Defense v. ObamaCare

DEFENSE SECRETARY HAGEL: To close these gaps, the President’s budget will include an Opportunity, Growth and Security Initiative.  This initiative is a detailed proposal that is part of the President’s budget submission.  It would provide an additional $26 billion for the Defense Department in Fiscal Year 2015.

defense v obamacare v2

Source for $88 B number: Congressional Budget Office, “Insurance Coverage Provisions of the Affordable Care Act–CBO’s February 2014 Baseline,” Table 1 (Net cost of coverage provisions for FY 2015).

Message to Governors: Biden v. Obama

Here is VP Biden, speaking this morning to all Governors:

THE VICE PRESIDENT:  It’s great to see you all.  And I don’t know about you all, I had a great time last night and got a chance to actually do what we should be doing more of — talking without thinking about politics and figuring how we can solve problems.

And here is President Obama, speaking at a dinner last Thursday night to just the Democratic Governors:

THE PRESIDENT: Now, unfortunately, state by state, Republican governors are implementing a different agenda.  They’re pursuing the same top-down, failed economic policies that don’t help Americans get ahead.  They’re paying for it by cutting investments in the middle class, oftentimes doing everything they can to squeeze folks who are bargaining on behalf of workers.  Some of them, their economies have improved in part because the overall economy has improved, and they take credit for it instead of saying that Obama had anything to do with it.  I get that.  There’s nothing wrong with that.  But they’re making it harder for working families to access health insurance.  In some states, they’re making it harder even for Americans to exercise their right to vote.

 

Sorry, Heritage, your number is still wrong

I’d like to thank the Heritage Foundation for taking the time and effort to respond to my post, “Eight problems with the Heritage immigration cost estimate.” Heritage’s response, written by Derrick Morgan, is professional and takes a constructive tone. I still disagree with their conclusion, but I appreciate their efforts to make this a discussion rather than the usual screaming matches one finds online.

I’m not sure it adds a lot of value for me to go point-by-point rebutting each of Mr. Morgan’s responses to my original technical points. He is right that we agree in some areas, even though he doesn’t highlight all areas of our agreement. I am sorry to say that where we still disagree his responses have not convinced me to change my original critiques.

While I therefore stand by each point of my original critique, I think it’s most helpful if I highlight a few points on which we agree, and then explain again only the most important reasons why I continue to recommend policymakers ignore this study and its headline number.

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How filibusters work and why they are so rare

How filibusters work and why they are so rare

Last night Senator Rand Paul from Kentucky led a 13-hour filibuster of the nomination of John Brennan to head the CIA. Based on a couple questions from friends I’d like to explain how a filibuster works and why they are so rare.

Background

At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:

  • Should amendment A by Senator B to bill C be adopted?
  • Should the Senate pass bill C?
  • Should the Senate consent to the nomination of person D to job E?
  • [Now that it has finished F,] Should the Senate next proceed to working on G?

Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.

A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.

There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.

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The President’s infrastructure investment argument

The President’s infrastructure investment argument

In his briefing yesterday White House Press Secretary Jay Carney said:

MR. CARNEY: [E]very proposal the President has put forward … has included significant investments in our economy — in infrastructure, in education, in putting teachers and police officers back on the street.

… they represent the President’s view that deficit reduction is not a goal unto itself; it should be in service of the broader goal, which is positive economic growth and job creation, and that we need to continue to invest wisely to ensure that our economy grows.

Investing in infrastructure, for example, doesn’t just create jobs in the near term; it helps build a foundation for sustained economic growth in the decades to come.

Mr. Carney and his boss use this argument often to justify many of the President’s proposed spending increases. The broader goal, they argue, “is positive economic growth and job creation … [to] build a foundation for sustained economic growth in decades to come.”

I expect Team Obama will be using this argument more frequently as the sequester and budget resolution debates heat up. They’ll probably use it again as a straw man to suggest that because Congressional Republicans oppose the Obama Administration’s proposed spending levels and particular spending plans, those same Republicans oppose all economic growth benefits that come from public infrastructure investment.

So let’s look at government capital investment in this context of long-term economic growth.

