Author Archives: Keith Bradford Hennessey

About Keith Bradford Hennessey

I escaped the Beltway and now work as a lecturer at Stanford Business and Law Schools.

Keith Hall, the new CBO Director

I’d like to associate myself with Dr. Charles Blahous’ endorsement of Dr. Keith Hall to be the new director of the Congressional Budget Office. Budget Committee Chairmen Tom Price and Mike Enzi made a strong pick by choosing Hall. I know him from his time at the Council of Economic Advisers and watched him from afar when he ran the Bureau of Labor Statistics.

In particular I agree with this Blahous quote:

The chairmen needed to find someone with impeccable academic credentials, and they did (Hall not only has his economics PhD from Purdue, but also served as chief economist for the White House’s Council of Economic Advisors (CEA)). They needed to find someone with the demonstrated ability to manage CBO, and they did (Hall previously ran the Bureau of Labor Statistics). They needed someone manifestly even-tempered and evidence-driven, and they got that in spades. Hall will quickly come to be recognized more widely as the soft-spoken and objective analyst his associates already know him to be. He has been particularly good as a witness delivering congressional testimony, where his “just the facts” style suits what Congress needs from CBO.

I am optimistic that Dr. Hall will continue the excellent work of outgoing director Dr. Doug Elmendorf and further reinforce CBO’s role as a highly credible, nonpartisan, and unbiased referee in the budget process.

 

Sources for last moderate fiscal Democrat post

  • Blue line (President Obama’s Budget): Table S-1 of the President’s budget.
  • Gray line (historic debt): Historical Budget Data from January 2015 Baseline from CBO, Tab 1. The parenthetical about pre-crisis average debt/GDP between 35 and 40% similarly comes from this table.
  • Yellow line (CBO long-term baseline): July 2014 Release from The 2014 Long-Term Budget Outlook from CBO, Tab 6. This is their “extended alternative fiscal scenario,” roughly CBO’s view of a current policy baseline rather than a current law baseline.
  • Green line (Bowles-Simpson proposal): Report of the National Commission on Fiscal Responsibility and Reform Figure 4 and Figure 16. I interpolated the intervening years in table 4 to fill in the long-term line to fit the 5-year intervals they specified.
  • Red line (House Republican 2014 proposal): House Budget Committee’s Summary Tables S-1 and S-6. I interpolated the intervening years in table 4 to fill in the long-term line to fit the 5-year intervals they specified.
I feel bad about combining projections from different years and against different baselines onto a single graph, but I’m convinced that (1) there’s no better alternative; (2) I’ve used the best available data for a fair comparison; and (3) these technical problems do not undermine the analysis or conclusions of the post. I’m helped by comparing absolute levels in each case rather than deltas relative to baselines.

Will the last moderate fiscal Democrat please turn out the lights?

In his new budget President Obama once again proposes to flatten debt/GDP, to stabilize it over the next decade at a high level.

obama-debt-fy16But wait, you say. That’s not stabilizing. That’s not “flat” debt/GDP, that’s a declining path. And it doesn’t look like a high level. If we zoom out we gain additional perspective. Let’s add 10 years of historical data and CBO’s projected long-term baseline forecast.

obama-fy16-debt zoom out

Now you see why I said “at a high level.” Under both a current policy baseline and the President’s budget, debt/GDP is in the mid-70s for the next five years, more than twice as large a share of the economy as it was pre-financial crisis. (The same is true if we go back even farther in time. The pre-crisis average debt/GDP varies between 34 and 40% of GDP for any start year from 1965 through 2007.) While the long-term baseline starts to climb about five years from now, the President proposes to keep it roughly flat through the next decade.

Let’s see what a “real” declining debt/GDP path looks like. I am going to add what Messrs. Bowles & Simpson proposed in 2010.

obama-fy16-debt zoom out compare bs

Now you can see why I use “stabilize” and “flat” to refer to the President’s proposed debt/GDP path. Technically both President Obama and Bowles-Simpson propose declining debt/GDP paths, and it’s just a difference of degree. But the difference is so quantitatively significant that they are fundamentally different proposals, representing different underlying premises about what is the preferred path of future government borrowing. Arithmetically, the President’s proposal would reduce debt/GDP by two-tenths of a percentage point per year. That’s basically a rounding error.

