Tag Archives: Tyler Cowen

The Real Public Choice Economics of Big Bird

In an informative post last week, Matt Yglesias pointed out that the few hundred million dollars a year that go to the Corporation for Public Broadcasting are in many ways the “least important” of Big Bird’s government-granted privileges. A far more important privilege is the spectrum on which Big Bird is broadcast. Public TV stations:

don’t have to bid at auction for access to the broadcast spectrum they use. It’s just been given away for free. The decision to allocate some of that spectrum to public TV stations is, at a fundamental level, why they exist.

Matt also points out that another important privilege—one which Tyler Cowen highlights in his book Good and Plenty—is the tax deduction for charitable contributions from viewers like you.

Matt’s post was titled “The Real Economics of Big Bird,” but I’d point out that it also provides a lesson in the real public choice economics of big bird. The President has eagerly mocked his rival’s interest in Big Bird, correctly pointing out that our trillion dollar deficit is not going to be solved by cutting a few hundred million dollars from Sesame Street. But this line of argument misses the public choice lesson.

First, Sesame Street is able to obtain so many government-granted privileges in part because these privileges are inconspicuous. This is known as “fiscal illusion,” and it is an idea which pervades James Buchanan’s research: when people are not clearly presented with the bill for government intervention, they will gladly accept more intervention.

In my research on government-granted privilege, I’ve noticed that the least-conspicuous forms of privilege are often the most popular among politicians. Farm subsidies are the exception, not the rule. Typically, privileges don’t appear as line items in the budget. More often, they are hidden. Think of the Export-Import bank which doesn’t subsidize Boeing, but instead subsidizes firms that buy planes from Boeing. Loan guarantees, tax credits, and favorable regulatory treatment are more-common still and each of these privileges is rather difficult to see.

Second, Sesame Street’s privileges are an illustration of the problem of concentrated benefits and diffused costs. Sesame Street’s direct (and even indirect) subsidy is tiny, especially when it is spread out among 311 million Americans. But it is precisely this characteristic of government spending which has allowed it to get out of hand. Too many government programs concentrate benefits on a comparatively small section of society and disperse the costs over the multitude of taxpayers and consumers. This means that those who benefit from a particular program have a strong incentive to get organized and lobby on its behalf. It is big money for them. But it also means that the millions who pay for the program have little incentive to get organized to oppose it. It’s just pennies to them.

This wouldn’t be so bad if the Corporation for Public Broadcasting were the only government program. But it’s not. Stealth bombers, bridges to nowhere, sugar subsidies, ethanol mandates, light bulb regulations, etc. all have this characteristic. They impose costs on multitudes and confer benefits on a handful. Add it all up and you have a government that spends $7 million every minute.

As the late Everett Dirksen put it, “A billion here, a billion there, and pretty soon you’re talking real money.”

Balanced Budget Rules and Unintended Consequences

In my view this is one reason of many why a balanced budget amendment is not a workable path toward fiscal conservatism.

That is Tyler Cowen’s take on my paper with Noel Johnson and Steven Yamarik. I can certainly see why he might come to this conclusion.  We find that when Democratically-controlled states face a binding constraint on their ability to carry a deficit over from one year to the next, they may regulate more instead. A friend of mine calls this the “muffin-top” problem: belt-tightening can sometimes lead to unsightly bulging…elsewhere.  In spite of the muffin-top problem, I am actually still an advocate of a balanced budget amendment at the federal level.

Though I often marvel at the fiscal irresponsibility of state governments, I can’t help but feel that if the states and the federal government were in some sort of fiscal beauty contest, the states would easily come in 1st through 50th while the federal government would come in 51st.  Consider:

  • Collectively, state and local governments are in debt to the tune of about 2.6 trillion dollars, while the federal government has racked up nearly 4 times that amount.
  • The states have accumulated $9.9 trillion in unfunded obligations that will come due over the next several decades.  The Feds, meanwhile have accumulated 5 to 10 times this amount (depending on whether you agree with Medicare’s chief actuary that the current political path is highly unlikely).
  • Most states manage to balance their operating expenses (some gimmickry aside) on an annual or biannual basis. In contrast,
    for the last 80 years, the federal government’s norm has been to run an annual operating deficit (with deficits about 85 percent of the time).
  • When states do borrow, it is typically for long-term capital projects (again, some gimmickry aside).  So future generations are on the hook for bridges and buildings that they, too, will use. In contrast, the Feds don’t even pretend to borrow for future projects; much of what my daughter’s generation will pay for is my generation’s consumption.
  • When states encounter budgetary problems, they tend to deal with them by cutting spending rather than raising taxes.

