Log Rolling Landrieu

From Jonathan Karl of ABC News ("The $100 Million Health Care Vote?") via the Drudge Report, we learn,

On page 432 of the Reid bill, there is a section increasing federal Medicaid subsidies for “certain states recovering from a major disaster.”

The section spends two pages defining which “states” would qualify, saying, among other things, that it would be states that “during the preceding 7 fiscal years” have been declared a “major disaster area.”

I am told the section applies to exactly one state: Louisiana, the home of moderate Democrat Mary Landrieu, who has been playing hard to get on the health care bill.

In other words, the bill spends two pages describing would could be written with a single world: Louisiana. (This may also help explain why the bill is long.)

Senator Harry Reid, who drafted the bill, cannot pass it without the support of Louisiana’s Mary Landrieu.

How much does it cost? According to the Congressional Budget Office: $100 million.

Log rolling is a legal and at times may be a useful legislative tool, but a $100 million payment to buy or sell a vote for a bill that will fundamentally change health care for 300 million Americans is immoral . It's like selling a vote to go to war. From Harry Reid's perspective, its cheap; thirty cents per American is a small price for Americans to pay to pass legislation that you support, particularly considering that it is other people's money. It also reveals that Reid is more concerned with "reforming" health care than with fiscal responsibility. It may also reveal Mary Landrieu's true measurement of the value of the bill. If Landrieu acted honestly for Louisiana's citizens and if Reid negotiated well for the rest of the country, the $100 million represents the state's opportunity cost. The people of Louisiana would be $100 million better off if the legislation fails.

In an earlier post, "Riddle Me This," I asked what is worse than Congress voting on bills that they have not read? My answer was proposing bills that cannot be understood if read. In that post, I referenced Nicholas Ballasy of CNSNews, ("Finance Committee Democrat Won’t Read Text of Health Bill, Says Anyone Who Claims They’ll Understand It ‘Is Trying to Pull the Wool Over Our Eyes’,") who quoted Sen. John Cornyn (Texas).

...the descriptive language the committee is working with is not good enough because things can get slipped into the legislation unseen.

“The conceptual language is not good enough,” said Cornyn. “We’ve seen that there are side deals that have been cut, for example, with some special interest groups like the hospital association to hold them harmless from certain cuts that would impact how the CBO scores the bill or determines cost. So we need to know not only the conceptual language, we need to know the detailed legislative language, and we need to know what kind of secret deals have been cut on the side which would have an impact on how much this bill is going to cost and how it will affect health care in America.”

Complex language may be part and parcel of writing legislation, but it also hides political payments that may be unpopular taxpayers. Perhaps this is why Reid is rushing the senate vote.
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Colorado and Medical Marijuana

From the Denver Post (Tim Hoover, "Suthers: Medical marijuana dispensaries subject to sales tax, retail license laws")via the Drudge Report,

Attorney General John Suthers said in a legal opinion released late today that the sale of medical marijuana is subject to taxation.

Responding to a query from Gov. Bill Ritter's office, Suthers, a Republican, said, "Medical marijuana is tangible property that is generally subject to state sales tax."

The opinion also said medical marijuana dispensaries must obtain retail sales licenses from the state.

Medical marijuana advocates applauded the opinion as a step in the right direction, saying the industry had been working on proposals to enact some sort of tax.

"I think the community is willing to pay taxes if it will help prove the legitimacy of their efforts," said Courtney Tanning, executive director of the Colorado Wellness Association, which represents medical marijuana dispensaries and the patients and doctors that deal with them.

"It (medical marijuana) has been an underground, black market community for so long that I think they're really willing to come out and pay dues to be taken seriously."

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Fiscal Policy

I have not taught fiscal policy in my principles classes for some time.  There seemed little need.  My reading of the macroeconomics literature was that the efficacy of fiscal policy was limited to the rare occurrence of a deep and long recession.  Based on the length of the Great Moderation, a period of low inflation, strong economic growth and high employment, I believed that monetary economists working inside the Federal Reserve had learned to better manage the business cycle.

A recession began when the housing bubble burst in 2007, straining our highly leveraged financial sector.  The economy headed south, leaving the desiccated memory of the Great Moderation in the dust, and beginning what many have termed the Great Recession, both long and deep, the conditions required for effective fiscal policy.

Fiscal policy is the sue of the federal government's taxing and spending authority to achieve or maintain full employment or price stability.  In times of recession, the government creates or enlarges deficits to maintain aggregate demand, the total level of demand for all goods and services throughout the economy.  Policy makers can cut taxes, increase spending or some combination of the two to reach desired deficits.  The additional spending by the government or recipients of tax cuts has a multiplied impact through the economy.  For example, Ben gets a $100 tax cut which he uses to buy a new Sony DVD player.  Sony uses the extra money to buy $90 of labor.  The $90 of wages buys $80 of groceries and so on. 

