Tag Archives: consumption

Don’t like the fiscal cliff? You’ll hate the fiscal future.

Absent an eleventh-hour deal—which may yet be possible—the Federal government will cut spending and raise taxes in the New Year. In a town that famously can’t agree on anything, nearly everyone seems terrified by the prospect of going over this fiscal cliff.

Yet for all the gloom and dread, the fiscal cliff embodies a teachable moment. At the risk of mixing metaphors, we should think of the fiscal cliff as the Ghost of the Fiscal Future. It is a bleak lesson in what awaits us if we don’t get serious about changing course.

First, some background. Over the last four decades, Federal Government spending as a share of GDP has remained relatively constant at about 21 percent. This spending was financed with taxes that consumed about 18 percent of GDP and the government borrowed to make up the difference.

After a decade of government spending increases and anemic economic growth, federal spending is now about 24 percent of GDP (a post WWII high, exceeded only by last year’s number) and revenues are about 15 percent of GDP (the revenue decline can be attributed to both the Bush tax cuts and to the recession).

But the really telling numbers are yet to come.

The non-partisan Congressional Budget Office now projects that, absent policy change, when my two-year-old daughter reaches my age (32), revenue will be just a bit above its historical average at 19 percent of GDP while spending will be nearly twice its historical average at 39 percent of GDP. This is what economists mean when they say we have a spending problem and not a revenue problem: spending increases, not revenue decreases, account for the entirety of the projected growth in deficits and debt over the coming years.

Why is this so frightful? The Ghost of the Fiscal Future gives us 3 reasons:

1) As spending outstrips revenue, each year the government will have to borrow more and more to pay its bills. We have to pay interest on what we borrow and these interest payments, in turn, add to future government spending. So before my daughter hits college, the federal government will be spending more on interest payments than on Social Security.

2) When the government borrows to finance its spending, it will be competing with my daughter when she borrows to finance her first home or to start her own business. This means that she and other private borrowers will face higher interest rates, crowding-out private sector investment and depressing economic growth. This could affect my daughter’s wages, her consumption, and her standard of living. In a vicious cycle, it could also depress government revenue and place greater demands on the government safety net, exacerbating the underlying debt problem.

This is not just theory. Economists Carmen Reinhart and Kenneth Rogoff have examined 200-years’ worth of data from over 40 countries. They found that those nations with gross debt in excess of 90 percent of GDP tend to grow about 1 percentage point slower than otherwise (the U.S. gross debt-to-GDP ratio has been in excess of 90 percent since 2010)

If, starting in 1975, the U.S. had grown 1 percentage point slower than it actually did, the nation’s economy would be about 30 percent smaller than it actually is today. By comparison, the Federal Reserve estimates that the Great Recession has only shrunk the economy by about 6 percent relative to its potential size.

3) Things get worse. The CBO no longer projects out beyond 2042, the year my daughter turns 32. In other words, the CBO recognizes that the whole economic system becomes increasingly unsustainable beyond that point and that it is ludicrous to think that it can go on.

What’s more, if Congress waits until then to make the necessary changes, it will have to enact tax increases or spending cuts larger than anything we have ever undertaken in our nation’s history. As Vero explains:

By refusing to reform Social Security, lawmakers are guaranteeing automatic benefit cuts of about 20-something percent for everyone on the program in 2035 (the Social Security trust fund will be exhausted in 2035, the combined retirement and disability trust funds will run dry in 2033, and both will continue to deteriorate).

In other words, if we fail to reform, the fiscal future will make January’s fiscal cliff look like a fiscal step. I’ve never understood why some people think they are doing future retirees a favor in pretending that entitlements do not need significant reform.

You might think that we could tax our way out of this mess. But taxes, like debt, are also bad for economic growth.

But it is not too late. Like Scrooge, we can take ownership of the time before us. We can make big adjustments now so that we don’t have to make bigger adjustments in a few years. There is still time to adopt meaningful entitlement reform, to tell people my age to adjust our expectations and to plan on working a little longer, to incorporate market incentives into our health care system so that Medicare and Medicaid don’t swallow up more and more of the budget.

Some characterize these moves as stingy. In reality, these types of reforms would actually make our commitments more sustainable. And the longer we wait to make these inevitable changes, the more dramatic and painful they will have to be.

For all the gloom and dread, the Ghost of Christmas Yet to Come was Scrooge’s savior. In revealing the consequences of his actions—and, importantly, his inactions—the Ghost inspired the old man to take ownership of the “Time before him” and to change his ways.