Bowles & Simpson said that debt/GDP in the 70s is too high, and that significant policy changes should be implemented to bring debt back down to its historic share of the economy. They proposed specific policies to back up this proposed debt path.

President Obama in contrast is implicitly saying “Now that the recession is over and high cyclical deficits are no longer increasing debt relative to the economy, my work is done. We do not need to bring debt down relative to the economy. I have higher [spending] priorities.”

That yellow line should terrify you. What’s even scarier is that I think the President’s blue line would start growing in parallel with the yellow line after ten years. He has not specified what he would do to keep the blue line flat beyond 10 years, so I can’t prove it. But as best I can tell, in addition to choosing not to reduce debt from its current high level, President Obama has no answer for how to continue to hold debt/GDP stable in the long run when entitlement spending pressures keep pushing it up.

The key question provoked by the blue and green lines is therefore “Is stabilizing debt/GDP in the 70s OK? Or should policymakers cut spending and/or increase taxes to put debt on an aggressively declining path relative to the economy?

For five years President Obama and his team have argued that aggressive deficit reduction would jeopardize the recovery. This was always a red herring argument, because nothing precluded policymakers from immediately enacting into law deficit reduction that would not have taken effect until after the recovery was well underway. Team Obama misdirected the public debate by conflating the date of enactment with the dates of first implementation and effect.

But never mind that now. The recovery appears well underway and the “stimulus vs. austerity” false choice is receding into the past. Although the President’s proposed debt/GDP is similar to that which he has proposed in his last four budgets, it takes on a different meaning today. With the weak economy excuse behind him, this year President Obama is choosing not to take advantage of a recovering economy to begin repairing the federal government’s fiscal balance sheet. He seems to think debt/GDP is OK where it is now, or at a minimum that he’d rather use his proposed higher taxes to offset new spending increases rather than to pay down debt.

Some on the left argue that there is nothing magic about debt/GDP in the mid 70s, that the U.S. government can borrow much more without risking investors losing confidence and triggering a new kind of financial crisis. That’s a judgment call that can be neither proven nor disproven, but let’s set that debate aside for the moment. There are other costs to high government debt.

  • High debt means high interest payments, especially once interest rates return to historic norms. Higher government interest payments either crowd out other government spending or create pressure for even higher taxes or more government borrowing. These are the real, quantifiable, and immediate costs of not reducing debt.
  • For fans of fiscal stimulus there is less room to do another round if (when?) another recession hits, since policymakers would be starting from a higher/weaker starting point.
  • Left unchecked, entitlement spending pressures will soon cause debt and deficits to begin climbing again. A higher debt starting point means bigger future deficits, which will divert capital away from productive new investments and toward financing past government consumption. Capital formation and productivity growth will slow, resulting in slower real wage growth over time.

OK, who else wants to reduce debt/GDP dramatically from where it is now? House Republicans. Here is what they proposed in the budget resolution they passed last year.

obama-fy16-debt zoom out compare bs house

Let’s not get too carried away in precise comparisons of the red and green lines. They were done four years apart from different baselines, so it’s not fair to say that House Rs would reduce debt/GDP faster than Bowles-Simpson, or to precisely compare the percentages shown on the graph. Instead, you should conclude that House Republicans (last year) and Bowles-Simpson (in 2010) expressed the same rough policy preference about present-vs-future: both groups said that stabilizing debt/GDP in the 70s was insufficient, and both groups proposed significant fiscal policy changes to dramatically change the path of future debt, to bring it down over time to its historic share of the economy.

This does not mean that House Republicans and Bowles-Simpson proposed similar means to reach that common goal. Quite the opposite. House Republicans allowed taxes to climb to 19% of GDP but held them there, relying on spending cuts to achieve the rest of their proposed debt reduction. In contrast Bowles & Simpson proposed higher taxes even than did President Obama, combined with less aggressive spending cuts than proposed by House Republicans. These are quite significant differences, and I do not want to belittle the policy gulf between the paths proposed by the centrists and by House Republicans.

I know that many left-of-center folks also (a) hate the House Republicans’ proposed spending cuts; and/or (b) think they are absurdly unrealistic. In my view both are critiques of the particular path chosen by House Rs, not their choice of a debt goal. Given the option I would hit the shared Bowles-Simpson-House Republican debt path with a package of fiscal policy changes different from either of their proposals.