All theories are just good stories until empirically verified.  The focus of the empirical debate has turned on the size of the multipliers.  Multipliers greater than one stimulate growth while those less than one restrain growth.  Robert Barro and Charles Redlick describe the literature on empirically estimated multipliers as "thin" in "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Paper No. 15369.  The authors estimate the multiplier at .7 when the economy is experiencing unemployment of 5.6%.  It increases .1 for every 2% increase in unemployment, implying that stimulus spending becomes beneficial (multiplier greater than 1) when the economy is experiencing 12% or greater unemployment.  In a Wall Street Journal article (Stimulus Spending Doesn't Work) that presents their findings, they conclude,

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP. 

Barro and Redlick have not given the final word on multipliers but their research is a good starting point for evaluating the effectiveness of fiscal policy and the size of multipliers
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Nice and the Creeping Nanny State

If any of the health care proposals before Congress pass and is signed into law, we will soon have a committee tasked with reducing health care expenditures similar to Britain's National Institute for Health and Clinical Excellence (Nice).  Some might remember Nice as the organization unwittingly killing patients who are terminally ill (see my previous post for more details and a Monty Python clip).  Nice takes its job seriously.  Robert Watts of Timesonline describes a new policy proposal in, "Health and safety snoops to enter family homes."

Health and safety inspectors are to be given unprecedented access to family homes to ensure that parents are protecting their children from household accidents.

New guidance drawn up at the request of the Department of Health urges councils and other public sector bodies to “collect data” on properties where children are thought to be at “greatest risk of unintentional injury”.

Council staff will then be tasked with overseeing the installation of safety devices in homes, including smoke alarms, stair gates, hot water temperature restrictors, oven guards and window and door locks.

The draft guidance by a committee at the National Institute for Health and Clinical Excellence (Nice) has been criticised as intrusive and further evidence of the “creeping nanny state”.

Creeping nanny state?  Daya think?  Matthew Elliot, a new found friend of freedom, nicely sums up problems with the proposal.

Matthew Elliott, of the TaxPayers’ Alliance, said: “It is a huge intervention into family life which will be counter-productive.

“Good parents will feel the intrusion of the state in their homes and bad parents will now have someone else to blame if they don’t bring up their children in a sensible, safe environment.”

Let me add my two bits to Elliot's.  Setting aside the insult to parents Nice's administrative shortcomings and the real possibility that collecting the information and applying safety equipment to households in Britain might well me more expensive then the medical costs, the plan has other problems.  The state officials know of safety devices, but not the household specific information about the children or their parents.  For example, a child may be a climber, and the state might notice that the parents don't have electrical socket plug covers.  The state might find the home safe but not know that the child spends ten hours a day with grandma.  Parents have that information, and nearly all parents love their children and are concerned about their welfare.  As Elliot suggests, why not let parents raise their kids?
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Shleifer: State versus Private Ownership

Chavez styles Venezuela as having a socialist economy and himself as the representative of the people. Simon Romero describes current problems with state production of electricity and water in a resource rich country (The New York Times, "Blackouts Plague Energy-Rich Venezuela."

CARACAS, Venezuela — This country may be an energy colossus, with the largest conventional oil reserves outside the Middle East and one of the world’s mightiest hydroelectric systems, but that has not prevented it from enduring serious electricity and water shortages that seem only to be getting worse.

President Hugo Chávez has been facing a public outcry in recent weeks over power failures that, after six nationwide blackouts in the last two years, are cutting electricity for hours each day in rural areas and in industrial cities like Valencia and Ciudad Guayana. Now, water rationing has been introduced here in the capital.

The deterioration of services is perplexing to many here, especially because the country had grown used to cheap, plentiful electricity and water in recent decades. But even as the oil boom was enriching his government and Mr. Chávez asserted greater control over utilities and other industries in this decade, public services seemed only to decay, adding to residents’ frustrations.

The bolded emphasis added to the quote is mine. Economists are not among the confused or perplexed. Andrei Shleifer concludes his Journal of Economic Perspectives article, "State versus Private Ownership (Vol. 12, No. 4, Fall 1998, Pgs. 133-150) as follows.

Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong. In essence, this is the case for capitalism over socialism, explaining the "dynamic vitality" of free enterprise. The great economists of the 1930s and 1940s failed to see the dangers of socialism in part because they focused on the role of prices under socialism and capitalism, and ignored the enormous importance of ownership as the source of capitalist incentives to innovate. Moreover, many of the concerns that private firms fail to address "social goals" can be addressed through government contracting and regulation, without resort to government ownership. The case for private provision only becomes stronger when competition between suppliers, reputational mechanisms, and the possibility of provision by not-for-profit firms are brought into play. Last but not least, the pursuit by government officials of political goals and personal income, as opposed to social welfare, further strengthens the case for private ownership, as the dismal record of state enterprises around the world and the tragedy of communism illustrate all too well.

The benefits of private delivery-regulated or not-of many goods and services are only beginning to be realized. Health, education, some incarceration, some military and police activities, and some of what now is presumed to be "social" insurance like Social Security, can probably be provided more cheaply and attractively by private firms. It is plausible that 50 years from now, today's support for public provision of these services will appear as dirigiste as the 1940s arguments for state ownership of industry appear now. A good government that wants to further "social goals" would rarely own producers to meet its objectives.

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Glaeser on the Home Buyers' Tax Credit

Edward Glaeser, described the bad incentives created by the Home Buyers' Tax Credit in "Attack of the Home Buyers' Tax Credit," written for the New York Times.  Glaeser creatively applies economic tools to problems.  

One reason to fret about federal anti-recessionary fixes is that they often last long after the crisis that justified their creation.

According to Case-Shiller data, housing prices have been rising since May, yet Congress has just extended and expanded last year’s home buyers’ tax credit. They’ve made the program more regressive by upping the income limit for families from $150,000 to $225,000.

Even more problematically, the new, but definitely not improved, tax credit now offers up to $6,500 to current homeowners who have lived in their houses for at least five of the last eight years and buy new homes.

Who but a real estate agent could love this policy?...

Certainly, extending the tax credit to current owners doesn’t increase homeownership. I believe that our government bears some responsibility for the housing bubble because it encouraged Americans to leverage themselves to the hilt to buy homes. But just because I’d like to do less to encourage homeownership doesn’t lead me to favor more handouts that don’t increase homeownership.

A buyers’ credit that goes to everyone creates a strong incentive for purely mindless house swapping. If my cousin and I sell our houses this year, and then move back three years later, we can make $13,000. In some such transactions, people may decide to flout the law and continue to live in their old houses, pocketing quick money for a sham deal...

It subsidizes existing owners to trade up or down, which implicitly encourages people to pull up roots and sever their connections with their existing community. If you ever thought that encouraging civic engagement through housing policy was a good thing, then the current policy will push in exactly the opposite direction.

There is also no reason to think that a tax credit that encourages house-trading among current owners will help the overall housing market. A subsidy for existing homeowners provides an equal incentive for buying and selling. There will be no net decrease in the vacant housing inventory; basic economics suggests that any policy that provides equal incentives to buy and sell will do little to increase housing prices.

Increasing the scope of the program will also significantly increase its cost.

Recently, first-time home buyers have been accounting for close to one-half of home purchases, but before the tax credit particularly subsidized new home buyers, their share was lower. In 2006, only 36 percent of home purchases were first-time buyers, and a tax credit for existing owners will surely move us in that direction. If 40 percent of future transactions involve existing owners who can take advantage of the benefit, then giving the tax credit to existing homeowners could easily burn through $5 billion in five months.

The best thing about extending the home buyers’ tax credit is that it does at least have an expiration date; it is currently set to end in May 2010. Unfortunately, the events of the last week lead me to suspect that the tax credit will continue to exist, like a B-movie zombie, long after it should have settled in its grave.

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The 4-Week Moving Average of Initial Unemployment Claims Updated to November 7, 2009

This post updates a graph comparing the 4-week moving average of unemployment claims through the week ended November 7, 2009 in "Unemployment Insurance Weekly Claims Report" with the average of the three previous recessions.  A little technical information of the graph follows the post.  Seasonally adjusted initial claims was 502,000, down 12,000 from a revised estimate of initial claims of 514,000 for the week ended October 31, 2009. The 4-week moving average decreased 4,500 to 519,750. The average is down 139,000 from its peak.

Robert J. Gordon did research exploring the relationship between the 4 week moving averages of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. This is bittersweet news.  While average has decreased, the rate of decrease has been painfully slow.   

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I built a graph that compares the 4 week moving averages of initial unemployment claims for recessions that began in December 2007, March 2001, July 1990, and July 1981.  I have not attempted to adjust the initial claims data for changes in the size of labor market. The plots are measured over 112 weeks, beginning eight weeks before the recessions began. The horizontal axis begins in October 2007, the date the current recession began, and the data for the other recessions are superimposed on this date.
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