Let us hope that Congress is so enlightened by the Ghost of the Fiscal Cliff.

Would You Oppose a Tax Cut on the Grounds that it Only Applied to a Few Firms?

A few weeks ago, Pete Boettke graciously invited me to speak at the Philosophy, Politics and Economics workshop at GMU. During the course of the talk, I extolled the virtues of what Hayek called “generality”—the idea that political action should not (positively or negatively) discriminate against any person or group of persons. (Note: generality goes beyond the 14th Amendment guarantee of equal protection under the law. That only prohibits discriminatory application of laws, but it does nothing to prohibit discriminatory laws such as taxes that apply to one group but not another. A true generality principle says that the laws themselves should not discriminate.)

Near the end of the talk, one of the attendees asked if I would oppose a tariff reduction for one (and only one) industry on the grounds that it violated generality. I believe many free-market advocates would say “No; we should always take any opportunity to expand economic freedom.” Milton Friedman expressed this view when he declared he’d “never met a tax cut I didn’t like”

My answer, however, is that in some circumstances the advocates of economic freedom should oppose such a tariff reduction. This is because I believe those of us who value economic freedom should also value generality. I have four reasons.

  1. Generality is morally intuitive. Kant called it the “categorical imperative,” others more prosaically call it the “golden rule.” Whatever you call it, it seems that lots of humans in lots of cultures value the idea that laws ought to treat us equally.
  2. Violations of generality make us poorer. When government discriminates in the way it taxes or in the way it spends, people change their behavior (note that in traditional public finance, a head tax creates no loss because it doesn’t discriminate between work and leisure or between consumption and non-consumption). And these changes in behavior are costly because they tend to discourage mutually-beneficial exchange. Economists call this the deadweight loss of taxation and these costs are greater when policy is more discriminatory. Thus, a tax that raises $100 million by taxing goods and services equally will involve less deadweight loss than a tax that raises $100 million by taxing only goods. What’s more, the tax rate on goods will have to be higher if the government wants to obtain the same amount of revenue. (I could mention other economic costs under this same heading. For example, knowledge problems and malinvestment, both loom large under discriminatory taxation).
  3. Violations of generality create rent-seeking loss. When government is in the business of privileging some and punishing others, citizens tend to invest resources (time, money, effort) in asking for their own privileges or in asking that others not be privileged. Quite often, these efforts produce no value for society and are a loss.
  4. Violations of generality make it easier to violate economic freedom. In the long run, I believe a norm which permits violations of generality will tend to make it easier to violate economic freedom. Consider a proposal to tax each of three people $10, plus one additional dollar in deadweight loss, in order to turn around and redistribute $10 to each of these same three people. None of our three citizens would be willing to vote for it. But now consider a proposal that costs each of three people $11 ($10 in tax + $1 in DWL) in order to turn around and redistribute $15 to two of the three. Now a majority coalition can easily be formed. The coalition is made viable only by violating generality. What’s more, the coalition will be even stronger if the proposal not only violates generality on the spending side but also on the taxing side. That is, if the proposal is to impose $33 in costs on only one person in order to distribution $15 to each of the other two, then the coalition will be especially strong. In fact, if it can shield itself from the pain of taxation, the coalition will be prone to ask for much more revenue. So in the long run, economic freedom is protected by adhering to generality, even if in the short run the two values appear as a trade-off.

None of this is to say that we shouldn’t also value economic freedom. To put it in terms that economists will quickly grasp, my indifference curves look like this:

 

 

 

 

 

 

Not like this:

 

 

 

 

 

 

Too often, in my view, conservative policymakers are suckered into violating generality because they believe they are advancing economic freedom. They end up supporting tax preferences for manufacturing, ethanol, housing, child bearing, and much else on the grounds that any tax cut is a good tax cut. Many of these tax preferences are the result of cronyism and each entails a host of economic and social costs. The end result is a tax code that is monstrously complex and that, too, is a cost.

The first-best solution is low and non-discriminatory taxation. Beyond that, I think we need to recognize that there are (short run) trade-offs.

 

Taxing People to Advocate for Taxing People

Back in April I blogged on a CDC program that seemed to be using taxpayer dollars to fund lobbying for more taxes. In his column this week, George Will picks up on the same program and offers a few more details. Here is a snippet:

In Cook County, Ill., according to an official report, recipients using some of a $16 million CDC grant “educated policymakers on link between SSBs [sugar-sweetened beverages] and obesity, economic impact of an SSB tax, and importance of investing revenue into prevention.”

