Tag Archives: CRS

Why a shutdown threat won’t work

There are many people who think that the Affordable Care Act (ACA) is bad policy. I am among them. There are also many who think that the current trajectory of government spending is unsustainable and economically harmful. I am also among them.

Then there are people who think it would be wise to shut down the federal government if they can’t get language passed that threatens to defund the ACA. (Notice that I didn’t say language that “defunds the ACA”; I said language that “threatens to defund the ACA.” Much of the ACA is actually funded through mandatory spending so Congress would need to pass a full repeal of the bill to defund it. What these folks want is language in the budget resolution saying that the ACA ought to be defunded. The bill might strip out some discretionary funding but most of the ACA would go forward.)

I am not among them.

To help us think through the options, let’s borrow from game theory and employ a decision tree. The House (H) can either choose to pass a continuing resolution (CR) that funds the ACA or a CR that calls for de-funding the ACA. The Senate (S) can choose to pass whatever the House sends them or to reject it. If they reject it, and no CR is passed by October 1, the federal government will shut down. In this case, as the CRS puts it, “substantial ACA implementation might continue during a lapse in annual appropriations that resulted in a temporary government shutdown.” If the Senate passes whatever the House sends them, then it will go to the President (P) who can either sign it or veto it.

At the end you can see the outcomes and the way that each group feels about them.

Options are happy, sad, neutral, and outwardly sad but secretly happy. (click on the images to enlarge):

decision tree

 To figure out the most likely outcome (the “equilibrium”) you do a fancy thing called “backwards induction.” It is actually quite simple: think about how each player would act at each stage, starting at the end of the game, and cross off implausible actions. This will help you eliminate unlikely outcomes. This is what I’ve done below, with dashed lines indicating an action that a particular player is unlikely to take.  

We can with confidence cross off the possibility that the President will veto a CR that keeps the government open and fully funds his signature initiative or that the Senate would reject such a bill.

We can also cross off the possibility that the President would sign or that the Senate would send him something that calls for defunding his signature initiative.

That leaves us with two plausible scenarios: the House doesn’t use the CR as a means to attack the ACA, the CR passes the Senate, and the President signs it. This is the top branch of the game tree. House Republicans will be neutral about this outcome since they will have escaped blame for a shutdown but will have done nothing to stop the ACA. Senate Democrats and the White House will be pleased.

The other somewhat plausible scenario is that the House passes a CR calling to defund the ACA, and the Senate rejects it. The government would shut down and the ACA would mostly be untouched. I’m guessing Republicans would get most of the blame for shutting down the government since they lack a bully pulpit, aren’t as gifted as the president at communicating, and the ideological stereotype is that Republicans would like to see the government shut down any way. The White House and Senate Democrats will be outraged—simply outraged—that Republicans would do this but they will secretly be happy to have one more reason to say Republicans should never be trusted with power.

If Republicans see all of this, they will likely flinch, hold their noses, and pass a CR that doesn’t touch the ACA and hopefully come up with more constructive ways to challenge the policy. But, it is a close call for some House Republicans so for this reason, I’ve only partially crossed off the first bottom fork of the decision tree. decision tree 2

What the tree doesn’t indicate is the long run consequences of a government shutdown. Two and a half years ago, when Washington was staring down a different government shutdown, I drew from the experience of U.S. states to conclude that a shutdown is not in the interest of those who advocate for limited government:

As is often the case, we can look to the American states for some guidance. It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rulesDavid Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally conservative tea partiers stand to lose the most if the federal government shuts down.

Perhaps it is time for them to rethink their support of a shutdown.

 

Why do almost all economists oppose U.S. farm policy?

There are many policies about which economists disagree. To read the news you might think that economists disagree about everything. In reality, there are plenty of areas in which the economics profession has reached a consensus. One is farm policy. Economists from Greg Mankiw to Paul Krugman oppose the “insane” (Mankiw’s word) and “grotesque” (Krugman’s) handouts to farmers that constitute U.S. farm policy. More broadly, Robert Whaples has found that more than 85 percent of surveyed economists oppose agricultural subsidies. (I’m willing to bet that many of the remaining 15 percent also oppose agriculture subsidies but are uncomfortable ending them cold-turkey).

