Reinhart/Rogoff and holy crap!

I don’t consider myself a deficit scold, but did write a book called Balancing the Budget is a Progressive Priority and worry about things like the Debt:GDP ratio more than most who would self identify as progressives. When asked at myriad speeches, presentations and the like the past 3 years how much debt:GDP is too much, I have many times said something like “no one knows for sure, but when you are getting around 100% of public debt:GDP you will harm economic growth.” This diddy was based largely on an influential paper by Carmen Rinehart and Kenneth Rogoff that showed that nations’ whose debt:GDP was above 90% had average economic growth of -0.1% annually. It appears this widely cited (this is an understatement of how influential it has been) conclusion was based on a coding error and the correct rate of growth with the code corrected should be 2.2% GDP growth according to a new paper. As Matt Ygelesias says, this will almost certainly change nothing about the policy debate because most people are so locked into their ideological positions at this point (there were also so questionable exclusions of data for certain countries; the original study is a cross-national look at debt:GDP and economic growth).

My first thought is WOW, what a big error. As several have said on twitter today, it also gives me a pit in my stomach…..making a mistake like this in a published paper is the professor/analyst version of having the dream in which you have to take the final exam but you never went to the class.

The data and the facts are important. I am sure there will be more post-mortems, but this looks to be a huge case of a false fact having a big impact on an important debate.

update: fixed a typo

The Future of the UNC System: should a campus be closed?

This is the third in a series about the Future of the UNC System. Past posts:

• Introduction
• Overview of Benefits of the system

In a political/media sense, the debate seems to be boiling down to whether a campus or campuses (of the 16 colleges, 1 high school) in the UNC System should be closed. During the budget-crisis-driven cuts of the recession, Erskine Bowles, then President of the overall UNC System said that if the General Assembly continued to make cuts, that the system would be forced to consider whether it made more sense to eliminate one or more campuses, instead of cutting them all by large amounts. Many interpreted this as a ‘shock therapy’ of sorts to dissuade the General Assembly from further cuts. In the current debate, some Republicans are saying that we need to consider eliminating a campus or two, and that Erskine noting it as an option proves it is a bipartisan notion.

Erskine Bowles can speak for himself about what he meant then.

For me, the debate about the funding level of the UNC system and whatever considerations flow from that need to be informed by the answers to some basic questions first. Here I pose a few of the key questions, without providing an answer.

• How many undergraduate credentialed students should the UNC system produce each year?
• What is the value to the state of undergraduates who earn degrees from research as opposed to more teaching-focused universities?
• How many professional students (Medicine, Dentistry, Law, Nursing, etc.) should the system graduate per year?
• How many doctorally-trained (non professional; Ph.D.) students should the system graduate per year?
• What is the relative importance to the State of undergraduate v. professional v. doctoral education?
• How do we as a State value the research that is produced in UNC system schools?
• What should the ‘service’ component of a faculty members job description look like? How does this differ for land grant versus other UNC System schools (if at all)?

In the end, we have to decide whether our production of students, research and service is going to stay steady as projected, or increase or decrease. Once that general decision is made (that requires taking all the questions above seriously and many more) then you can have the ‘close a campus v. cut them all debate.’ Or maybe we should invest more.

These are big questions that are tremendously important. I know that people within the UNC System think about them and have plans and projections. Somehow, we need to have a meaningful, statewide conversation about these issues. The duly elected General Assembly holds the purse strings for the funding of the UNC System, which is as it should be. It is quite possible they are not the best body to answer the questions above (and the myriad detailed questions below these). However, they will have to appropriate the money to fund whatever system we will have going forward.

We need a process that explicitly states resources available and then asks the University system to work within that, making clear what is lost by lowered levels of spending, or what could be gained from increases. This sort of marginal analysis is key to identifying the appropriate level of investment. Give and take is required, and the case will have to be made that investments in the UNC system have been, and are worth it going ahead. The last step (funding) is rightly the General Assembly’s alone. However, playing this out blow by blow in an overtly partisan fashion which seems to be where we are headed is bad for our State.

