The President's Latest Stimulus Proposal

From a NY Times Editorial:

According to Mr. Zandi, President Obama’s $450 billion jobs plan could add 1.9 million jobs in 2012 and cut the unemployment rate by a percentage point. With interest rates so low, the government could easily pay for a bigger program.

Wow that is $459 billion / 1.9 million = 241,578.95 per job! One would hope that would make Mark Zandi against this stimulus plan but not so. He is for the plan.  Now I admit that you do get some stuff for the money not just jobs, they are not digging holes and filling them in. I also admit that this is a great time to get ahead on building and fixing roads and bridges and some of the proposed stimulus is in tax cuts which is almost free.   All tolled thought, $241,578.95 per job is still seems like a very expansive way to create jobs but since the median voter seems to demand jobs programs we should find cheaper ways to do it.

Perhaps this simplest way would be to replace the minimum wage with some kind of wage subsidy.  The recipient would get the bast wage that he can find and the Government would pitch in enough to get the recipients income up to some acceptable level.  We are already paying those who are still eligible to collect unemployment so we might as well pay them to work rather than paying them to not work!

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Warren Buffett's Article on Taxation has Spawned Some Good blog posts on Taxation

Warren Buffett's article about  taxation and tax rates has spawned some very good blog posts on the subject of  taxation and who pays for what.  


Here is a good post on the subject by John Goodman. In it he proposes a progressive consumption tax.  There are things that we could do short of that.  For example  I wonder why we have a cap on how much a person can put in an IRA.  Why not tax income when it comes out of the IRA to be consumed, rather than when it is earned.  Investment helps us all in the longer term so why tax it?  


Also it would seem to me simpler and better to tax a husbands and wive's income separately and let them divide the exemptions optimally.  This would eliminate the marriage penalty making conservatives happy and would encourage more women to work in the taxed part of the economy making Democrats happy. 


Of course I would also eliminate most deductions to simplify.  


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Why Eliminating the Deficit is Technically Easy but Still Politically Impossible

Why Eliminating the Deficit is Easy but Impossible


Below I address the big federal government expenditures and tell how they could easily be reduced without much causing much pain.  


Social Security


Social Security is one of the biggest areas of federal spending. If we are looking to reduce federal government spending Social Security is a good place to start. The first fact that stands out with Social Security is that it is a rob Peter to pay Peter program.  What I mean is that it takes money from all of us to give to all of us.  In fact it takes more money from the higher earners and gives more money to the higher earners but, if you ask people why Social security exists they will tell you that it exists so that no one will be destitute in retirement.  And make no mistake about it in a rob Peter to pay Peter program, if you are middle class you pay the full amount for yourself plus the  cost of inefficiency and dead weight losses.  


Here are some excerpts from the Social Security web site:


The maximum benefit depends on the age a worker chooses to retire.  For example, for a worker retiring at age 66 in 2011, the amount is $2,366.  This figure is based on earnings at the maximum taxable amount for every year after age 21.

The average monthly Social Security benefit for a retired worker was about $1,177 at the beginning of 2011.  This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits.

BTW I learned some thing from doing this research, I learned that there is no minimum Social Security benefit so it does not even cover some of the neediest people at all.  


So if we want to keep people from becoming destitute in retirement but want to be more efficient and not discourage work and saving, what can be done with Social Security to save money?  Means testing the benefit in retirement is out because that would discourage saving. What you could do is select an amount below the average benefit and give that to everyone. So how about we give everyone on the program $800/month that would reduce spending on the program by of over 32 percent.

The big obstacle to this sensible change is that people are fooled into thinking that they are getting something for nothing from SS, and old people vote.

Schooling/Education


Schooling is another big Government expenditure and though most of the spending is at the state level a big reduction at the state level would allow the federal government to remit less to the states and localities.


The average cost per student per year is now up to $13,00.  I pay $4,000 per year to send my son to private school.  If you ask why the Government runs the schools a common answer is because otherwise people would not be able to afford to send their children to school.  but lets face it if you earn median income or better you are probably paying the full $13,000 through taxes.   I like to ask women if the state would pay you $10,000 each to educate your children would you home school them.  The simple money saving solution is to start to charge families based on income for each child that they have in government schools.  Poor people would use government schools for free and as income goes up the charge would go up more slowly as to not make it better to make less.  At some point above the median income people would pay the full $13,000 per child.  this would push people to find cheaper ways to educate their children.   Of course this is politically impossible now because the median voter being rationally ignorant thinks that school is free paid for by the rich.  