The Administration starts from a strong theoretical foundation. Capital investment, whether in the private or public sector, should lead to more productive workers, who will enjoy higher wages and improved living standards over time. When aimed at increasing productivity, capital investment (or capital formation) leads to “sustained economic growth in decades to come.” So far, so good.

But…

  1. Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance). The pursuit of multiple policy goals lowers the expected economic growth benefit of public capital spending.
  2. Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.
  3. Non-geographic politics can distort government capital spending. This is principally an Executive Branch concern, as we saw with the Obama Administration’s decision to throw good money after bad to postpone Solyndra’s failure. And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
  4. Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort. We should allow them some rhetorical leeway, and we should recognize that government has other reasons to spend money than just to maximize future economic growth. At the same time, it’s misleading when they claim that increased government spending that serves other policy goals (some quite legitimate) also increases future economic growth.
  5. There’s a difference between government investments in the commons and government spending that primarily benefits individuals.  A new airport benefits all who use it. A scientific research grant benefits the researcher and society as a whole if his research advances our understanding. A subsidized student loan is an investment in human capital, but the return on that investment accrues mostly to the student and his or her family. That’s not wrong, it’s just having a more limited effect on increasing long-term growth for society as a whole.
  6. Government investment in physical infrastructure is slow. The Administration learned this as they tried to force money out the door in 2009 for “shovel-ready jobs” that turned out not to be there. This doesn’t mean you don’t build roads and improve ports and airports, it just means the short-term fiscal stimulus argument for this type of spending is weak.
  7. Government investment in physical infrastructure is intentionally expensive because of “prevailing wage” requirements, championed by construction labor unions, that mandate the government must pay more for workers than an aggressive private firm might be able to find in the labor market.
  8. We should evaluate the marginal productivity benefits of additional investment. The President sometimes argues that building the national highway system was good for growth, therefore his specific proposal to increase highway spending is good for growth, too. But those are different investments, and we need to examine the marginal benefits (and rate of return) on the specific incremental investments he is now proposing. The transcontinental railroad definitely increased national economic growth, but that doesn’t mean the feds should subsidize a costly California bullet train with questionable growth benefits.
  9. International comparisons of government infrastructure are silly. U.S. government capital spending should be determined based on what will most increase U.S. productivity without comparison to what other countries are doing. If American ports are clogged and that is harming our trade and slowing American economic growth, then we should upgrade our ports. We shouldn’t instead improve our airports because other countries have shinier ones. We have a different geography, a different economy, and different infrastructure needs than does China, or Japan, or Dubai or France. It is crazy to suggest that the U.S. should build bullet trains because China is doing so.
  10. Government investment faces no market discipline. Capital investment in a private firm can face some of the above challenges—a CEO, for instance, might want a new facility built in his hometown rather than where it will produce the highest rate of return. Or a firm might reject an investment that would maximize its’ workers’ productivity because that investment is inconsistent with the firm’s broader strategic goals. But these firms ultimately face the discipline of the market to curb their excesses. Government does not, and in some cases policymakers are rewarded by their election markets to distort infrastructure investment even farther from its growth-maximizing ideal.
  11. Government capital investment financed by raising taxes on private capital investment will slow long-term economic growth. While in theory there probably are government infrastructure investments with very high rates of return, all of the above reasons suggest that in practice the actual rate of return on government-directed investment is going to be lower than in the private sector. If you advocate raising capital taxes (on capital gains and dividends, for instance, as Senate Democrats appear poised to do) at the same time you argue for increased government capital spending, you’re shifting capital investment from the private sector to the public sector. That will slow long-run economic growth rather than increase it.

After all of these cautions you might conclude that I’m opposed to more highway spending or to all additional government capital investment. I’m not. America needs a robust, efficient, and plentiful supply of national physical and human capital. And there are definitely areas where smart government capital investment can increase productivity and contribute to faster long-run economic growth.

I am instead suggesting that the President’s infrastructure investment strategy is missing some key cautions, and that we shouldn’t use simplistic arguments and flawed logic, cloaked in attractive investment rhetoric, to justify enormous and often unrelated increases in government spending. We should recognize that in practice government infrastructure investment falls far short of its theoretic ideal, and we should therefore spend taxpayer money on it cautiously and wisely rather than with reckless abandon.