Along the way, Will also highlights some excellent work coauthored by my colleague Sherzod Abdukadirov. Leaving legality aside, Will asks, “is such “nutrition activism” effective?”

Not according to Michael L. Marlow, economics professor at California Polytechnic State University, and Sherzod Abdukadirov of the Mercatus Center at George Mason University. Writing in Regulation (“Can Behavioral Economics Combat Obesity?”), a quarterly publication of the libertarian Cato Institute, they powerfully question the assumptions underlying paternalistic policies such as using taxes to nudge individuals to make consumption choices that serve their real but unrecognized interests — e.g., drinking fewer SSBs.

 

Tax Holidays in the Dog Days of August

In what has become a common practice in about a dozen and a half states, August is the month for the sales tax holiday. Whether the goal is to encourage consumer spending or ostensibly offer tax relief to families, the three-day holiday waives sales tax on certain purchases – typically school supplies and clothing. Here’s a chart listing the states and the once-a-year exemptions they offer.

What exactly do sales tax holidays accomplish? Some claims:

  • They save consumers money.
  • They increase consumer spending on both tax-free and taxed items. On net, the result is more revenue in what the National Retail Federation calls a “win/win/win” for consumers, retailers and governments.
  • A weekend tax break keeps spending in the local economy. According to Bloomberg BNA Ohio and Michigan first experimented with a tax holiday on cars in 1980. New York picked up the weekend tax holiday in 1997 to entice borough residents to keep their clothes shopping dollars in NYC rather than cross the border to New Jersey’s malls.
  • It is a way for politicians to make good on tax relief without making permanent changes to the code.
The Tax Foundation claims that tax holidays only shift consumer spending and any savings in tax may be offset by higher retail prices. In addition, the “gimmick-y” exemption leads to arbitrary decisions (e.g. backpacks are exempt but briefcases are not – see Virginia). Basically, the one-time break is a way for politicians to crow about tax relief while avoiding more substantive reforms to the code such as broadening the base and lowering the rate of tax.
A 2009 econometric study, The Fiscal Impact of Sales Tax Holidays, by Adam Cole of the University of Michigan finds that sales tax holidays induce “timing behavior” in consumers. There is a reduction in sales and use tax collections by 4.18 percent in the month of the tax holiday. Half of this reduction is attributed to consumers timing their purchases to coincide with the tax-free weekend. Though there is no evidence that this leads to a large substitution of purchases during the rest of the calendar year.
Cole raises two interesting issues for researchers to consider. Do tax holidays produce cross-jurisidictional shopping effects? Secondly, because of their short duration, do tax holidays allow retailers to evade taxes by attributing earlier sales to the holiday weekend?

Marwell and McGranahan (2010) provide another set of questions to consider for those who over-sell the benefits of back-to-school bargains for family budgets. In their working paper, “The Effect of Sales Tax Holidays on Household Consumption Patterns“, the authors ask: Who’s shopping and what are they buying? Their preliminary findings suggest it is primarily upper income households and they are mainly purchasing clothes.

On a purely anecdotal note, I calculate that if our family went shopping during Virginia’s August 3-5 tax holiday we would have saved about $9.00 on backpacks and school shoes. To avoid the back-t0-school crowds we purchased those items at Tysons Corner the weekend before. If that’s the premium for efficient mall shopping, we paid it gladly.

 

Is the Localvore Movement a Folly?

Pierre Desrochers, Canadian economic geographer and Mercatus affiliated scholar makes the case that the Localvore’s drive to get people to “eat-locally” is based on fanciful notions of economics and agriculture, in his book, The Localvore’s Dilemma: In Praise of the 10,000-mile diet, co-authored with wife Hiroko Shimizu.

The book goes to the heart of an apparent motivation for food activists, that “sustainable farming” and “eating local” will help the planet. Desrochers and Shimizu disagree. They show that subsistence farming is unsustainable, back-breaking and not environmentally-superior to large-scale methods. Rather than reducing “food miles” (the distance the banana travelled into your cereal bowl) the authors instead make the case for eliminating ag-subsidies. The takeaway: eating globally gets you to a better place, environmentally, than limiting your consumption to the downtown farmer’s market.