The big problem here is that people are fooled into thinking that they are getting something for nothing but I assure you that you cannot subsidize everyone and you cannot subsidize the middle class they pay every penny.  On top of that the system is so inefficient that we can all be better if we just focus on subsidizing the poor rather that trying to subsidize everyone.  

Medicare 
Recently there was a big press story about changes in Medicare leading to "death panels" but it there is strong evidence that at least half of all healthcare spending is for care that net out negative on the harm verses benefit scale.  The Rand Health Insurance is one big piece of evidence and differences by area on spending show the same results that is places the spend half as much per medicare patient often get better results that areas that spend more.  Further no one is saying that you cannot opt for aggressive expensive care just that medicare should refuse to pay for it if it does not net about positive among the population.  We evidently do to much medical and so medicare needs to have panels that decide what it will cover in what circumstances.  This can easily knock medicare expenses down a third and still there would be waste.  


Also between Medicare medicaid and plans for government employees government currently spends more that half of the money that is spent on medical care in this country.  It therefore has considerable market power and so can more affect in market prices than it does.  It could simple negotiate lower prices.  Most of the difference in spending between the USA and Canada is due to higher prices not less care.  


Licensing is an issue that also needs to addressed.  It is currently to difficult and long a poses to become an MD, PA, NP, RN and LPN.  The evidence is that this does not improve quality does push up prices.  One piece of evidence is that PA, NP and midwives get as good outcomes as MDs.  Generally with a reasonable range of qualifications it is not better people that improve outcomes but better systems.  


Making it easier to become a provider would make for more competition and make it cheaper get care. 


The big problems here are that people think that they are getting something for nothing and old people vote.  People are also convinced that Doctor quality drive outcomes and that schooling it a very accurate way to screen for better doctors.    


Defense


In reality we won the wars in Iraq ans Afghanistan within weeks of the invasions and those invasion are a good deterrent against allowing the establishment of Al Queda again in those countries.   We could save considerable money by admitting victory in those countries and leaving them to work out their own salvation with fear an trembling.  


Also we still have bases in Germany and Japan long after the end of the cold war.  


The USA spends about what the rest of word combined spends on defense.  We spend more 2x what number 2 China spends and there stuff is not as good as ours and much of there spending is wasted on foot soldiers nor does China look like a threat to us but like an ally.  



We could easily cut military spending in half without compromising security.  


Other Smaller Areas to Cut:


Energy has been an area of interest t me since my college days when I majored in resource economic believe me when I say that the Department of energy has accomplished nothing and should be completely eliminated.   The same goes for the Department of education.  




Why it cannot be done until a sever crisis hits:



The median voter thinks:

1. That corporations pay the corporate tax
2. That Warren buffet is under taxed 
3. That schools are free to him
4. That SS is not a welfare program.  

Related Issues for Other Posts:



Medicaid puts huge marginal taxes on the poor.  Better huge deductibles that vary with income.  

The corporate tax is paid by the people, either the stock holders, employees or consumers.  


It is very hard to really tax the rich.  


Hidden taxes everywhere don't be fooled if you are middle-class you pay every penny for every program/benefit that you receive from Government and then some.  


Why we should just have a consumption tax.  It hard to tax the rich.  How to make a consumption tax progressive and keep wives in the in taxed labor force.  

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Kevin Outterson at The Incidental Economist Blog Made the Kind of Post that Gets Me Going

Kevin Outterson at The Incidental Economist blog made the kind of post that gets me going in high gear.  He wrote:

 Japan – better outcomes with older people at half the cost

Don’t let anyone assert (without data) that the aging US population is to blame for our high health care costs. Look at Japan. Despite one of the oldest population in the OECD and health expenditures half the US amount, Japan enjoys much longer longevity.

It is not clear that Japan has better out comes see here:

1. Asians live longer here too.
2. Japan has a much lower accident rate than the USA.
3. Japan has a much lower homicide rate than the USA.
4. Japan has a much lower multiple birth rate that the USA. 

If you assume that all ethnic groups are equally health then we don’t have to go to Japan for an example we can adopt the the care level to that of Hispanics here in the USA and that will improve our longevity. I think it would not help, though it could be true that too much health care is killing whites.  Hispanics have less access to health care than even black Americans.  

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The Macro Resilience Blog Post on Snap Back

The macro resilience blog has a post that uses a term "snap back" a term that I had never seen used in this context but it seems like a great way to describe the problem.


"The problem in a credit economy is not so much excess savings but as Borio and Disyatat put it, excess elasticity. "
...
"If our financial system is a rubber band, the long arc of monetary system evolution from a metallic standard to a credit economy via the Bretton Woods regime has been largely a process of increasing the elasticity of this rubber band (excepting the period of financial repression post-WW2 when the trend reversed temporarily). Snap-backs are inevitable – the question is simply whether the snap-backs are “normal” or catastrophic."