One Sided Deficit Debate

James Kwak laments a “one-sided deficit debate” and says there has been no left/progressive discussion of these issues, and points to his book with Simon Johnson White House Burning as offering one (that I have yet to read). I would say my book Balancing the Budget is a Progressive Priority tried to make a contribution, with the next steps on health reform being the key.

Most people who look at these issues agree that the long run spending side problem if you are interested in a balanced (or even close) federal budget is health care costs. This won’t happen before the election of course, but if President Obama wins, then the Republican dream of repealing the ACA will be gone, and both sides have plenty of incentives to achieve a deal on health reform that is part of a larger, longer term deal on the tax code in a second Obama term. The niche of my book is that it moves from this agreement that health care costs are the key spending side problem to a set of nuanced health reform proposals that I claim represent what a bipartisan health reform might look like if both sides actually negotiated based on policy. Many writers on the deficit are budget types who dip their toe into health policy. I am a health policy guy who has dipped his toe into budget stuff.

The state of the meta debate seems to be that you are either for deficit reduction or you believe we need to do more to stimulate the economy because aggregate demand is too low. The dichotomy is false, and my book notes we need more in the short term to boost, and more in the longer term to increase taxes (the percent of the economy collected in taxes) and decrease spending not really over current levels, but over the default levels over the next 30 years given the movement of the baby boomers into Medicare, Medicaid and Social Security given our tax code and other spending priorities. My book certainly focuses on the longer run issues, but you don’t have to pick between the problems to address .

Politically, the crux of my book is that if you believe government has a key role to play in modern society, you have to be able to make the “trains run on time”, and so in that sense I think progressives/liberals need a sustainable long term budget more so than do Conservatives. Without proactive action, my view is that those hurt most will be the most vulnerable members of society in Medicare, Medicaid and Social Security.

The Dems have passed a health reform plan which everyone knows will be tweaked forever (any plan would be) and they are open to tax increases, and so have a record and affinity that can plausibly lead to a sustainable budget. At this point, Republicans have no health reform plan and are opposed to tax increases, meaning they have no plausible route to get to where they say they most want to go (a balanced budget). Of course there are Republicans who know taxes will have to increase to have a sustainable budget, but they cannot own up to this until after the election, and only if President Obama is re-elected.

The Republicans have won the metaphor war (cuts, austerity language predominate the discussion in the electorate), yet they are all talk, with no way to get to a sustainable budget. I think this provides a political opening that enables the Democrats to call the bluff of Republicans and press the case that if you want a balanced budget (ever) it will take an increase in taxes and a health reform plan, including acknowledging that changes to the ACA are inevitable and such a process is good and needed and challenging the Republicans to be clear on what they are for in health reform. The polls suggest there are very few undecided voters, but I suspect this type of discussion would appeal to the few that are left.

Simpson-Bowles in the Senate

Ezra Klein’s take is about right. It is very possible behind the scenes people feel differently, but before the election given what has transpired, it just seems impossible for any bipartisan budget absent an economic calamity. An obvious strategy is to let Taxmageddon go off, and then passing something like Simpson-Bowles (or just about anything else) in Jan. 2013 could be declared to be a tax cut…..it just depends on the baseline used to keep track.

One key point is Sen. Session’s criticizing Sen. Conrad’s Chairman’s mark as raising more in taxes than the House version of Simpson-Bowles. That is true, but mostly because they Cooper-LaTourette, which was labelled Simpson-Bowles, really was not, and raised far less revenue.

I am left wondering what might be different if President Obama would have embraced Simpson-Bowles immediately when released in Decmeber 2010, and put that forward as his next budget? Many Liberals and Progressives hated it, especially the Social Security aspects (my least favorite part of the plan at first glance; and after more consideration). I understand the argument that the most likely outcome of President Obama embracing this in his budget would have been a Republican move to redefine the plan as the new practical definition of socialism, etc. However, I don’t think that charge would hold up over time. And it is also the case that the initial Simpson-Bowles plan is the MOST LIBERAL plan put forth that had any modicum of bipartisan support in the sense of raising taxes; (this rightward drift viz. tax increases v. budget cuts of all the plans can be seen in the House v. the Senate versions of “Simpson-Bowles”). Further, Simpson-Bowles quite clearly assumed the implementation of the Affordable Care Act and moved on to the next steps; this would have been a powerful rhetorical argument in the health reform wars of the 16 months since the report was issued, had the President embraced Simpson-Bowles as the hard medicine the country needed.