I don’t disagree. But this review by Emily Badger at The Atlantic contains some food for thought. She suggests reading, Urban Farms, by Sarah Rich who went out and interviewed urban farmers to understand this growing movement. Here’s one of her findings, quoting Badger’s article:

Politics are all but absent from Rich’s interviews. She visits one urban farmer in Detroit who comes the closest to voicing revolutionary motives. He is concerned about a trash incinerator in his neighborhood, and he views his backyard farm partly as a defiant form of environmental remediation.

“That’s what he’s thinking about, his local garbage system and how messed up it is,” Rich says. “He wasn’t talking to me about Monsanto, or industrial agriculture.”

Throughout her 16 urban farm profiles, Rich found what she describes as very local initiatives, where agriculture just happened to be the medium for doing something positive in the city.

Rich documents many non-political motives for urban farming: a social anchor for the community, beautifying blight, jobs for the unemployed, places for children, opportunities for school kids to learn about plants and science, fresh produce in food deserts.

Does the Localvore movement have to be an either/or proposition? I’m intrigued that Rich went into the field and talked to urban gardeners to see what is driving them. Based on Ms. Badger’s article it isn’t green ideology or government subsidies, but something much more ‘organic and human.’

The pleasures and rewards of a backyard garden.

I think the policy problem Desrochers and Shimizu identify is a real one.  The more idealistic members of the “Food Activist” movement assert that local farms can (at least partially) replace global production to sustain the current population. They insist that large-scale food production is bad for the environment and take an overly romantic view of small-scale subsistence farming. That is folly. But free trade in food should not imply that urban gardening doesn’t have virtues of its own.

I confess my prejudice. Growing up in suburban north Jersey we benefitted from a subdivided acre of land that we shared with my grandmother. My siblings and I helped tend a large vegetable garden, fruit trees, berry brambles and my mother’s ever-expanding herb garden. For a period my father experimented with growing grapes for wine (a project he abandoned upon sampling the results). We learned how to grow, care for, and cook the fruit of our labors.

There is an indescribable gulf between the Jersey tomatoes we grew and the tasteless rubber ball I reluctantly buy in the grocery. We canned, froze and shared the yield of our garden with neighbors. I learned to appreciate food (i.e., not waste it), how to recycle (compost), how to cook, how to propagate raspberries, currants and gooseberries; and for a few summers to stomp on grapes.

Before I was born, my grandmother (who was raised on a farm in Białystok, Poland) kept two chicken coops. I imagine that turned into more trouble that it was worth but nevertheless it was the source of my grandparents’ dinner for a brief time. The exercise of gardening not only taught basic science and refined our palates, but imparted lessons in self-sufficiency, responsibility, stewardship, familial cooperation, gave us spells of serenity, a place of respite and imagination, and the opportunity for generosity. Non-quantifiable.

We managed to grow enough to eat well during the summer and have some to spare for the winter. It would have been tough (impossible) to survive on it alone. And, we made frequent trips to the grocery store for everything else: to buy food that was produced everywhere else. We tended to skip over the produce section between June and September and never bought a tomato.

So, yes to the economics of global food production and subsidy-free agriculture. And yes to the non-quantifiable benefits of working the land no matter how modest the effort.

 

 

 

 

Net Worth is Down and that May Explain Why Stimulus Wasn’t Particularly Effective

This week saw the release of the Federal Reserve’s Survey of Consumer Finances. The news isn’t good. Median net worth fell 38.8 percent from 2007 to 2010. Predictably, the unhealthy diagnosis has occasioned a healthy dose of political posturing. For its part, the White House was quick to note that “the entire decline in household wealth took place before President Obama came into office” and that total wealth “has risen every year since he came into office.”

E21, in turn, pointed out that it was a little odd for the White House to emphasize the aggregate numbers rather than the median:

The claims made by the White House are disingenuous (at best) because they ignore the median U.S. household and focus instead on the increase in overall wealth, which has largely come from gains in the stock market. The White House is essentially saying that we shouldn’t worry about the plight of the typical family because Warren Buffett’s stock holdings have gone up in value by tens of billions of dollars since March 2009. The focus on aggregate household net worth is extremely comical when compared to previous statements made by the President and others in his Administration about the country’s lamentable concentration of wealth and income in the hands of a “fortunate few.” Someone should ask President Obama if this means we needn’t worry about income disparities anymore because total household income is up nearly 20% on an inflation-adjusted basis over the past 10 years?