But the centrists and the House Republicans at least share a common judgment about how much government borrowing is too much, and a common goal for how rapidly to reduce that future borrowing. Both propose to radically change the path of future borrowing relative to current policy. And President Obama’s debt goal is fundamentally different from the shared debt goal of the centrists and House Republicans. Agreement on a debt goal is a necessary (but not sufficient) precondition for reaching a significant fiscal policy agreement, and the debt goal gap between President Obama and the centrists is a fundamental problem.

In effect there are four possible paths:

1. the current policy path of stable debt/GDP for the next five years, followed by ever-increasing debt;

2. President Obama’s path to stabilize debt/GDP for the next ten years, [followed by ever-increasing debt?];

3A. the Bowles-Simpson path to rapidly and sharply reduce debt/GDP to historic levels through a mix of higher taxes and spending cuts; and

3B. the House Republican (2014) path to rapidly and sharply reduce debt/GDP to historic levels almost entirely through spending cuts.

I know that in the current partisan environment one’s temptation is to focus on the contrast between President Obama and House Republicans. I also know that the President’s defenders correctly point out that House Republicans rejected the Bowles-Simpson recommendations as did President Obama. But while the gulf between Republicans and the centrists on the path to the shared goal is large, the disagreement between President Obama and the centrists on the underlying goal is more basic.

Elected Democrats who plan to be making policy after President Obama leaves office need to decide whether they are for the blue or the green debt line. If they hate the entitlement spending cuts proposed by Bowles and Simpson, they need to decide whether they will propose other policies (tax increases, mostly) to reduce debt/GDP to match the centrist/House R debt path. Or are future Democratic leaders going to agree with President Obama that debt/GDP is OK where it is now, that it does not need to be reduced from the 70s?

This is therefore not a decision for President Obama. He haalready made his choice. It is instead a decision for any remaining moderate Democrats in Congress: Are you going to plot a third way, a path that agrees with Republicans on reducing debt but disagrees with them on how to do it? Or are you going to use your minority party status as an excuse to duck saying what you’re for and let Sen. Bernie Sanders, President Obama, and Sen. Elizabeth Warren represent your views as being the party of high and ever-increasing debt?

Here’s what I think happens if future Democratic policymakers allow President Obama’s goal of stabilizing debt in the short term rather than reducing it to become the unified position of the entire Democratic party.

  • They will tee up an advantageous policy and political contrast with centrists and especially with Republicans who will be proposing specific painful fiscal policy changes.
  • But they will be forced to defend the specific policy costs of higher debt described above: higher interest costs crowding out other government spending and eventually slower wage growth.
  • And they will sacrifice to Republicans the political turf of being “for less borrowing from future generations.” Republicans will claim the mantle of lower debt and greater fiscal responsibility toward younger generations. Democrats will argue they are protecting seniors while Republicans will show they care more about the Nation’s fiscal future and long-term wage growth.
  • Finally, by splitting with the centrist debt hawk point of view, future Democratic policymakers risk alienating the substantial communities of fiscally conservative, socially moderate Democratic voters and supporters outside the Beltway.

DC Democrats used to be split, with a sizable and influential fiscally moderate minority fighting a larger and stronger liberal base. Bill Clinton, Bob Kerrey, John Breaux, Sam Nunn, Joe Lieberman, the former Democratic Leadership Council, Robert Rubin, Max Baucus, Ben Nelson, John Spratt, Erskine Bowles, Leon Panetta, Alice Rivlin, Tim Geithner, and Bruce Reed all fit this profile.

None of these moderate fiscal Democrats are in power today and I see no successors. The Democratic party’s fiscal policy shift away from debt reduction results from a combination of (1) the retirement of these moderates, (2) the rise of the progressive base and its strong new leaders, and (3) President Obama’s rejection of the Democratic moderates’ traditional debt reduction goal.

Will the last remaining moderate fiscal Democrat in Washington please turn out the lights?

Data sources and further detail on the charts are here.

 

Response to OMB Director Donovan on dynamic scoring

OMB Director Shaun Donovan criticized House Republicans today for their rule change on dynamic scoring. I’ll skip the preliminaries and offer responses to his main critiques.