(photo credit: Robin Ellis)

More on the President’s veto bluff

More on the President’s veto bluff

Yesterday I argued that the President is bluffing on his veto threat. Today I want to respond to some great feedback from friends and readers. Warning: discussions of negotiating strategy and tactics can get a little dense.

1.  I agree that Senate Democrats would likely block any bill that the President would veto. This means the veto threat is important principally to reinforce Leader Reid’s efforts to hold his Democrats together as a unified bloc.

But if I’m right that the President thinks he cannot afford to risk a recession, then the President needs a new law. Whether a bill dies in the Senate or as a result of his veto, in either case no law –> fiscal cliff –> recession –> severe damage to the rest of the President’s agenda. My hypothesis is that the President is unwilling to take that risk, so he needs the House and Senate to pass a bill he can sign. I think my argument holds whether the veto would be actual or merely a tool to reinforce his allies stopping a bill in the Senate.

2.  I agree that, were it not for the recession risk, many Democrats, possibly including the President, would think that no new law was a good fiscal policy outcome. Yes, the President and almost all Congressional Democrats say they want to extend current tax rates for the non-rich.  But if all tax rates go up, future deficits will be $5.4 trillion lower.  If the sequester is allowed to bind, deficits would be reduced by another $1.2 trillion over the next decade. This outcome, of no new law, would give the President a lot more fiscal flexibility.  The deficit and debt problem would be far from solved, but he would have more room to propose new spending that I’m guessing he wants.

There’s an interesting intra-Democratic party tension here. Which is more important to elected Democrats: preventing middle class tax increases or having more room to increase government spending? The President insists he wants to prevent tax increases on the middle class, but it’s easy to believe that he, and especially some Congressional Democrats, would be happy to have such broad-based tax increases to finance their desires to expand government.

If you think the President thinks the potentially quite significant fiscal policy benefits (from his point of view) of no deal are greater than the costs of a 2013 recession and the damage it would do to his entire policy agenda, then you disagree with me and should conclude the President is not bluffing.

4. There are clearly some important Congressional Democrats (e.g., Senator Patty Murray) who appear willing to risk a recession so they can have more money to spend. I disagree with those who suggest those Congressional Democrats would block a bill that the President wanted to sign. If he wants a deal, he’ll be able to deliver the Democratic votes to pass it, and if he wants a bill blocked, they’ll block it for him.

Indeed, the President’s greatest tactical weakness is the varying views within the Democratic party, and especially differences between confident liberals like Senator Murray and nervous in-cycle moderates. Congressional Republicans need to figure out how to expose and exploit these differences and split Congressional Democrats. I will address that in a future post.

5.  One wise friend thinks the President is so confident that he would win an early 2013 blame game that he is willing to risk a recession.

In this view you agree that the President still wants and needs a new law to avoid a recession. You also think that not only does the President think he has negotiating leverage now, he thinks his leverage would increase after the new year if there is no new law. You would argue that he is willing to gamble that, faced with the prospect of being blamed both for tax increases and triggering a recession, Republicans would quickly fold in January 2013 if there is no deal. Therefore, you think he thinks risking a recession still won’t result in a recession, because it will end quickly when Republicans cave.

Thanks to all who provided great feedback and counterarguments.  For now I’m going to stick with my original view. I think the President thinks he needs to get a deal because I think his highest priority is (and should be) avoiding even the risk of triggering a new recession in the first year of his second term.

What scares me more is that I fear the President wants a deal but doesn’t know how to get one with Republicans. My working hypothesis is that the President is an ineffective negotiator when dealing with those who disagree with him. This view is heavily reinforced by Bob Woodward’s book The Price of Politics.  Other than two years ago when he swallowed the Republican view whole and extended all tax rates, the President is oh-for-Administration in major bipartisan legislation.  At the moment I worry less about the President’s goals and priorities, and more about his negotiating skill and his capacity to reach agreement with those with whom he strongly disagrees.

(photo credit: Jim Moran)

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