Why is there so much agreement on this issue? Here are a few thoughts.

Subsidies and Price Supports Create Dead Weight Losses

U.S. farm policy is a grab bag of over 80 separate programs with confusing names like the “shallow loss program” and the “dairy indemnity program.” But for all the arcane language, the programs match pretty neatly to the simple microeconomic models that we teach undergraduate economics majors. They are price supports, they are subsidies, or they are barriers to trade. And whatever they are, they are inefficient.

Consider the Dairy Product Price Support Program. According to the CRS, it “specifies minimum purchase prices of: block cheese, $1.13/lb.; barrel cheese, $1.10/lb.; butter, $1.05/lb.; and nonfat dry milk, $0.80/lb.”

With the mandated price set above the market price, consumers gain less from exchange than they otherwise would and producers gain more than they otherwise would. Importantly, though, the simple economic model of a price floor (see below) tells us that consumers lose more than producers gain. Economists call this “dead-weight loss.”

Minimum PriceOr consider the Direct Payments program. According to the CRS, it pays growers of “wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans, and other oilseeds” a fixed subsidy that does not vary according to the market price. This effectively lowers the marginal cost of production, lowering the price and increasing the quantity sold. In this case, producers and consumers gain, but taxpayers lose. Moreover, the simple producer subsidy model tells us that taxpayers lose more than consumers and producers gain. Thus, this program too creates a dead-weight loss.

SubsidyNo Coherent Story of Market Failure or Imperfection

These interventions might be rationalized by some sort of story about market imperfection (externality, monopoly, asymmetric information, etc.). But as a commodity industry with so many producers and so many consumers, agriculture is much closer to the textbook ideal of a perfectly competitive industry than one plagued by market failure.

Safety Nets for People Not for Firms

“Well yes,” a champion of farm policy might reply, “but poor American farmers deserve a safety net.” Lots of economists (even Milton Friedman and F.A. Hayek) have conceded that publicly-funded social safety nets might be worthwhile. But these nets should catch people when they fall, not the firms that these people work for. The farm safety net makes even less sense when you dig into the numbers. As Vincent Smith has shown in his recent Mercatus paper, average household farm income is substantial greater than overall average income. Moreover, about 80 percent of direct payments go to the largest 15-20 percent of farms and a majority goes to the top 10 percent “whose owners, for the most part full-time farm operators, typically earn many times the national average household income.”

As Smith points out, many in the farm lobby claim that farmers need the safety net because they are in a particularly risky line of business. But, he says, this claim doesn’t stand up to scrutiny:

Farms fail at an annual rate of 0.5 percent: only one in every 200 farms goes out of business because of financial problems.24 By comparison, the annual business-failure rate is over 7 percent, 14 times greater. Among small nonfarm businesses, the companies most comparable to farms in terms of sales, the failure rate is about 14 percent, almost 30 times greater than among farms.

The farm safety net makes even less sense when you think about justice on a global scale. Daniel Sumner explains it well in his Agricultural Subsidy Program entry in the Concise Encyclopedia of Economics:

Some of the poorest countries in West Africa have traditionally been cotton exporters. In 2001 and 2002, they faced a world price of cotton ranging from thirty-five cents to forty-five cents per pound. Meanwhile, cotton growers in the United States, the world’s largest exporter, received seventy cents or more per pound from the subsidies plus the market price. Economists have estimated that U.S. exports of cotton would have been substantially lower, and the world price of cotton 10 to 15 percent higher, if U.S. cotton subsidies had been unavailable during this period. Reducing farm subsidies in the United States and other rich countries would help poor cotton growers and other farmers in poor countries, and, moreover, would begin a process of relying more on trade rather than aid for economic growth.

Given the near-consensus among economists, why does the U.S. continue this grotesque and insane experiment? I’ll explore this question in subsequent posts.