OMB Director Shaun Donovan: “[U]sing dynamic scoring for official cost estimates would risk injecting bias into a broadly accepted, non-partisan scoring process that has has existed for decades.”

KBH:

No, the new rule attempts to eliminate an oversimplifying assumption that we know is incorrect and biased in a limited number of cases where that bias is large enough to matter. We know that some policy changes can increase (or reduce) the size of the economy, and that to assume otherwise is wrong. The longstanding scoring process is biased against policies that would increase economic growth, and biased for policies that would shrink the economy. The size of the effect of large and broad-based reductions in tax rates is uncertain, but we’re pretty darn sure it’s not zero. Certain immigration reforms would increase domestic labor supply and increase economic growth. More accurate scoring would incorporate both types of effects.

Donovan: “[D]ynamic scoring requires CBO and JCT to make assumptions in areas with unusually great uncertainty.”

KBH:

  1. Yes, these assumptions are uncertain. So were CBO’s estimates of short-term fiscal multipliers from the 2009 stimulus law. CBO assumed (guessed) that the effect on short-term GDP of increasing government of purchasing goods and services by $1 could range from 50 cents of increased GDP on the low end, to $2.50 of increased GDP on the high end. (See Table 2 here and this paper.) That’s a big range that didn’t dissuade Team Obama from arguing that fiscal stimulus would increase GDP growth.
  2. Is it better to be precisely wrong or imprecisely right? I’m generally for the latter, which is what this rule change would encourage. We know that assuming zero GDP effect from large fiscal policy changes is incorrect. I think it’s an improvement to move to a new non-zero point estimate even if that means we have to accept wider error bounds.
  3. The way you get better at narrowing these uncertainties is to do more estimates and to learn by doing.

Donovan: “Dynamic scoring would require CBO and JCT to make assumptions about policies that go beyond the scope of the legislation itself.”

KBH:

  • Yes, just like they had to do on fiscal stimulus in early 2009. They had to make an assumption then about how the $800+ B of increased debt would be financed in the future. They also had to make an assumption about whether the Fed would turn the monetary policy dial differently after Congress had pulled hard on the macro fiscal policy lever. Nothing new here, they’ll have to do for a few more bills what they have been doing elsewhere for quite a while.

Donovan: “Dynamic scoring can create a bias favoring tax cuts over investments in infrastructure, education, and other priorities. … The House rule would not apply to discretionary spending, ignoring potential growth effects of investments in research, education, and infrastructure.”

KBH:

  • So you’re opposed to dynamic scoring for policies you don’t like, but OK with it for policies you do like? Hmmm…
  • This is almost a conceptually valid critique but it’s a little hard to see how one would practically expand the new rule to apply to discretionary spending. The House rule would only apply dynamic scoring to big fiscal policy changes, those with an aggregate static budget impact bigger than 0.25% of GDP (>$45 B per year in 2015). That high de minimis threshold is a smart practical limitation so that CBO doesn’t have to worry about the growth impacts of the cars-for-crushers program or a $50M increase in spending for pet project X. But since nobody is proposing adding >$45B/year to discretionary spending, this limitation in the new rule has no practical impact.
  • But the House rule doesn’t create a bias for tax cuts. It eliminates a pre-existing bias against very large policy changes that would expand the supply side of the economy, including but not limited to broad-based reductions in tax rates.

The Obama Administration’s position seems to be:

  • We like incorporating the short-term growth effects of increased government spending (fiscal stimulus);
  • In that case we’re OK with estimators making assumptions that go beyond the scope of the legislation (Fed reaction to fiscal stimulus);
  • We’re OK with lots of estimating uncertainty when it applies to policies we like (big ranges for short-term fiscal multipliers);
  • We’re happy to trumpet the growth benefits, as estimated by CBO, for policies we like such as the Senate immigration reform bill;
  • But we don’t want to incorporate long-term supply-side effects from policies we don’t like (broad-based tax relief),
  • And we will label any scoring change which incorporates (but is not limited to) those policies as “biased.”
  • Their goal is to preserve a longstanding scoring bias that keeps taxes probably higher than they otherwise would be if scoring were more accurate and policy neutral.