Framing aside, there is an important policy implication of such a large fall in net worth. Richard Clarida of Columbia University explained this point way back in March of 2009:

There is a second reason while the bang of the fiscal package will likely lag behind the bucks. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time, as households rebuild their balance sheets the old-fashioned way – by boosting their saving rates.

In our working paper last fall, Veronique and I explained this point further:

The current recession has resulted in an unprecedented collapse in net wealth. In other words, it is a deep “balance sheet”‖recession. But with personal wealth diminished and private credit impaired, some economists believe that stimulus is likely to be less effective than it would be in a different type of recession. This is because consumers are likely to use their stimulus money to rebuild their nest eggs, i.e., to pay off debts and save, not to buy new products as Keynesian theoreticians want them to.

The White House is interested in escaping blame for the collapse in median net wealth. That’s understandable; that’s what White Houses do. It is harder to escape from the policy implications of a balance sheet recession.

Trickle-Down Economics: Does Anyone Actually Believe In It?

I have heard a lot about “trickle-down economics” lately. The President has taken to using it in speeches. And pundits have increasingly invoked the idea. Back in February, I was asked about the term when I testified before a House committee and had to confess that I have never met an economist who has advocated anything close to “trickle down” economics.

The words “trickle down” imply that if you redistribute money to the wealthy, they will spend it (say, by hiring workers or by buying products) and it will somehow find its way into the hands of the poor. To the extent that any economists endorse such a notion, they are emphatically not free market economists.

This is not to say that there is no case for low taxation. There is a strong theoretical case for low taxation (so long as it is accompanied by low spending!). And it is backed by good empirical evidence.

But the case for low taxation is not—as the phrase “trickle down” implies—based on the idea that we should give money to a wealthy person so she can spend it. Instead, it is based on the idea that if we take money away from either a rich or a poor person when they engage in some activity, they will tend to engage in less of that activity.

If we tax work, people will tend to work less. If we tax consumption, people will tend to consume less. If we tax saving, people will tend to save less. The idea is rooted in basic microeconomics. Taxing labor, for example, makes leisure less expensive. So people choose more leisure. This is called the substitution effect.*

All this theory is well and good, but is there any evidence to back it up? Yes. Michael Keane offers a nice survey of labor supply and taxation studies in the December issue of the Journal of Economic Literature. He identifies at least two major patterns in the evidence:

  1. Women are more responsive to taxes than men (most economists think men are relatively unresponsive to labor taxes, especially in the short run).
  2. People—particularly women—are more responsive to taxes when they consider whether to work than they are when they consider how much to work. In the average study, the long-run elasticity for female labor is 3.6. This means that if a tax hike reduces after tax wages by 10 percent, female labor force participation tends to fall by about 36 percent. As Keane puts it, this is a “very large” effect.

In my view, both of these patterns make sense. Historically, women have been more likely than men to work at home and so higher taxes seem more relevant for them than for men (as more women work outside the home and as more men stay home, I’d expect this gender difference to narrow). It also makes sense that taxes have a larger effect on the decision to work at all than on the decision to work a certain number of hours. Most of us can’t tell our employers that we want to work 30 hours a week rather than 40. But we can tell our employer that we don’t want to work at all. And evidently a lot of people—particularly women—do tell their employers this when taxes are high.

So far, I’ve only discussed how taxes affect labor supply. But they may also depress consumption and investment. What is the overall effect on the economy?

One of the best recent studies is that by President Obama’s former economic advisor, Christina Romer and her husband, macroeconomist David Romer. The Romers set out to understand the effect of taxation on an economy. But they knew that there was a major problem: taxes are not randomly increased or decreased. Instead, politicians tend to keep taxes low when the economy is in recession and raise them when the economy is booming. This makes it very difficult to disentangle cause and effect. So the Romers painstakingly analyzed decades of presidential speeches and government documents to identify exogenous tax changes (i.e., changes that were undertaken for reasons other than the condition of the economy). They then compared the performance of the economy following such exogenous changes. They concluded that exogenous tax increases are “highly contractionary.” As they put it in the conclusion:

Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.

Now here is the irony: As I note above, few if any economists advocate redistributing resources to the wealthy in the hopes that they will trickle down to the rest of us. But over the objection of economists—particularly free market economists—policy makers do this all the time. Think of President Bush’s TARP. Or President Obama’s decision to extend TARP to the auto companies. Or his excursions into venture capital. In each case, money was actually transferred from taxpayers to the (mostly) wealthy managers and shareholders of private firms.

