evidence that Latin Americans are fed up with the war on drugs and that momentum is building for a paradigm shift in dealing with drug abuse.

Headed by ex-presidents of three leading Latin American countries—César Gaviria of Colombia, Ernesto Zedillo of Mexico, and Fernando Henrique Cardoso of Brazil—the commission calls for Latin American and other leaders to “break the taboo” of criticizing anti-drug policies.

It is imperative to rectify the ‘war on drugs’ strategy pursued in the region over the past 30 years…

Prohibitionist policies based on the eradication of production and on the disruption of drug flows as well as on the criminalization of consumption have not yielded the expected results. We are further than ever from the announced goal of eradicating drugs.

The commission further calls for drug use to be dealt with as a public health issue, notes that prohibition has increased violence and corruption, and has otherwise undermined democracy as it has led to “the criminalization of politics and the politicization of crime.”

Leading Latin American intellectuals, including Peruvian writer Mario Vargas Llosa, Mexican writer Enrique Krauze, and Venezuelan policy expert and editor of Foreign Policy Magazine Moisés Naím, were also members of the commission.

This is a significant report and comes after Honduran President Zelaya’s recent call for legalization. In the past, Latin American leaders have expressed frustration with Washington’s heavy handed war on drugs, but have nevertheless relented in the face of enormous U.S. pressure. A few public officials, such as former Mexican Minister of Foreign Affairs Jorge Castañeda, have been openly critical of prohibition, but they have been virtually alone and without official support for their views. The commission’s report is a sign that Latin American leaders feel more confident in acting together to counter a policy approach that is destroying the region. And, as my Cato colleague Ted Carpenter notes, now that Mexico is being consumed by an unwinnable war against drug trafficking that is spilling over into the United States, Washington can no longer easily ignore the damaging effects of its policy in the region.

Nostalgianomics: If the Shoe Fits…

In a recent post commenting on my new Cato paper, Matt Yglesias just doesn’t get why I would accuse Paul Krugman of peddling nostalgia for the good old days of his boyhood. Indeed, Matt says my whole argument is “kind of silly.” Here’s the gist of Matt’s critique:

In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role [in increasing inequality]. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom – that it would be impossible to reverse the growing inequality of our society.

I think Matt misunderstands both my argument and what Krugman has been doing. I quite agree that Krugman doesn’t want a full-scale reinstatement of the corporatist, cartelistic policies of yesteryear. I say as much in the paper. What Krugman does want, however, is to portray the economic policies of the early postwar decades as an inspiration for progressives today – an example of how activist, interventionist government can simultaneously promote growth and reduce inequality. To quote Krugman’s Conscience of a Liberal: “During the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.”

To get to that ideologically convenient punch line, Krugman is forced to systematically misrepresent the policies and culture of the early postwar decades. He has to leave out all the things he doesn’t like, all the things that virtually all his fellow economists and fellow progressives don’t like, about the supposedly good old days – for example, the widespread cartelization efforts of the thirties, farm supports, price and entry controls on large sectors of the economy, restrictions on retail competition, high trade barriers, racist immigration laws, and the sexist confinement of working women to a pink collar ghetto. All of these contributed to the compression of incomes, yet they don’t serve Krugman’s ideological purposes. So he ignores them. That’s nostalgia-mongering, plain and simple: the selective recall of the past to make it seem better than it really was.

The relevance of all this to today’s situation is both real and important. Progressives have returned to power, and because of the current economic crisis the policymaking environment is incredibly fluid. Big changes are possible, indeed almost inevitable. In particular, proposals to substitute government control for market competition on a massive scale are now on the table: large-scale industrial policy in the name of creating “green” jobs, a full-court press to restore the power of private-sector unions, a qualitative increase in government’s role in health care, and “temporary” (such a dangerous word in Washington) government control of large parts of the financial system. We run the risk right now of making disastrous mistakes that will haunt us for many years to come. And that risk is exacerbated by the nostalgic fantasy, peddled by Krugman and others, that the record of the early postwar decades shows that Big Government and Big Labor are actually good for the economy.

Executive Pay Restrictions

Government-imposed pay restrictions are generally a bad idea; we have literally centuries of evidence showing that price controls always undermine economic performance.

But in the case of executives who came begging to the feds after mismanaging their companies: Sorry, guys, you asked for it.

President Obama’s proposal gets me nervous since it may lead to further meddling by government, but there is a silver lining.  Bailouts are a major threat to the economy’s long-run dynamism, so I want to discourage companies from sticking their snouts in the public trough. Restricting pay for incompetent corporate executives is not a proper role of government (by definition, successful corporate executives do not try to loot taxpayers).  But propping up poorly-run companies is so misguided that second-best (or even 50th-best) options may be palatable.  Corporate chieftains who run their companies into the ground should not be allowed to simultaneously shift the burden of their mistakes to taxpayers and expect multi-million dollar pay packages.

Meet the New Boss…

On Tuesday the Obama administration changed tunes from his campaign rhetoric and did nothing to change the government’s position on the State Secrets Privilege.  A government lawyer told the Court of Appeals for the Ninth Circuit that the government was continuing to assert the controversial defense to a civil suit arising from the extraordinary rendition program.

Glenn Greenwald and David Luban have taken the Obama administration to task.  Read some more here and a word from my colleague Tim Lynch.