In contrast, my view is:

  • Scoring should be accurate, unbiased, and policy neutral.
  • The “fixed nominal GDP” estimating convention is both inaccurate and biased.
  • Estimates of very large fiscal policy changes should incorporate CBO and JCT’s best judgment (not Members’ of Congress best judgment) about both the short-term demand-side GDP effects and the long-term supply-side GDP effects.
  • Relaxing this fixed nominal GDP assumption should apply to all types of fiscal policy changes exceeding a certain size, whether I like them or not. The House’s >0.25% of GDP seems like a reasonable threshold.
  • CBO and JCT should explain their estimating ranges and uncertainty for these dynamic estimates, as they have for short-term fiscal multipliers in the past.
  • The House rule is a responsible improvement in scoring policies that makes scoring more accurate by reducing a long-standing bias.The increased uncertainty that results is worth reducing the underlying bias.

 

DouglasWElmendorf

Elmendorf for CBO

The new four year term of the Director of the Congressional Budget Office begins soon. Now that Republicans will have majorities in the House and Senate, this job is entirely their call. The President is not involved. Incoming House and Senate Budget Committee Chairman Tom Price and Jeff Sessions will make this choice.

While at first blush it may seem counterintuitive, the best move for fiscal and economic conservatives is to reappoint Doug Elmendorf. If Chairmen Price and Sessions won’t do that, then I recommend they choose Kate Baicker. If any key Hill Rs want to know why I think Dr. Baicker is the best new candidate, please contact me privately. Here I’m going to focus on why I hope Chairmen Price and Sessions reappoint Dr. Elmendorf.

Dr. Elmendorf is not a conservative. He was originally chosen to head CBO by Congressional Democrats. He came from the left-of-center Brookings Institution. I think he is registered as an independent. I don’t know how he votes but I’d bet he’s a moderate/centrist Democrat.

I want to move economic policy to the right, not to the center-left. I think Dr. Elmendorf is the best pick for CBO because (a) he is unbiased and intellectually honest; (b) his background insulates his rulings and the Congressional Republicans who choose to reappoint him from accusations of bias; and, most importantly, (c) this combination greatly disadvantages the progressive Left who both dominate current economic debate within the Democratic party and who cannot refrain from intellectual overreach.

There are two ways to move economic policy debate to the right. One is to make stronger free market and small government arguments. The other is to rebut the wackiest arguments made by the Left. Congressional Republicans should do the former and lean on Dr. Elmendorf and CBO for help with the latter. Over the past few years an Elmendorf-led CBO has weakened a few key support pillars of the Left’s big government intellectual edifice, not because Elmendorf leans right but because the Left is dominant and nuts and their most outrageous arguments just beg to be debunked by a neutral referee.

  • Team Obama overreached, arguing that a minimum wage increase would result in no job loss, that an increase to $10.10/hour would benefit millions and harm no one. Under Elmendorf CBO destroyed this claim, pointing out that the President’s favored policy would reduce the labor supply by about half a million workers. For once economic conservatives were on strong ground not just because we had facts and logic on our side, but also because the press repeatedly wrote that “the nonpartisan CBO said the President’s minimum wage increase would reduce the labor supply by half a million workers.” We won those debates in part thanks to an assist from a CBO that was and was described as unbiased and nonpartisan.
  • Elmendorf’s CBO analyzed the reduced labor supply that would result from ObamaCare, a 1.5-2 percent reduction in hours worked. CBO applied routine analysis straight out of a microeconomics textbook. In doing so they rebutted absurd free lunch claims made by the Obama White House and their allies on the Left. And again, the press (even all the biased ones) had no choice but to report these findings as definitive, since they had no opportunity to accuse the director of Republican bias.

Had CBO been led at the time by a director chosen by Republicans, the exact same conclusions would have been dismissed or caveated by many (most?) of the press. The press coverage and public debate would have instead been about how “Congressional Republicans and their hand-picked conservative CBO Director said ______________.” The identical conclusions from a director chosen by Republicans would have had far less impact on the public debate. That is unfair. It is also an unavoidable consequence of a biased press corps that free market and small government conservatives would be foolish to ignore.