All of this is somewhat surprising given the fact that, constitutionally, the states were given a blank check whereas the feds were not. As Madison put it in Federalist 45:

The powers delegated by the proposed Constitution to the federal government, are few and defined. Those which are to remain in the State governments are numerous and indefinite.

So why, given so much more (constitutional) power than the feds, do the states seem to manage their affairs more-responsibly? Tiebout competition and the lack of a central bank likely play a role. But I believe the fact that every state but Vermont has to balance its books each year must account for a large share of this relative fiscal probity.  As James Buchanan and Richard Wagner argued over 30 years ago, the ability to buy items for today’s generation while putting the tab on tomorrow’s generation creates a systematic bias in favor of irresponsible spending. In contrast, they argue:

The restoration of the balanced-budget rule will serve only to allow for a somewhat more conscious and careful weighting of benefits and costs. The rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers; it will tend to dispel the illusory “something for nothing” aspects of fiscal choice.

I believe the evidence supports this claim.  David Primo (2003) and Mark Crain (2003) find that states with a strict balanced budget requirement tend to spend less than other states.  Shanna Rose (2006) finds that states with strict balanced budget requirements tend not to experience a political business cycle in which government spending rises just prior to an election and falls shortly thereafter. Bohn and Inman (1996) find that states with strict balanced budget requirements tend to have larger General Fund surpluses and larger rainy day funds.

In our paper we find that stricter balanced budget rules tend to constrain partisan fiscal outcomes.  The fact that they may lead to bulges in the regulatory state is, indeed, unfortunate.  But in my view, that suggests that we should also examine biases in the political economy of regulation and consider institutional reform to address those as well.  Perhaps there is need for a more-conscious weighing of the benefits and costs of regulation?  If belt-tightening leads to muffin-tops, maybe we need more than a balanced budget amendment?  Perhaps spanxs?

Great Myths of the Great Depression

The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

So writes Dean Baker in the New Republic. This is marginally better than the myth I learned in high school: FDR saved capitalism from itself by embracing the wisdom of Keynesian economics. He “primed the pump” with massive deficit spending and lifted the economy out of the Great Depression.

My high school story was a tad inconvenient for those who are fans of both Keynes and FDR: In 1940—7 years after the New Deal had begun—the unemployment rate still hovered at an astounding 14.6 percent.

But the high school myth turned out to be wrong: Keynesian economics didn’t end the Great Depression because Keynesian economics was never tried. Keynes, remember, called for deficit-financed spending during downturns (and surpluses during times of plenty to pay off the debt). The data show that FDR (and Congress) implemented half of the Keynesian stratagem: real spending dramatically increased throughout the Great Depression. 

The problem—from a Keynesian perspective—is that they also massively increased (already-high) taxes so that, even as the economy collapsed, revenue soared.  

 

 

A seminal piece in the American Economic Review by Cary Brown exploded the myth that Roosevelt was a Keynesian:

The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government.  Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934.  [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields.

But notice, Brown doesn’t say that FDR failed to be Keynesian because he stopped spending; he failed to be Keynesian because he also raised taxes. But that doesn’t stop many in the punditry from claiming that, in his later years, FDR was converted into some sort of proto-Paul Ryan.

See this excellent post by Alex Tabarrok on the subject. See, also, these posts by Tyler Cowen.

Getting Clean Water to Cambodia

Today on NPR:

In the 1990s, he accompanied teams of workers as they went around the city trying to convince ordinary Cambodians that installing a water meter and paying for water meant they would save money and be healthier.