This doesn’t mean I don’t support the President, I do. My take simply flows out of my belief that Progressives and Liberals need a sustainable federal budget more than Conservatives do, given our view of the role of government in society. My thoughts are more fully fleshed out on this in my e book on the subject; a fuller version will come out in May 2012 published by Springer (Balancing the Budget is a Progressive Priority).

Conrad budget

Here is the Chairman’s mark from the Senate Finance committee Chair, Sen. Conrad. On twitter it is being called the “legislative language of Simpson-Bowles”, but I haven’t had a chance to dig in and look closely; I cannot get to it until later.

Update: ShaiAkabas of the Bipartisan Policy Center says the Conrad budget is quite close to the final Simpson-Bowles report (unlike the Cooper-LaTourette bill voted down in the House).

Update 2: busy day…..Sen. Toomey offers a budget today. Will have to dig in later…..twitter saying he claims balanced budget within 8 years which is quite aggressive.

The Blahous dust up

Jonathan Bernstein with a post decrying the poor job the WaPo Ombudsman did in describing the controversy around the piece put out last week by Charles Blahous that said the ACA will increase the deficit (contro to CBO’s longstanding estimates). I was with my family in a car heading South on I-95 reading about the unfolding controversy on twitter last week, and so I didn’t post on it. However, even now, it is mostly being described as a dust up over double counting (how can something help the deficit and Medicare). Jonathan Chait has a good piece debunking this claim, Kevin Drum has a nice illustration of why this is not a valid claim, and Josh Barro adds a bit more on how this interpretation undermines one of the conservative charges leveled against the President. This is an old argument, rehashed.

The primary issue with the Blahous study is his development of a new baseline against which to compare the ACA. As I tweeted last Tuesday as we sped to vacation wonderland (I wasn’t driving)

(Here are Avik’s posts including Chuck’s guest post response: here and here).

The baseline used by Chuck Blahous essentially says that when tax inflows are no longer large enough to pay for Medicare outlays, then they will be cut to equal tax inflows; this is what is set to happen by law, but then again so are the cuts to Part B payments under the SGR. The baseline he used in this study to estimate the ACA’s impact on the deficit essentially says, Voila! There are no long term financing problem with Medicare after all, we will just fix them when we have to do so, using some sort of secret plan to cut Medicare spending (he seems to have backed off this later, but if so, the ‘stop the presses’ aspect of the paper is gone). As compared to this (very large, hypothetical) cut in Medicare expenditures cooked into the baseline used by Blahous in his study, the ACA would increase the deficit. That is a bit like me saying if I was a faster runner, I could be a professional marathoner. My point is that the main action in this study is comparing the ACA to a baseline that is unrealistic, not double counting.

Now what I would really like to read would be Chuck Blahous’ thoughts on what type of health reform strategies that we should undertake, especially ones that could do away with the long term financing problems faced by the program. I mean that sincerely because he is a great analyst with lots of experience, this just wasn’t his best.

update: edited for clarity.

Bartlett on tax reform

Bruce Bartlett’s suggestion in Economix (h/t @afrakt) would be a big change, namely get rid of the income tax for most persons (those under $100,000 income) and replace it with a 12.5% VAT. His motivation for ending the income tax code for most is doing away with tax expenditures without having to take them on one by one. I have a post later today that has a similar logic of getting rid of the corporate income tax because it is exceedingly hard to levy such a tax.

Bruce notes (and many others have) that the Bowles-Simpson plan was rejected with only 38 votes a few weeks back. However, it wasn’t really the same set of policies contained in the report. The bipartisan group decided they were going to call it that I guess, but it is not so clear why. Just call it a bipartisan budget that was the best we could do (and which obviously didn’t have much support). The Bipartisan Policy Center seems to be the only place pushing back against this meme.

Maybe it is not that important, I just don’t get why people cannot be more precise.

Should we take Ryan’s health policy plans seriously?