I am not arguing that Republicans should always choose a Democrat to run CBO, or that only a Democrat can have this  public credibility, or that the press credibility of choosing a Democrat is worth appointing someone biased to the left. I think Dr. Kate Baicker would quickly build Elmendorf-like credibility if chosen to lead CBO. And I think Dr. Peter Orszag, chosen by Democrats to head CBO before he became President Obama’s OMB Director, ran CBO as an advocate and policy entrepreneur, not as a neutral referee.

Just as I sometimes disagree with and even yell at the fairest football and basketball refs, I disagree with some of the judgment calls Dr. Elmendorf and CBO have made. But I don’t want the ref to be biased right or left. I don’t even think a right-leaning ref would be that valuable to winning these debates, given the higher press hurdle that would be set by a biased press corps. I also think fiscal and economic conservatives benefit from an institutionally strong CBO, as the Left far more often wants to ignore arithmetic and cost-benefit tradeoffs than do the Republicans now taking the helms of the key economic committees in Congress.

I think CBO is too wedded to assuming large and unproven short-term Keynesian multipliers, but their approaches to estimating long-term tax, debt, labor, and health insurance policy changes support those of us who prioritize increasing the supply of labor and capital. As I noted earlier, an Elmendorf-led CBO showed that ObamaCare and a minimum wage increase would both reduce employment. Under Elmendorf, CBO said that increasing marginal tax rates dampens economic growth because it reduces incentives to work, save, and invest. Elmendorf’s CBO said that transfer payments reduce work incentives and shrink the labor force. In contrast to President Obama and Dr. Krugman, Elmendorf’s CBO warned that high and rising debt levels will lower future income, increase pressure for higher taxes or less defense spending, and increase the risk of a fiscal crisis at some uncertain future date. In contrast to the Piketty Fan Club, CBO’s distributional analysis showed that the burden of financing government is even more distributed toward the high end than is income, and they integrated into their analysis the effects of both taxes and transfer payments.

Many Congressional Republicans need to learn how to use CBO better. They need to actually read what CBO writes and to figure out how to ask questions of CBO and of Dr. Elmendorf that will highlight the ways in which left-wing dogma contradicts straight-up-the-middle economic analysis. If Hill Republicans learn how to do this more effectively, the debate will move rightward as the Left’s case weakens.

I hope Congressional Republicans who want smaller government and freer markets think strategically about this post. Keep CBO strong and unbiased both in fact and in appearance. Win the economic policy debate by keeping the valuable asset they now have, the public and press credibility of a fair ref who often rebuts wacky dangerous arguments made by the Left. Learn to use CBO’s analyses more effectively and to ask them the right questions. Reappoint Dr. Doug Elmendorf to head the Congressional Budget Office.

4886422045_68c86a43b7_z

I’m with Stupid —>

A few days ago I wrote about MIT’s Dr. Jonathan Gruber’s honesty about lying to enact ObamaCare. Today I want to focus on a different part of this quote, his reference to “the stupidity of the American voter.”

In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in – you made explicit healthy people pay in and sick people get money, it would not have passed… Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical for the thing to pass.

In 14 years of policymaking I encountered this word “stupid” and this attitude many times. I am certainly not arguing that all Democrats or all progressives think like this. I hope it’s only a tiny fraction. In my experience it’s a mindset that reveals itself every once in a while from a small but influential set of progressive policymakers and outsiders who participate in and comment on the policy process.

At the same time, the progressive idea of “stupid Americans justify paternalism” is a composite concept. Let’s try to unpack that composite. Here are six variants I have seen expressed by some of my policymaking counterparts who reside on the far left of the spectrum.