World water experts have nothing but good to say about him and the PPWSA. Per-Arne Malmqvist, a water expert at the Stockholm International Water Institute in Sweden, says they have succeeded in doing something that even cities in the Western world have not succeeded in.

At one point, a Cambodian general who objected to the scheme held a gun to Chan’s head, refusing to pay. But with the help of politicians who supported his scheme, Chan won over all levels of the city.

“It’s not only about technicalities — constructing pipelines and water works — it’s also the management of the system, fighting corruption and having people to pay for the water which, of course, is very important.”

Tyler Cowen, writing in 2008, on the water problems of the Third World:

The solution for the poorer parts of the Third World is deregulation of the market for piped water, combined with the enforcement of property rights. Yes, I’m saying that Third World governments should consider letting private companies sell water at any price they want. This includes giving them the right to cut off people who don’t–or can’t–pay their bills.

Do a majority of Americans prefer tax hikes to state budget cuts?

According to an ABC/Washington Post poll, the real third rail of politics isn’t Social Security it is state budgets. According to the poll results, 55 percent of Americans favor freezing wages for state employees and 51 percent are for reducing pension benefits for new hires.

But when asked more specific questions about cuts, 89 percent oppose laying off firefighters, 86 percent don’t want teachers or police officers laid off. Seventy five percent of people reject cuts to state aid for schools, 76 percent reject cuts to Medicaid, and 76 percent also oppose closing parks. At the same time, significant majorities oppose tax increases (though not as robustly). Sixty-three percent of those polled oppose increases in state income taxes, 61 percent oppose sales tax hikes.

What to make of these results? People don’t like tax hikes, and they really don’t like service reductions. They are also not confronted with the full bill for public services upfront.

State aid, debt, income tax withholding, spending deferrals, intergovernmental transfers contribute to fiscal illusion, by obscuring the full cost of spending and making spending look less expensive than it is.

More direct forms of taxation such as the property tax tend to be less popular for a reason. The property tax is more directly observed – both in paying for it and seeing how it is spent. (though it is also argued that renters experience fiscal illusion since they do not pay property taxes upfront).

New Jersey’s property tax crisis is an example of this. While the state instituted an income tax in 1976 to help defray the cost of public school spending on the local level, property taxes continued to rise over the period – in recent years to crippling levels for many residents. In 2010, when confronted with reductions in state aid and revenues and the request by teachers unions to grant salary hikes, New Jersey voters rejected the majority of school budgets for the first time since 1976.

It is not surprising that people will want to maintain or increase spending as long as the bill remains hidden. More than half of state Medicaid programs are sustained by federal transfers paid for with deficit spending, continuing to participate in this fiscal illusion has serious consequences for our economic future.

Tyler Cowen writes in The New York Times about how this disconnect between spending and revenue (identified by James Buchanan), results in institutionalized fiscal irresponsibility. Ultimately, we don’t recognize what it will take to pay off the debt we have accumulated at the federal level. It will take eroded savings, “…there is a rude awakening coming. One way or another, some of our savings will be taxed away to make good on government commitments, like future Medicare benefits, which we currently are framing as personal free lunches.”

 

Medicaid: Are Costs Up or Are We Buying More?

Writing in the New York Times, Peter Orszag notes that a quarter century ago, states spent 50 percent more on higher education than on Medicaid, while today states spend 50 percent more on Medicaid than they do on higher education. The former Office of Management and Budget director is absolutely right that Medicaid costs have grown far faster than every other major category in state spending. He is at least partially wrong, however, on the diagnosis. He writes:

These Medicaid cost increases have closely tracked cost increases in the rest of the health care system over the past three decades. So the problem is not Medicaid per se; the fundamental problem is rising health care costs as a whole.

The graph below, taken from my recent working paper, examines this issue:

The left column shows 2009 Medicaid spending as a percent of 1987 Medicaid spending. Over this period, spending increased 813%. There are three factors that might explain this increase:

  • The general population has increased,
  • The cost of medical care services has increased (which is what Orszag sees as the problem), and/or
  • The Medicaid program is buying more medical services.   

The chart helps disentangle these three factors. The right column is the sum of population growth and medical care inflation. Note that, together, these two factors explain little more than half of the increase in Medicaid spending.