Only if the focus of attention quickly shifts to the Commerce and Ways and Means committees in the House of Representatives. That is where the heavy lifting of any health reform proposal must be done, as it was with the Affordable Care Act. As long as the Budget committee and Rep. Ryan remain the focus, the health policy aspects of the proposal are mostly talk.

Rep. Ryan this morning unveiled the beginnings of the House Budget committee’s budget resolution for the Fiscal Year 2013 budget, and here is CBOs early take, though it is important to remember that they have not analyzed the specific policies contained in the Budget Resolution.

The calculations presented here represent CBO’s assessment of how the specified paths would alter the trajectories of federal debt, revenues, spending, and economic output relative to the trajectories under two scenarios that CBO has analyzed previously. Those calculations do not represent a cost estimate for legislation or an analysis of the effects of any given policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget figures released today by Chairman Ryan as part of his proposed budget resolution.

CBO has essentially said, if this budget performs exactly as Chairman Ryan says it will, this will be the top level result; CBO will eventually weigh in on whether they believe the numbers add up, but they have yet to do so.

On the big picture health policy front, Marilyn Serafini has a quick take, and notes that the FY 2013 budget sets a Medicare growth target of GDP growth plus 0.5%–more aggressive than his 2012 budget target of GDP plus 1.0%–but matching the goal set out by President Obama’s budget. So, they have agreed on an overall health care cost inflation target for Medicare, but not on the details of how to get there.

The details are really important.

That is where the Commerce and Ways and Means Committee’s come in. They have jurisdiction over health care (as does the Budget Committee) and they will have to discuss, mark up and pass very detailed health policy legislation to bring about any sort of premium support/competitive bidding policy (TIE FAQ key reading on topic) such as what is suggested in this budget. It is instructive to remember that the health policy provisions contained in last year’s budget resolution did not see the light of day in either Commerce or Ways and Means, or the Budget Committee for that matter. Nor has Rep. Ryan’s Patients’ Choice Act (post on the PCA with multiple links), which is a plan to reform health insurance for the under 65 set that he introduced on May 20, 2009 ever been marked up by one of these committees so that it could be scored by the CBO. And Republicans have been claiming to be interested in replacing the ACA, but have taken no actual (hard) steps to do so.

So, there is a bit of a pattern here: lots of noise and no follow through on the health policy details. So, unless you start hearing more of the names Fred Upton (Commerce) and Dave Camp (Ways and Means) and less of Paul Ryan, you will know the health policy provisions contained in this budget are not serious.

College students and deficit reduction

This post is cross posted at The Incidental Economist.

Last week the students in the class I co-teach with David Schanzer (Gridlock: can our system address America’s big challenges?) completed an in-class exercise created by the Concord Coalition that lets people devise their own plan to reduce the federal budget deficit (or not) over the next 10 years. A brief report on what they (10 groups of about 4 each; mostly undergrads, with a few grad students) decided.

• 9 of the 10 groups embraced policies that would reduce the federal deficit over the exercise baseline (which includes taxes greatly increasing on Jan. 1, 2013 and the implementation of the ~ $1.2 Trillion in spending cuts agreed to in the debt limit deal).
• The spread of the difference between the groups was over $5 Trillion over 10 years (a $430 Billion increase in the deficit to a $4.7 Trillion decrease, over 10 years; half of the groups identified deficit reduction of over $3 Trillion, again as compared to the baseline noted above).
• You can download the materials we used (and you can use with a class, etc.) here.
• The students engaged in long discussion about investing more in some areas, while cutting in others.
• Any such exercise necessarily simplifies the choices available, and this one boils it down to 40 choices about spending and taxation. The portion of the exercise that students were most frustrated with was the section on health care and Social Security. They wanted more nuance than was available in this section. For example, it offers the choice to repeal the ACA, or not. Likewise, they wanted more subtlety to address Social Security with a mix of benefit cuts and taxes.

There are other models available for such an exercise, and I highly recommend the online budget simulation tool developed by the Committee for a Responsible Federal Budget. It provides a bit more nuance in some of these key areas than does the tool produced by Concord, but the materials from Concord were more suited to an in-class group discussion format. Tradeoffs! Both are excellent tools to get students (and anyone) thinking about the choices our nation faces.