  1. “The American voter is stupid because he is less well educated or less credentialed than I am.” This one is self-explanatory, a combination of arrogance + entitlement. Educational credentials are of course highly imperfect measures of intelligence. False positive and false negative errors abound. This variant is sometimes combined with a regional component, a coastal big city elitism embodied in snarky terms like “fly-over country” and bias against those with rural upbringings or southern accents.
  2. “The American voter is stupid because she ignores scientific evidence by opposing progressive policy X.” Popular discussion of this variant often begins with the progressive habit of seeing scientific ignorance only on the right, ignoring parallel problems on the left from those who reject scientific consensus on, among other issues, the safety of vaccines and of genetically-modified food and the environmental safety of fracking. While the issues and causes differ, scientific ignorance exists across the full range of the policy and political spectrum. A deeper flaw occurs when some progressives reframe a value difference as a rejection of a scientific conclusion. I can accept certain widely held scientific conclusions about greenhouse gas emissions and still believe that a particular cap-and-trade proposal is bad policy. This doesn’t make me anti-science or stupid, it just means that my values lead to a different view on what is good policy.
  3. “The American voter is stupid because he doesn’t know what’s in his own best interest. I, the progressive policymaker, therefore must enact a policy that will give me the power to make decisions for him.” This logic underlies many paternalistic expansions of government–benefit mandates in ObamaCare, the Consumer Financial Protection Bureau, outlawing Super Big Gulps in New York City. Sometimes using behavioral economics as intellectual cover, this logic creates a slippery slope whereby progressives start imposing policies that represent not just what they think is best for us stupid people, but what they think is best for us even when we might disagree if fully informed. The policy question is not whether people make stupid decisions every day. Many do. The policy questions are whether substituting a centralized, bureaucratic, and politicized authority subject to interest group pressure will result in fewer mistakes than we would make on our own, and whether we value the freedom to control our own lives, even when that freedom will lead us to make mistakes. I am for letting the American people make their own mistakes.
  4. “The American voter is stupid because, if he had the same information and understanding of the situation as I do, he would support less redistribution of society’s resources than I would.” This, of course, is not stupidity, it’s simply a different value choice. And it provokes a hard question for honest, well-intentioned and ethical progressives who believe in democracy: Are you willing to tell the truth to, honestly inform, and then accept the will of the American people, as expressed though our highly imperfect representative democracy, if it results in less redistribution than you would prefer? Which is more important to you: democracy or redistribution? Are American voters stupid if they don’t want quite as much redistribution as you?
  5. “The American voter is stupid because she was unable to see through my efforts to obfuscate the true redistributive effects of my policies.” It’s not just the malevolence behind this view that frustrates me. It’s the arrogance. Dr. Gruber may be the only one to have admitted to this line of thinking, but he is far from the only policymaker to use it.
  6. “The American voter is stupid for trusting that I believe in democracy, that I will use the policy power I am granted only to enact policies that reflect broad American values when they differ from my own.” This is why Dr. Gruber and those who think like him should not be trusted with power. It is especially true for those who hold power but were not elected by a popular vote: staff, appointed officials, and outside advisors. It is also an argument for smaller government. The greater the reach of government into our lives, the more tools and opportunities exist for those who cannot be trusted with power to abuse it.

If American voters are stupid because they think academic credentials do not perfectly equate with intelligence…

If they are stupid because they think policy decisions should be informed both by sound science and values…

If they are stupid because they would rather let people make their own mistakes than allow government to make different mistakes for them…

If they are stupid because they support less redistribution than certain progressive policymakers and their allies in academia…

If they are stupid because they don’t spend all their time trying to sift through policies intentionally designed to deceive them…

If they are stupid because they trust that elected and especially appointed American officials will not abuse the power temporarily granted to them…

… then I’m with stupid.

(photo credit: Andres Musta)

jonathan-gruber

Dr. Gruber’s honesty about lying

MIT Economist Dr. Jonathan Gruber, widely cited as “the architect of ObamaCare,” recently committed a Kinsley gaffe, “when a politician tells the truth – some obvious truth he isn’t supposed to say.”

This bill was written in a tortured way to make sure CBO did not score the mandate as taxes. If CBO scored the mandate as taxes, the bill dies. Okay, so it’s written to do that.  In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in – you made explicit healthy people pay in and sick people get money, it would not have passed… Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical for the thing to pass. It’s a second-best argument. Look, I wish Mark was right that we could make it all transparent, but I’d rather have this law than not.

This provokes four questions:

  1. Is Dr. Gruber right that lack of transparency was a huge political advantage in enacting ObamaCare?
  2. Do Dr. Gruber’s allies in Congress and the Obama White House agree that ObamaCare cross-subsidies were intentionally obscured to avoid politically unpopular votes?
  3. Do they agree with the more general principle, that some large, explicit, and transparent subsidies will be unpopular, and that the only way to enact them is to hide and obscure them?
  4. If so, is it ethical to hide and obscure large cross-subsidies (or large costs), in ObamaCare and elsewhere, so they can be enacted into law? Does the end of greater redistribution justify the means of obfuscation, of lying to voters?