This "snap back" is the problem that I think competitive currency issuing can solve.  In a system with bank's currency backed only in bank assets in the face of deflation banks would have an incentive to issue more currency to by up assets.  This would slow the appreciation of currency (deflation) and slow the fall in asset prices.  Further more if currency is not Government issued it might not out compete stocks and other investment so badly when people are scared.


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Productivety

This is an interesting article The Greater Recession: America Suffers from a Crisis of Productivity with interesting graphs

His energy costs are off because he measures the cost of energy inputs but we do not buy energy we buy mobility, cool, warmth, TV viewing time etc. and those cheap new manufactured goods deliver more of those output per energy input BTU.

Also housing is on the mend recently. prices are falling. That leaves medical care and schooling/credentials which is what we really buy (education apart from schooling/credentials has gotten much, much cheaper since the internet). Medical care is a strange good but if you just look at output that is health life expectancy we are doing much better than in 1970. I think that schooling/credentials on the verge of big positive change. I think that we need a separation between education and grading/testing.

So I am very optimistic.

Very Informative Post on Infant Mortality

There is a very informative post on infant mortality on The Incidental Economist blog.  It talks about the racial differences in infant mortality.  Excerpt:

Personally, I think there is some genetic component–at every gestational age, black babies are smaller than babies of other ethnicities (the distribution is still normal, but it’s shifted to lower weights–that’s why any discussion of racial disparities in low birthweight needs to adjust for this), but, at any gestational age, their survival is better (a black baby born at 31 weeks has better survival than a white baby, but, because there are more 31 week deliveries, overall mortality is higher in blacks), and there are differences in the distribution of pelvic shapes (black women are more likely to have a narrower pelvic outlet.    

Cost per Job of Gov. Created/Saved Jobs

From John Goodman's Blog:

A lot of news outlets carried Mark Zandi’s prediction:

“The president’s plan would provide a meaningful boost to the economy and job market in 2012,” Zandi concluded. “I expect the plan to add 2 percentage points to real GDP growth and 1.9 million payroll jobs, and reduce unemployment by a percentage point.”

Steve Allen’s response:

I entered these numbers into a spreadsheet along with the cost of each program (based on WSJ) of $175b, $70b, and $140b respectively.  You can then calculate how much it costs (in lost revenue or greater expenditures) to create a job.  The numbers are sobering: $233k per job for the payroll tax cuts and $350k per job for the infrastructure spending.  And these jobs would only be around for the duration of the new stimulus package!

 I am afraid that it is a political reality that we must have jobs programs (the median voter votes for them) so we must find a cheaper way for Government to encourage job creation. I say we try to get the politicians, to replace the minimum wage with a wage subsidy and see of that works. We are already paying many of the unemployed.

SS is NOT a Ponzi Scheme but that does not Mean it is not Fraudulent

SS is NOT a Ponzi scheme but it is a welfare program disguised as an insurance annuity.  All welfare programs work the way that it works.  That is, all such programs pay for current welfare out current income.  Even charities work that way so that is not the fraud..  The fraud is that it is structured in a way to fool people into thinking that it is insurance/retirement annuity like what some insurance companies offer.  It was supposedly setup the way it is to make it politically difficult to end.   But the disguise makes it make a much costly welfare program that it should be and the disguise is meant to fool people and so it is  a bit of a fraud.   It is welfare program that distributes most of it funds to people who do not need the money.

SS as a welfare program should not pay out more to those who made more in their working years.  As a welfare/insurance program if everyone got the same minimal amount in retirement, and we can debate what the amount should be,  the tax could be lowered allowing individuals more control of their own money and retirement.  That would make most everyone better off.  It should also be funded through general revenue not some special tax.

A Theory of Our Current Long Lasting Unemployment

It has been 3 years since the financial crisis and yet unemployment is still over 9%.  So why?  Well, from my admittedly narrow perspective the internet and China eliminated certain jobs faster than jobs could be added in other areas. For example due to the internet our company was able to reduce marketing staff.  We found that marketing staff made very little difference because buying Google search terms was the only thing that significantly effected sales.  


The way I see it the 2001 downturn corresponded with the fall in the need for certain worker due to the internet even while mechanization and China's fast growing economy eliminated many manufacturing jobs. Greenspan pushed interest rates down low enough that housing absorbed enough workers to mask the situation. Now that the housing bubble has burst we need some deep changes. There is as always plenty of work to be done but it takes time for new services to evolve and be accepted.