If words mean anything, each of these policies—and not, say, an across the board reduction in marginal income tax rates—should be labeled “trickle-down economics.” But in politics, words often mean nothing.

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*  You might be thinking that the income effect offsets this: By taxing income, you not only make leisure less expensive, you also make people feel poorer. In response to feeling poorer, they may feel that they need to work harder to make up for the loss income. This works for an individual, but as economists James Gwartney and Richard Stroup long ago explained in the American Economic Review, it does not work for society as a whole. This is because governments do something with the money they collect in taxes. And the income effect of spending government revenue makes people work less. So at the economy-wide level, the income effect from spending offsets the income effect from taxing. All you have left is the substitution effect and that unambiguously reduces labor supply.

 

New Levels of Paternalism Promoted in New York

Image via Flickr user freedryk

Earlier this week, New York City Mayor Michael Bloomberg introduced a proposal to ban the sale of sodas larger than 20 ounces by any retailers regulated by the city’s health department. This proposal has many New Yorkers upset, and even the New York Times says this would be a step too far toward paternalism.

While many agree that banning a product goes beyond the bounds of what we can tolerate from the nanny state, writers including Matt Yglesias support additional soda taxes instead. Yglesias suggests that a soda excise tax is a good idea primarily because it will raise revenue and that one good use of this revenue would be increased welfare payments.

The problem with suggesting excise taxes as revenue raisers to support welfare programs is that low-income people are those who are disproportionately hurt by these taxes. Yglesias suggests that the tax will fall in large part on tourists, but I’m not convinced that tourists drink a large percentage of sodas sold throughout the city. Further, a study of soda consumption in New York shows that people in a household at 200% of the poverty or below drink more soda than the average New Yorker. If this statistic were adjusted for the percent of income spend on soda, the results would be even more striking. This tax will also fall the hardest on those who have the strongest preferences for soda over other drinks, the same people who are the least likely to change their behavior as a result of the tax.

Paternalists may suggest that low income soda drinkers are behaving irrationally and that a higher soda tax will help them make better choices. However, it’s impossible for regulators or supporters of paternalistic policies to understand consumers’ preferences better than consumers themselves. While increased health outcomes may be an objective for policymakers, this is not to say that it is or should be everyone’s objective. Almost none of us acts in accordance with seeking the lowest risk choices in diet or any other area of life, and trying to enforce healthy choices with tax policy is going to make some people worse off with the highest burden falling on those at the low end of the income distribution.

However, a policy choice is available to policy makers not in New York but at the federal level that would decrease the deficit, make soda a little more expensive, and likely lead consumers to make healthier choices at the grocery store. Corn subsidies totaled an estimated $3.5 billion in 2010, making food made with corn products relatively cheaper than food that is less heavily subsidized. Rather than targeting a specific product, large sodas, Bloomberg should put his efforts toward advocating a more fair national food policy in which food prices more accurately reflect their true costs.

Government Spending Has Shrunk…When You Ignore 44 Percent of Government Spending

Floyd Norris has made an astounding discovery. When you don’t count 44 percent of government spending, it appears that government spending has shrunk in recent years.

Writing in the New York Times, Mr. Norris asserts:

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

In the first quarter of this year, the real gross domestic product for the government — including state and local governments as well as federal — was 2 percent lower than it was three years earlier, when Barack Obama took office in early 2009.

The operative phrase here is “real gross domestic product for the government.” What Mr. Norris neglects to note is that real gross domestic product for the government is only about half of what governments actually spend. And when you look at total spending, it is actually up over the last three years, not down.

Let’s begin with government gross domestic product (GDP). This is the portion of government spending which is counted by the Bureau of Economic Analysis (BEA) when it tabulates national GDP. It consists of government consumption expenditures and gross investments. You can think of it as the tab for all items that the government buys on the open market: salaries of public employees, purchases of weapons for the military, investment in infrastructure, etc.

Among other things, however, government GDP does not include transfer payments such as Medicaid, Medicare, Social Security, Unemployment Insurance, Earned Income Tax Credits, Supplemental Nutritional Assistance, Housing Assistance, Supplemental Security Income, Pell Grants, Temporary Assistance to Needy Families, WIC, LIHEAP…you get the point.

It turns out that real spending on everything other than government consumption and gross investment is up about 19 percent since Obama took office. And this is more than enough to offset what’s going on with consumption and gross investment. Thus, total spending is up 7.7 percent in real terms.