This suggests that much more weight should be placed on the third option. In other words: Yes, medical prices have gone up and yes, the overall population has grown. But more importantly, the program is simply buying more medical services. In what ways? This paper by Holahan and Yemane offers some insight. They find that the real reason we are spending more on Medicaid is that more people are enrolled in the program.

In addition to increased federal support for the program, Orszag believes that the “fundamental response” is to “get a better handle on rising health care costs.”

The data suggest that the more appropriate response is to get a handle on enrollment growth.

My thanks to Tyler Cowen for directing me to Orszag’s piece.

Edward Pinto on the Community Reinvestment Act

The debate about the role of the Community Reinvestment Act in the current mortgage morass — and its effects on neighborhoods — continues with this article from Edward Pinto in City Journal. Pinto writes:

Whatever the precise magnitude of the CRA’s role, there is no question that as the government pursued affordable-housing goals—with the CRA providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5 percent or less down more than tripled, from 8 percent in 1990 to 29 percent in 2007. Adding to the default risk: of these loans with 5 percent or less down, the average down payment declined from 5 percent to 3 percent of the loan’s value.

As for Fannie and Freddie, most of the loans with 5 percent or less down that they had acquired by 2005 had down payments of 3 percent or even no down payment at all. From 1992 to 2007, the two entities acquired over $3.1 trillion in low-down-payment or credit-impaired loans and private securities backed by credit-impaired loans—and these are performing horribly: the delinquency rate on Fannie’s and Freddie’s remaining $1.1 trillion in such high-risk loans is 15.5 percent as of this past June 30, about 6.5 times the rate on the entities’ traditionally underwritten loans. All this risky lending, of course, drove the nation’s homeownership rate up and inflated a housing-price bubble.

Last year, Tyler Cowen disagreed. Here is Randy Kroszner’s take. Russ Roberts wrote about it in the Wall Street Journal last year.

Steward Brand, Slumlord

Whole Earth Catalog founder and onetime Merry Prankster Stewart Brand is one of twelve thinkers asked this month by Wired magazine to contribute to a list of “twelve shocking ideas that could change the world.” In this brief piece, Brand praises slums as good for the environment:

Cities draw people away from subsistence farming, which is ecologically devastating, and they defuse the population bomb. In the villages, women spend their time doing agricultural stuff, for no pay, or having lots and lots of kids. When women move to town, it’s better to have fewer kids, bear down, and get them some education, some economic opportunity. Women become important, powerful creatures in the slums. They’re often the ones running the community-based organizations, and they’re considered the most reliable recipients of microfinance loans.

Here is Stewart Brand’s TED talk from earlier this year where he discusses the idea in greater depth.

Mike Davis wrote in 2007 that slums are, contra Brand, environmental tragedies. For different but related reasons, Tyler Cowen argued in 2006 that in recovering from Hurricane Katrina, New Orleans should allow shantytowns to emerge unmolested.

Can Tysons be Fixed?

Last week, Tyler Cowen wrote about planning issues in Northern Virginia on Marginal Revolution.  He compares Tysons Corner to Clarendon, demonstrating the importance of street layout in urban development. While the two areas are geographically close DC suburbs, they have very different atmospheres because Clarendon has successfully fostered pedestrian-friendly mixed use development, while Tysons has a lower residential density, fewer public transportation options, and roads that are much more difficult to traverse on foot.

Fairfax County planners are in the process of creating a redevelopment plan, promoted as a way to make the area more urban and less car-dependent. Cowen points out that simply providing incentives for higher residential density will not necessarily give Tyson’s the vibrant street life experienced in Clarendon:

The whole area is carved up by major roads, including three significant highways, one of which could be called massive.  Try crossing Rt. 123 at Tysons Corner or try crossing Rt.7. Even some of the “small” roads on this map are harder to cross than is the main Clarendon/Wilson thruway in Arlington.  It’s not just the roads and the overpasses; crossing or circumventing either major shopping center is a daunting experience.  Furthermore very little is laid out in a line and thus the presence of Metro stops (right now there aren’t any) would not cover the area nearly as well as they do in central Arlington.