Here are my answers.

  1. Yes. Dr. Gruber is right that lack of transparency provided a huge political advantage in enacting ObamaCare. He is correct that the cross-subsidies within that bill would have doomed it had they been explicit, transparent, and well understood. If your goal is to enact unpopular subsidies then hiding them is an effective means to doing so.
  2. Yes. I would bet heavily that both Team Obama and key Congressional Democrats involved in enacting the Affordable Care Act intentionally obscured these policies as Dr. Gruber described and for the reasons he gave. I think this logic permeates the construction, drafting, and enactment of this law.
  3. Yes. I think this tactic is core to progressives’ long-term success in expanding government’s function as a massive income redistribution machine. This logic underlies hidden cross-subsidies in many of our largest government programs and the taxes imposed to finance them. It is on occasion embraced across the political spectrum, but it’s a tool used far more often  by the Left to redistribute society’s resources behind our backs.
  4. No. I think this tactic is repulsive and unethical in a representative democracy.

Here are a few areas where American economic policy hides or obscures subsidies or costs, I believe intentionally.

  • As Dr. Gruber points out, in ObamaCare the healthy cross-subsidize the sick. He does not point out that embedded within this the healthy subsidize the sick for the portion of their sickness related to unhealthy behaviors. A Congressional floor vote to defend such a value choice, if made transparent and explicit, would certainly fail.
  • ObamaCare also forces young people to subsidize older people by limiting the width of premium “rating bands” for insurance sold in the individual market. This was the result of closed-door lobbying by AARP. This one might pass Congress if voted upon explicitly, but the ACA’s architects hid it to avoid admitting that they were shafting young people.
  • Social Security conflates forced individual retirement saving, insurance programs, and massive cross-subsidies, in part to hide the latter.
  • So does Medicare. The biggest cross-subsidies are across birth year cohorts but there are plenty of others as well. Don’t get me started on trust fund accounting.
  • The employer-side half of FICA payroll taxes that finance most of Social Security and part of Medicare are often framed as if they “are paid by the employer” when their true economic burden is borne by the employee in the form of lower wages. If all FICA taxes were imposed on the employee-side they would be more transparent and less popular.
  • A minimum wage increase forces low-skilled unemployed workers to subsidize the wages of the low-skilled employed. Expanding the earned income tax credit is a more transparent way to help the low-skilled unemployed but it puts the costs on budget and in full view. The Left pushes to hide the costs and lies, claiming it’s a free lunch.
  • CAFE fuel economy requirements are less transparent than a gas tax that would achieve a similar goal. But gas tax increases are wildly unpopular while raising CAFE standards appear only to make things harder “on the auto companies.”
  • A global CO2 cap-and-trade system would have obscured the redistribution of global economic growth from developed economies to developing economies. An explicit and transparent carbon tax imposed only on developed economies would achieve a similar endpoint but would have made explicit this massive proposed global redistribution.
  • For years policymakers used Fannie Mae and Freddie Mac to subsidize homeowners through hidden credit subsidies. The Left pushed this for low-income homebuyers through affordable housing goals, while elected officials across the political spectrum supported the same thing for all homebuyers through special advantages conferred by government on these two firms.

I could go on. Corporate incomes taxes hide the costs imposed on the people who work for, own, and buy from these firms. Many agricultural subsidies are intentionally obfuscated to enhance their bipartisan support.

Apparently Dr. Gruber thinks it’s OK to lie to American voters when his allies are in power to enact policies that he wants but the voters wouldn’t. He then says American voters are “stupid” both for not agreeing with his value choices and for not figuring out the deception.

I disagree.

When you strip away all the complexity, economic policy is ultimately an expression of elected officials making difficult value choices. If over time these officials make value choices that do not reflect the values of the people whom they represent, they can, should, and will be replaced.

When these same elected officials, and those who advise them, deliberately construct policies to hide value choices that would be unpopular were they transparent and explicit, we end up with two terrible outcomes. We get policies that do not reflect our values, and we re-elect representatives who are lying to us.