You can see this in this chart*:

There’s nothing wrong with using government GDP figures. They are used all the time to estimate things like the government purchases multiplier. And they are also helpful in understanding whether government is growing faster or slower than the private sector. But Mr. Norris does his readers a disservice to casually conflate government GDP and total government spending. How many people reading his column would know that he left out 44 percent of what government spends? Or that when you include that 44 percent, total spending actually rose over the last three years?

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*Technical note: when the BEA calculates real government GDP, it uses chained 2005 dollars. It does not calculate real total spending, offering only the nominal figures in Table 3.1. I have therefore used 2005 inflation conversion factors found here to convert total spending from Table 3.1 and government GDP from Table 1.1.5 into real figures. When you do it this way, real government GDP actually rose slightly (0.41 percent) under Obama. In other words, the 2 percent drop in real government GDP looks like a slight increase if you use a different inflation conversion method.

New Public Choice Papers

Last week I attended the annual Public Choice Societies conference in Miami, Florida. Among the most interesting papers were:

Does Economic Freedom Foster Tolerance?” by Niclas Berggren and Therese Nilsson:

Tolerance has the potential to affect both economic growth and wellbeing. It is therefore important to discern its determinants. We add to the literature by investigating whether the degree to which economic institutions and policies are market-oriented is related to difference measures of tolerance. Regression analysis of up to 65 countries reveals that economic freedom is positively related to tolerance towards homosexuals, especially in the longer run, while tolerance towards people of a different race and a willingness to teach kids tolerance are not strongly affect by how free markets are….We furthermore find indications of a causal relationship and of social trust playing a role as a mechanism in the relationship between economic freedom and tolerance and as an important catalyst: the more trust in society, the more positive the effect of economic freedom on tolerance.

Governance, Bureaucratic Rents and Well-Being Differential Across U.S. States” by Simon Luechinger, Mark Schelker and Alois Stutzer:

We analyze the influence of institutional restrictions on bureaucratic rents. As a measure for these rents, we propose subjective well-being differentials between workers in the public administration and workers in other industries. Based on data for the U.S. states, we estimate the extent to which institutional efforts to strengthen bureaucratic accountability affect differences in well-being. We find that the differences are smaller in states with high transparency, elected auditors, and legal deficit carryover restrictions. These findings are consistent with limited rent extraction under these institutional conditions. No effect is found for performance audits and regulatory review.

Economic Performance and Government Size” by António Afonos and João Tovar Jalles

Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth.

Leaders, Institutions and Fiscal Discipline” by Heiner Mikosch:

In particular, I find evidence that pure career politicians are fiscally more disciplined than politicians with working experience outside of politics. This contradicts a popular claim that people who have been working in the “real world” outside of politics, are better politicians.

Institutions, Lobbying, and Economic Performance” by Jac Heckelman and Bonnie Wilson:

They find that economic freedom improves growth but that lobbying detracts from it. Moreover, there may be an interaction between the two. It might be that in economically free societies, lobbying is particularly bad for growth whereas in less-free societies it actually enhance growth. This lends support to their basic hypothesis that:

while economic freedom that emerges spontaneously may be growth promoting, economic freedom that emerges as a result of costly lobbying efforts may be less fruitful.

And here’s one that made me smirk:

The Right Look: Conservative Politicians Look Better and Voters Reward It” by Niclas Berggren, Henrik Jordahl and Panu Poutvaara:

Political candidates on the right are more beautiful or are seen as more competent than candidates on the left in Australia, Finland, France, and the United States. This appearance gap gives candidates on the right an advantage in elections, which could in turn influence policy outcomes. As an illustration, the Republican share of seats increased by an average of 6% in the 2000–2006 U.S. Senate elections because they fielded candidates who looked more competent. These shifts are big enough to have given the Republicans a Senate majority in two of the four Congresses in the studied time period. The Republicans also won nine of the 15 gubernatorial elections where looks were decisive. By using Finnish data, we also show that beauty is an asset for political candidates in intra-party competition and more so for candidates on the right in low-information elections. Our analysis indicates that this advantage arises since voters use good looks as a cue for conservatism when candidates are relatively unknown

This last one reminded me of this famous paper from a few years ago showing that inferences based solely on appearance predicted 68.8 percent of U.S. Senate races in 2004. (It isn’t good to have a baby face).