Even for those not familiar with these Northern Virginia suburbs, Cowen’s description of Tysons probably conjures images of urban sprawl problems across the country. On his blog The Bellows, Ryan Avent responded to Cowen:

At any rate, it does seem odd that once again, we have a libertarian-ish figure cheering on the planners’ decision to artificially reduce density.

It has been widely asserted by writers such as Will Wilkinson that libertarians tend to support government incentives that favor roads and driving as opposed to public transit, even though both require taxing, spending, and distortions of the free market.  This larger issue may be a relevant point for debate in future developments. In existing suburbs, it remains true that existing traffic patterns that are not navigable on foot are difficult, or at any rate very costly, to redesign into bustling city neighborhoods.

For creating blocks that support high residential density and mixed use, Jane Jacobs recommends short blocks and small streets, similar to those witnessed in Clarendon, although it is easy to imagine that she would like to see much wider sidewalks even there. However, it is worth considering whether her policy recommendations would be feasible in a place like Tysons where land value is very high and the urban geography is already completely designed for transit by car.

Cowen recommends focusing on new, more urbanist developments in other parts of Northern Virginia that are currently less built up than Tysons, which may make more sense. Working within the municipal government confines that currently rule streets and zoning, cost benefit analysis must be relied upon instead of market signals.

Overplanning in Dubai

In an  LA Times article, architecture critic Christopher Hawkin writes about his trip to study Dubai:

Like many first-time visitors, I expected to find in Dubai a messy, vital hybrid of architectural and urban strategies, reflecting the city’s history as a regional crossroads and trading center. I could hardly have been more wrong. Dubai is not some Middle Eastern Venice, a polyglot city where the combination of construction workers from Pakistan, bankers from London and Hong Kong and tourists from around the world creates a mash-up of contemporary urbanism.

[. . .]

One major reason that the city has been divided up this way is that the emirate’s ruling family, led by Sheik Mohammed bin Rashid al Maktoum, controls all the major real estate companies operating here. In Dubai, the urban planners and the developers are essentially one and the same. Market ambition and civic ambition are similarly intertwined: Sheik Mohammed has often been called Dubai’s chief executive. Instead of building a monumental city hall or war memorial, Dubai builds shopping centers and office towers at a monumental scale.

In the heart of most cities, the biggest piece of land that a single developer is typically able to control is one square block. (In a dense, layered city, of course, the average parcel is far smaller.) In Dubai, whole districts of the city, many covering dozens of square blocks and hundreds of acres, have been given over to single developments. Seeing architectural diversity within any project as a threat to the bottom line, their creators usually hire a single firm to design them around a recognizable theme: the golf community, the office park, the vaguely souk-like waterfront combination of retail outlets and condominiums.

Currently, the relationship between builders and policy makers in Dubai has led to a strange pattern of development and has resulted a compartmentalized city rather than a conglomeration of neighborhoods. If the city does not recover its position as a tourist destination, it will be difficult for it to diversify its economy because current land use is not suitable for typical residential or business uses.

The unnatural development that a lack of competition has created in Dubai shares similarities with ideas promoted by garden city planners of the early 20th century. Garden city planners believed an organized, planned utopia would be preferable to the apparent chaos of cities that grow organically. Although the idea of a highly stylized and planned city may theoretically seem  this sort of development does not lead to livable cities.

If Dubai seeks to be merely a tourist attraction rather than a vibrant city, this glitzy but impractical development model may succeed provided that global economic prosperity returns quickly.  However, such an undiversified economy means that the city would remain in a position to be particularly hard hit by downturns in the business cycle, as Las Vegas is in the United States.

In order to develop cities that function as more than amusement parks, competition between developers at the street level is necessary to facilitate the diverse needs of residents, rather than exclusively the desires of wealthy tourists.  As a British businessman in Dubai explained in The Sunday Times:

Dubai has brilliantly exploited the boom years to build itself on to the map and into people’s minds. But Plan A is over now. The model only works in the good times. We need Plan B and we need it fast.

More on Dubai’s economy from the Economist, and on the city’s future prospects from Tyler Cowen (who has written on Dubai over 100 times).